Credit spread trading is one of the most popular options strategies, which allows traders to generate consistent income with controlled risk. Automating the process will help the traders streamline their workflow considerably and, in turn, allow high-quality setups without manual efforts. Here’s how to properly automate credit spread trading to achieve maximum profitability while having a robust and disciplined approach to trading.
Understanding Credit Spreads
A credit spread is selling one option and buying another with different strike prices but the same expiry. There are two primary categories:
Bull Put Spread
This is used when you expect the underlying’s price to increase.
Bear Call Spread
That is applied when you predict the underlying’s price going down.
Both strategies are based on collecting a premium upfront, hoping that the spread’s value remains when the options expire worthless. The right trades are a key to success.
Important Credit Spread Trading Criteria
Automation automates the process of filtering through trades on some particular basis. The following should be considered before activating an automated system:
Minimum Credit Threshold
The focus will be on those trades wherein the credit collected is at least 33% of the vertical width. For example, on a $5 wide spread, the minimum that should be gathered is $1.65. This is a pretty favorable risk-reward ratio.
High Liquidity
Trade only on highly liquid underlyings to ensure smooth execution at the midpoint. Illiquid options can lead to wider bid-ask spreads, increasing trading costs and reducing profitability.
Technical Alignment
Align trades with technical trends. For bullish credit spreads, look for pullbacks in uptrends. For bearish spreads, target rallies in downtrends. This alignment increases the chances of success.
Efficient Scanning
Use a scanner that filters for options meeting your criteria, such as liquidity, credit percentage, and technical alignment.
Automation of Credit Spread Setup and Analysis
Automation tools can handle the complex process of identifying and evaluating potential trades. Here is how to automate the process:
Filtering for Liquidity
Exclude 95% of optionable symbols with low liquidity. Focus only on underlyings that have tight bid-ask spreads, thereby permitting easy entry and exit of positions.
Technical and Fundamental Screening
Utilize platforms such as OptionsPlay, which combine technical indicators with fundamental analysis. For instance, the scanner may pick stocks in bullish trends that experience temporary pullbacks.
Setting Trade Parameters
Rules to be established for the trade entry such as to buy near 25-delta on the leg bought and collecting at least 33-40% of the vertical width.
For instance, in case of Tesla selling $310 put and buying the $280 put by December expiry, one could collect 41% of the vertical width which may bring out a good quality setup.
Automated Trade Reports
Platforms such as OptionsPlay provide reports with pre-evaluated trade setups, saving research time. These are in alignment with your risk-reward criteria, liquidity filters, and directional views.
Example of Automated Credit Spread Trade
Let’s take a particular example using Tesla:
Scenario:
Tesla is experiencing a pullback in a larger bullish trend.
Trade Setup:
- Sell the $310 put (at-the-money).
- Buy the $280 put (25-delta).
- Expiration: 43 days out (e.g., December 27th).
- Credit Collected: 40% of the vertical width.
- Max Profit: $1,200.
- Max Risk: $1,747.
This trade has a great risk-reward ratio and fits the technical trend and liquidity. This way, by automating the identification of such setups, traders can spend more time on execution rather than analysis.
Aligning Trades with Trends for Consistency
Automating credit spread trading ensures that the trades are aligned with the directional market trends. For the bullish trades:
Wait for pullbacks in uptrends to establish positions.
For bearish trades:
Use rallies in downtrends to enter credit spreads at higher levels.
With these criteria automated, traders eliminate emotional decisions and keep the approach disciplined.
Why Automation Matters
Credit spread trades through manual research require looking at:
- Technical trends.
- Option chains for liquidity.
- Risk-reward profiles.
This is time-consuming, and one may miss the opportunity. Automated platforms do this work well and provide actionable trade ideas according to your criteria.
Platforms and Tools for Automation
OptionsPlay
Pre-configured scanners are available to find trades with favorable risk-reward ratios and technical alignment.
Liquidity filters ensure that there is reliable execution.
ThinkorSwim
Offers powerful tools to build custom scanners and automate trade setups.
TradeStation
Supports complex scripting to develop automated strategies.
Conclusion
The way to maximize the profit, saving time, and efforts is through an automation credit spread trading approach. Such trades that have high liquidity coupled with a technical trend most often present favorable risk-reward conditions, and a trader will be in a position to achieve solid results. A platform like OptionsPlay does this in a very seamless manner so that you may focus on the execution rather than research. With the proper tools and approach, credit spread trading can be a great and efficient way to make money in the options market.