While many of us love dividend, the capital required to capture these returns can be burdensome.  One way to generate synthetic dividends is to sell credit spreads.  This strategy allows you to cap your risk with a trading strategy that is likely to win most of the time.

Credit Spread

Do you want to trade a strategy where you can be wrong about the direction of a security 100% of the time and still make money? One of the best ways to generate income selling options is to use a credit spread strategy. A credit spread is a strategy that allows you to generate premium as well as protect yourself against an adverse move in the market. The two most widely used vertical spread are the bull put credit spread and the bear call credit spread. Each of these spreads allows you to receive premium, and cap your losses.

This option strategy allows you to enter a position that is comprised of two similar options.  The only difference between the options is the strike price. The vertical spread will either be two calls or two put, and the expiration date is the same.  The idea is to purchase a call and simultaneously sell another call or purchase a put and simultaneously sell another put. The number of contracts that you buy and sell are the same.  There are listed options where you can trade weekly, monthly and quarterly credit spreads.  

The bear call credit spread gets its name because you will receive a credit in the form of a premium when you transact the trade, and the trade will be successful if the price of the underlying stock moves lower, or stays below your short strike.  A bull put credit spreads also allows you to receive a credit in the form of a premium and will generate a profit if the price of the underlying stock moves higher, or stays above your short strike.

One of the great perks of credit spreads is that you have an embedded risk management feature that allows you to cap your maximum loss. This is a very important concept as many traders are leery of selling naked calls and puts as your maximum risk can be unlimited.  If you are selling a naked put option your maximum loss can be bounded by zero, but when you are selling a naked call option your maximum loss can be unlimited.

Iron Condor

This strategy combines a bull put credit spread and a bear call credit spread.  The strategy pays off if prices remain in a pre-defined range. When implied volatility climbs ahead of earnings, opportunities arise to generate income using an iron condor.

Sample Signal

Bullish Put Spread

United Continental. (UAL)

Sell to Open 2017 FEB 17  71.0 Put (0.68)
Buy to Open 2017 FEB 17  69.5 Put (0.40)

For a total credit of $0.28
Potential return is 18% if UAL stays above $71 by expiration date (February 17, 2017).

Statistical and Technical Outlook

The probability of success on this trade is very high above 72%, with the maximum risk of $1.22 ($1.5 minus premium of $0.28).

UAL recaptured resistance which is now support near the 50-day moving average at $72.75.  Momentum has turned positive as the short term MACD (moving average convergence divergence index) generated a crossover buy signal. For this trade to be success, UAL needs to stay above $71 until February 17, 2017.