High Probability Option Trading with Limited Risk to your Wallet

Verticals are one of my favorite option trades for a lot of reasons. The sheer simplicity and genius of a vertical makes it an essential for any serious trader, and having probability in your favor is a nice bonus. But before I explain some of the benefits and strategies with trading a vertical, let me just provide a brief explanation of what a vertical is.

A vertical is when you buy an option and sell an option one strike price away from it. An example of a good vertical might be to sell the 112 put and buy the 111 put on the SPY, which is trading at around 114 as of writing this article. This would be referred to as a credit spread since you are buying a cheap put at the 111 and selling a more expensive put at the 112. This would also be referred to as a bear call spread since we are placing calls but are bearish. You can make around 14 dollars per contract on this while taking a potential risk of up to 86 dollars should your options go into the money. However, considering the RSI on the SPY is currently at 72 with low implied volatility in a solid uptrend and a calculated probability of success of around 78.6 percent, you would most likely walk away with a 14 dollar profit per contract less commissions. This particular options trade is specifically referred to as a bull put spread.

I enjoy vertical credit spreads because you don’t have to forecast price action specifically with this options strategy, you just have to pick one particular direction that the price is sure not to go. In my opinion, it’s a great options trade to play whenever a stock is driving up or down with a decent amount of momentum, because you can play whatever side is least likely to go into the money and walk away with the upfront credit, not to mention the shirt on your back.

It’s also a great options strategy to play because you know exactly how much you stand to risk should the trade go wrong. The intrinsic value of your options purchased back will cost around 100 dollars since they are one point away from each other, so to calculate your potential loss, just take the upfront credit and subtract it from the distance between each option multiplied by 100 for each contract you are trading.

The tradeoff of high probability trades is always a higher potential for losses should you be wrong about the underlying asset. That means that whenever you have the house advantage, expect to get hurt when you don’t make the most of it.

If you’re interested in trading verticals like the bull put spread, be sure to check out Brett Fogle’s Options University Home Study Course. It pretty much has all the knowledge you need to be successful in the financial markets and give you an edge on the competition without all the trial and error of trading on your own. Click here to check it out.