Work With Time Decay

A lot of traders are now embarking themselves in credit spreads due to their limited risk and reward spread. This type of spread is said to be delta neutral. You gain profit if the market stays in a trading range.

Time decay is one of the reasons that credit spreads work. This is because the value of options depreciates a little each day before they expire. Time decay increases in the last 30 days of an option’s life. This is why when you are dealing with credit spreads you must maximize the time you spend in the market simply by looking for options that has 30 more days before they expire.

At expiration, options are worth a hundred percent of intrinsic value. Before expiration they are worth more or less than their intrinsic value. There are different forces that can act on option prices before option expiration. Some of these forces are identified by the Chadwick Investment Group as market volatility, interest rates and time before expiration.

Credit spreads are always done for an initial credit. In fact, the Chadwick Investment Group says that if you are not able to receive a credit when you have placed the trade then you did not do a credit spread.