Stockmarkets go up and down, and over time they generally return back to normal trends, and have done so since they began. There are numerous strategies to invest and potentially make money in the markets. Typically, the most basic is to buy a stock at a certain price, hope the price goes up, and sell it at the higher price sometimes in the future.

Implementing Credit Put Spreads is a good way to maximise returns while minimising risks without ever buying the stock.

Essentially, selling and buying and option in a certain stock in the market gives the buyer or seller the right, but not the obligation to buy or sell a stock at a certain price sometime in the future.

Example: XYZ share is trading at $50 per share.

You can buy a put option in that share for $49 that expires in 1 months time. If the share price falls below $49 before or once the month has ended, you can sell the share at $49, regardless of what the price is. Essentially, you are insuring your share for $49. Even if the price of that share falls to $1, you can still sell it for $49.

Conversely if you buy XYZ share at $50, you can sell a call option at $51. Because you have sold the option, you will receive a premium (usually a fraction of the share price, i.e $0.50) You keep that premium no matter what happens. The share price can go up, down or sideways, and you still keep the premium. If the share price goes above $51, you must sell it for $51 after the month expires. However, you bought it for $50, made $0.50 in premiums, and $1 in capital gain. Therefore you just made $1.50 even though the share price only increased by $1.

With a credit put spread, you are hoping the price of the stock goes up, sideways, and can even move down a little without any risk.

This how it works:

1. Sell a put option in XYZ share for $49 for say $0.50 per share.

2. Buy a put option in XYZ share for $48.50 for say $0.25 per share.

Therefore you are insured for $48.50 per share (i.e you have the right to sell your share for $48.50 no matter what happens).

The difference between the the sold put and the bought put is your income, i.e $0.25 per share.

Your maximum risk is $0.25 per share.

It sounds complicated, but really it’s not at all.