Selling Deep Out of the Money Options can offer high odds of an option expiring worthless for individual investors. Leveraged options can offer potentially high returns and real diversification.*
But you’ll need the right strategy.
This is where Credit Spreads come in.
There are numerous versions of credit spreads investors have access to. One common version is called the vertical bull/put spread, also known as “Covered” option selling – with one option “covering” another. While covered option writing in commodities does not carry the same meaning as covered stock option writing, the premise is the same: Targeted Income but with with hedged risk.
(*With corresponding risk. Only risk capital should be used.)
In commodities, leveraged option structures can offer many of the same benefits sought by traditional option sellers while using offsetting positions to manage exposure and margin. This approach appeals to investors who value probability-based trades and disciplined portfolio management over speculation or constant market timing. This is why selling levered credit spreads or structures can make an excellent “bread and butter” strategy for the serious option selling portfolio that is focused not on excitement and action, but on targeting a strong annual return (with corresponding risk of loss, of course.)
In leveraged option selling, short options can be paired with other options at different strike prices or expirations to shape a desired risk profile. These multi-leg structures — such as bull/put credit spreads, ratio spreads, or covered strangles — allow traders to balance risk and reward while maintaining flexibility across different market conditions.
Some of these strategies can limit risk to a known amount (as in bull/put credit spreads), while others may retain open-ended exposure in exchange for higher potential premium or capital efficiency. Understanding these differences is central to proper risk management.
At OptionSpreaders.com, we implement two primary credit spreads for our private clients.* They are featured below. (* While these are primary strategies, OptionSpreaders.com may occasionally implement other strategies as well.)
These spreads are called vertical because they involve the selling of one option and then the buying of another either above or below it. Thus, the strikes are stacked vertically.
There are two types of vertical spreads – the bull put spread (for bulls) and the bear call spread (for bears). I recommend vertical spreading to you as they carry risk management benefits as well as favorable margin requirements.
Vertical credit spreads are excellent choices for both beginner and expert traders alike, combining durability with ROI firepower.
My team and I call ratio credit spreads “equity builders.” While these are a bit more advanced than vertical spreads, they combine flexibility with a high premium to equity ratio. But they also provide the added “pop” of potential larger return than just premium if you hit the market just right. *
Selling a ratio credit spread means selling a group of two or more out of the money options, and then buying a closer to the money option to protect them. This creates a powerful hedge while at the same time giving the seller a wide profit zone.
Ratio credit spreads are my “go to” strategy in managing private client portfolios.
(*All option selling involves risk of loss. Only risk capital should be used.)
The primary benefits of using option credit spreads are threefold.
Of course, there are drawbacks to any strategy and credit spreads have some as well. These include
Credit spreads must often be sold slightly closer to the money than a naked option in order to collect a similar premium.
Despite these drawbacks, we feel the advantages to credit spreading, especially using leveraged (futures) options, far outweigh the drawbacks. That is why credit spreads are the only strategy I use when trading for my private clients. We’re not called OptionSpreaders.com for nothing.
Think of writing leveraged credit spreads as still driving that Ferrari down the highway you’re just doing it with a seatbelt on.
I’ve been trading options for 40 years. I don’t need to drive without a seatbelt anymore – especially when I don’t have to. If you feel the same, we may be a good match.
($100,000 minimum investment. High-Net-Worth Investors only)
