Ready to master these essential exit rules that can increase your profits and win rate? In this article, we will delve into two crucial exit rules that can significantly impact your success in credit spreads course trading. These rules are designed to help you increase your profits and win rates while minimizing risks.

Understanding Credit Spreads

Before we delve into the exit rules, let’s briefly recap what credit spreads are and how they work. Credit spreads are options trading strategies that involve simultaneously selling and buying options contracts on the same underlying asset. The goal is to generate a net credit by collecting a premium when you initiate the trade. Credit spreads can be constructed using both call and put options, and they are often employed to profit from price movements, or lack thereof, in the underlying asset.

Now, let’s explore the two essential exit rules for credit spreads trading:

Exit Rule #1: Close When the Strike Price Is Broken

The first exit rule is straightforward: close your credit spread trade when the strike price is broken. To understand this rule, let’s use a visual example. Imagine you’ve set up a put credit spread trade, with your strike price as the point where you want the underlying asset to stay above. If the stock moves against your trade and breaches your strike price, it’s essential to act swiftly.

Closing the trade when the strike price is broken serves several critical purposes:

1. Preventing Assignment Risk: When a credit spread is in the money, you face the risk of assignment, which can lead to unforeseen consequences. By closing the trade, you avoid this risk.

2. Reducing Losses: Exiting the trade when the strike price is breached typically means you’re exiting around the 50% mark of the potential loss. This significantly limits your downside risk and helps you preserve capital.

This rule is crucial for risk management and emotional control. It prevents you from holding onto a losing trade in the hopes of a turnaround, a common mistake that can lead to substantial losses.

Exit Rule #2: Early Exit for Sideways Markets

The second exit rule, the early exit strategy, is particularly useful in neutral or sideways markets. While it’s tempting to hold credit spread trades until expiration, certain conditions can make early exits advantageous.

Here are the criteria for employing the early exit rule:

1. Close for Five Cents or Less: If you can buy back the credit spread trade for five cents or less, consider it for an early exit. This typically indicates that the trade is already highly profitable.

2. More Than Four Days Until Expiration: Ensure there are more than four days left until the options contract’s expiration date. This allows you to redeploy your capital into new trades more quickly.

This early exit rule helps increase your win rate by taking profits sooner and freeing up your trading capital for other opportunities. It’s particularly valuable in markets where the underlying asset isn’t exhibiting strong directional movement.

Conclusion

Mastering credit spreads trading involves a combination of strategy, risk management, and discipline. These two essential exit rules, closing when the strike price is broken and employing an early exit strategy for neutral markets, can be powerful tools in your trading arsenal.

Remember that trading always carries risks, and it’s vital to educate yourself thoroughly, practice responsible trading, and continuously adapt to changing market conditions. By following these exit rules and staying informed, you can enhance your chances of success in credit spreads trading while minimizing potential losses and emotional stress.

Would you like to access the entire video course now? Here’s the backdoor link to The Ultimate Credit Spreads Trading System Course for FREE! This backdoor link won’t be available long.

Thanks for reading 🙂
Austin Bouley
CEO & Chief Strategy Officer