Net Credit Spreads, within the context of crypto institutional options trading, refers to an options strategy where the premium received from selling an option exceeds the premium paid for buying another option of the same type, underlying asset, and expiration, but with a different strike price. This strategy aims to generate income by betting on limited price movement of the underlying cryptocurrency. It is a common technique used to profit from either decreasing volatility or a specific price range forecast.
Mechanism
The mechanism involves simultaneously selling an option with a higher premium and buying an option with a lower premium, both within the same options chain. For a call credit spread, an out-of-the-money call is sold and a further out-of-the-money call is bought. Conversely, for a put credit spread, an out-of-the-money put is sold and a further out-of-the-money put is bought. The net premium collected upfront constitutes the maximum potential profit, while the difference in strike prices minus the net premium defines the maximum risk.
Methodology
The methodology dictates careful selection of strike prices and expiration dates based on volatility expectations and price forecasts for the underlying crypto asset. Risk management is crucial, involving the calculation of maximum potential loss and ensuring sufficient collateral is available to cover margin requirements. Traders often use technical analysis and market sentiment indicators to identify suitable entry points, aiming to capitalize on expected range-bound trading or slight directional bias while limiting downside exposure.
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