Credit Spread Criteria

1. Implied Volatility (IV)

  • Target IV: Moderate to High (higher IV means higher premiums)
  • Why? High IV inflates option prices, allowing you to collect more credit upfront.

2. Probability of Profit (POP)

  • Target: 65%+
  • Why? A good credit spread setup should have a high probability of expiring worthless so you can keep the premium.

3. Delta (∆)

  • Sell Leg Delta: 0.25 – 0.40 (for a balance of risk-reward)
  • Buy Leg Delta: 0.10 – 0.20
  • Why? A delta of 0.25-0.40 means there’s a 60-75% probability that the option will expire out of the money (OTM).

4. Bid-Ask Spread

  • Target: Tight Spread (<$0.10 difference)
  • Why? Tight spreads ensure easy entry/exit and avoid slippage losses.

5. Open Interest & Volume

  • Target: 1000+ Open Interest & high daily volume
  • Why? High OI & volume ensure liquidity, reducing the risk of poor fills.

6. Credit Received

  • Target: 30-40% of the width of the spread
  • Example: For a $5-wide spread, aim for a $1.50 – $2.00 credit.
  • Why? Ensures a good risk-reward balance.

7. Days to Expiration (DTE)

  • Target: 30-45 Days
  • Why? This period balances theta decay and profit-taking opportunities.

8. Theta Decay (Time Decay)

  • Target: Higher Theta (closer to expiration, more decay)
  • Why? Selling premium benefits from time decay.

9. Support & Resistance Levels

  • For Bull Put Spreads: Sell below key support levels.
  • For Bear Call Spreads: Sell above key resistance levels.
  • Why? Ensures a higher probability of staying OTM.

10. Earnings & News Events

  • Avoid credit spreads before earnings or major news.
  • Why? IV crush & unexpected moves can blow up spreads.

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