People have all witnessed the volatility in the commodity markets in 2007. Volatility means considerable far-out-of-the-money premiums available for collecting. Options expire worthless more than 80% of the time. Volatility can be a good thing for traders, especially option sellers. However, volatile markets are played best with a flexible strategy; one that can withstand large swings against a position while not causing a nerve testing drawdown in the meantime. Enter the credit spread. A credit spread is really just selling an option and using part of the premium collected to buy another option to protect the short position. In a credit spread, if both options expire worthless, the trader's profit will be the credit. The vertical spread is a versatile strategy that holds up very well in adverse market conditions. Credit spreads should be an optimum strategy for trading energy markets in early 2008.
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