Casinos bring in gaming revenue confident that over time they will collect more than they will pay out in winnings. They know that even though there are jackpots to be paid, the odds are in favor of the house. Similarly, insurance companies collect premium with the expectation of future payouts. By knowing the probability of a claim, they can calculate their expected return for assuming the risk of the policyholder. The insurer is confident that, over time, they will profit despite their obligation to pay claims.
Option traders can benefit from the same logic by selling credit spreads. This strategy gives them the ability to capitalize on probabilities, as opposed to entering a position hoping to profit on a ?long shot?, as well as limit their exposure to risk.
Credit Spreads
A credit spread is an option strategy that involves the simultaneous sale and purchase of an option with common underliers and expiration dates. As the name implies, the short options must be higher...
