Why do you write credit put spreads versus just selling the puts on a stock as writing a spread only reduced the premium you take in?
Credit spreads are the only way some investors can take advantage of selling puts. Many brokers will not allow less experienced investors to sell puts sell puts; they feel it is too risky as the stock could theoretically drop to $0, and you would have to take the stock at the strike price you sold. That is ridiculous as they will gladly let you buy a stock and ride it to $0. Nonetheless, this is a problem many new investors have. Credit spreads are a good way to get around this problem as your risk of loss is limited to the spread. We like to write $5 spreads where possible, so the maximum risk of loss is $5 minus the credit times the number of spreads written. Another advantage of writing spreads is that you do not tie up as much margin cash. Typically, when you sell a put you are required to maintain 30% margin, i.e., enough cash to cover 30% of the value of the stock if it is put to you at the strike price sold. If you are selling ten contracts of puts on a $200 stock, that means you would be required to keep $60,000 cash as margin. You could write 12 $5 credit spreads with that margin requirement.
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