Credit Spread with San Jose Options

In this excerpt from our options mentoring course, David gives us some insight on understanding the Credit Spread.

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Credit Spread with San Jose Options

Video Transcripts

Greeks Singly. What we’ve got highlighted is a single call. Let’s talk about that. With the single call, you’ve bought it, you’re going to be long delta. We know we’re at the money or close to it so we know that our delta is right around 50. You’re at the money strike is always going to be around the 50 delta. We know that we bought in options so your gamma is always going to be positive when you’re talking about single strikes. Gamma, again just a refresher, is the amount that your delta is going to move with a 1-point change. We see that with a 1-point change, our gamma is going to move the delta a full 50 cents. We also know that gamma is highest right her at the money. We don’t do a lot of trades, San Jose Option trades at the money, but again this is a good refresher for the at the money spreads.

When we buy a call, you see that a theta is negative because we bought the call. In fact, a lot of it will be extended value. All this kind of bell curve stuff, when you’re looking at just the Greeks is all of this is highest at the money, the gamma, theta and vega. When you’re buying just an at the money option, your theta is going to be highest right here. That’s why a lot of people will not just buy a single option like this at the money because it wastes so dramatically.

You guys know what we’re looking at on the risk profile graph right here of just a lone call. We bring it back a little bit like this. We see that the red line is what the position will look like at expiration, at September, expiration the third week of September. What we’re looking at is what the option position looks like and so over time the white line will gravitate towards the red line. What that means is your zero line goes right across, like this, this white line right here where it says zero. If you put your strike or your slice right on the at the money, you’ll see that over time, the white line will start coming down and gravitate towards the red line. What that shows is your theta wasting away if the underlying doesn’t move. You guys get that?

For that matter, as we go up this line, does anybody know exactly what we’re looking at when you take a look at this white line here? I know I already said that it’s what your position looks like today but to really kind of dig deep, do you know what we’re really looking at? It’s one of the Greeks. There you go, slope is delta. Thank you Alan! What happens is, when you’re looking way over here…