In Search of Credit Spreads

For professionals and market makers, boxes -- and their relatives, the conversion and reversal -- are basically risk-management tools or interest rate plays. But for the rest of us, they provide a great way to see how multiple-strike positions can be broken down into the component parts, making it easier to scan for equivalent replacement positions.

We've all been frustrated at some point when we were unable to get a trade off at what we believe is a "fair price" in our chosen strike. Being able to look at other strikes and identify better prices when confronted with wide bid/ask spreads or thinly traded issues (or any other obstacle that prevents establishing the first choice of position) is invaluable. The flexibility to move to a second, third or even fourth alternative will allow you to execute more trades and, hopefully, be more profitable.

Looking at credit spreads, that is using calls to establish bearish positions and put options to create bullish positions, adds additional tools to your trading arsenal and often offers superior probability of achieving profitability.