In Search of Credit Spreads

Investors are often warned against shorting options because it offers only limited profit potential. But I want to make the distinction between selling options "naked," meaning having a position consisting of more options sold short than owned, and establishing a position for a net credit.

A credit position simply means you are selling more premium than you are buying. There's a multitude of ways to establish a credit position but I want to focus on one of the most basic: the vertical spread. A credit spread calls for investors to sell higher-priced or closer-to-the-money options while simultaneously buying an equal number of lower-priced or further-out-of-the-money options.

Most investors want to use options to make a directional bet and opt for buying options or purchasing a spread for a net debit because of the limited risk associated with owning options. But I think it's a huge mistake to overlook the fact that credit spreads are also directional bets that not only limit risk but also offer a distinct advantage. Credit spreads have a higher probability of achieving profitability. ...