Selling credit spreads based on support and resistance is often a very good way to go for option traders. If an option trader believes the stock will stay under a specific area, he or she often looks for areas of potential resistance that might help keep the underlying from attempting to move higher. If he or she believes the stock will stay above a certain area, potential areas of support might help keep the underlying from moving higher. It seems intuitive but I also see option traders do the opposite when initializing their credit spread.

Many times, traders will identify support and resistance and use that as a guide for their credit spread. That is all fine and good but I often have questions about when to initialize the trade. One of the biggest potential mistakes I see is that option traders sell put spreads when the underlying is at resistance and sell call spreads when the stock is at support, as seen below.

Many times the logic is that the underlying is further away from support or resistance. This much is true but there is also the other side. Support, as well as resistance, has a better chance to hold than get traded through. For example, if you are selling a call spread when the underlying is at support, the stock has a better chance to move sideways (which would be OK) or higher than lower. Clearly when a call spread is sold, the option trader prefers the underlying to move lower than higher.

Maybe this is something to consider as an option trader before you implement your next credit spread. Consider selling a call spread when the stock is at potential resistance and selling a put spread when the stock is at potential support. The odds may be on your side with the underlying having a better chance to reverse than move against the position. Good luck!

John Kmiecik, Market Taker Mentoring