You sell and buy a put option or call option on the same security with the same expiration month. The option being sold is closer to the current market price and thus more expensive, selling that option and buying the option further out of the money creates your credit amount, or option premium collected. This money goes directly into your trading account and you will get to keep all of it as long as your trade ends profitably by the end of the particular options cycle.

The way we make money is with the passage of time. Every option has an expiration date. As each day passes the option is worth less and less due to time decay. If we sell an option for $2.00 as it gets closer to its expiration date it will gradually drift closer and closer to a value of $0 as long as it remains out of the money.

There are two kinds of credit spreads: the bull put spread; buy a put and sell a put, and the bear call spread; buy a call and sell a call.

When you mate the bull put spread and the bear call spread together on the same security this creates the Iron Condor. (See Diagram)

The Iron Condor is considered a non-directional or neutral strategy, meaning you feel the market will trade in a sideways direction for a while. You can also put on a bull put spread, a bullish strategy, and wait to a point when you feel the market has lost its upward momentum and then put on a bear call spread. In other words you don't have to enter the iron condor as one trade or all at once.

One of the main reasons to trade the iron condor is to double your profit. Your broker will require a certain amount of money to be held in your account as maintenance for your credit spread. This is called the margin amount or margin requirement. When you enter a June bear call spread on OEX and receive .50 net credit, there will be a margin requirement of say $5,000. As long as your broker is not still living in the dark ages, they will let you put on a bull put spread on OEX and receive an additional .50 net credit and not have to put up an additional $5,000. The broker allows you to do this because they know at expiration date your stock, index, or ETF can only be in one place. You can win on both trades, you can win on one and lose on the other, but you cannot lose on both positions.

It's a laid back strategy and fairly easy once you understand the mechanics of it. The key is knowing when and where to enter, how soon to get in, how far out of the money do you go, how much premium do you try to capture, how to negotiate the amount of premium you collect, and what to trade.

It is a very consistent and safe strategy. We use it as a cash flow machine to generate consistent monthly returns. We have sold naked or uncovered calls and puts in the past and yes you can receive more money than from selling credit spreads; however your losses are also unlimited. With a credit spread you are always hedged and protected, your losses are capped. You also end up with a better rate of return with selling credit spreads as the margin requirement is lower than when selling naked options.

One of the best features of this strategy; is you know before you ever enter the trade what your profit will be and what your maximum loss will be. You also know when to get out of the trade which is hopefully, just letting it expire worthless on expiration date. Compare this with the traditional buy a stock and hold it, not knowing how much it will go up, or if it will go up, not knowing how long it will take to move, do you take a small profit or let your profits run, take a small loss, or hope it will turn around.

We will show you when to get in. You will know ahead of time what your potential profit will be for the month. You will know how long your money will be tied up. We only trade the very broad Indexes and the ETF version of the indexes. This smoothes things out and calms down our trading activity. If you sold a credit spread option on an individual stock you expose yourself to accounting irregularities, upgrades, downgrades, changes in sector sentiment, earnings forecasts and outlooks etc. We prefer to trade a larger, less volatile basket of stocks by trading the whole index itself.

One of the concerns some people have with this strategy is the risk/reward ratio. With some strategies you have 2 or 3 times as much upside potential as your downside. With credit spreads it's a little different. We take in a $1.00 on an iron condor and we risk $4.00, but because we are going so far out of the money our success rate is 85 - 90% and higher. We are stacking the odds in our favor. If it looks like our position might be threatened we will have plenty of time to react. There is no need for you to sit in front of your computer or in front of CNBC or Fox Business Network and watch the market all day long. We will do that for you and we will also provide you with alerts you can set to warn you if your trades get close to being threatened.

We will normally trade 2 or 3 different indexes per month and their ETF equivalent. It is best to trade more than one index for diversity, but you don't have to. You can choose only one if you like. We used to trade several indices in one month, but found it unnecessary. It only led to more babysitting and more commissions. We now focus on only 2 or 3 and have chosen the biggest and broadest of them all. The Dow Jones Industrial Average only contains 30 stocks, yet everyone is always talking about what the Dow did. If one or two of those 30 stocks had some news or earnings come out, it could dramatically skew what the entire index does.

Here is a list of what we have traded credit spreads on in the past OEX, XEO, SPX, RUT, OIH, BBH, SOX, MSH, NDX, MNX, SMH, IWM, QQQQ, OEF, TLT, XLF, XLE, DJX, DIA, MDY, and EEM. May have forgotten a few, but you get the point. We have sifted, sorted, and experimented with many ETF's and Indexes to find the most consistent, diverse, and liquid of them all.

We only trade where there is plenty of open interest, so there should be no issues of liquidity with several orders being placed within the same time frame. The longest we will ever be in a trade is about 7 - 8 weeks.

We provide you with both a trade on the Index and on the ETF derivative of the index. There is no need to trade both unless in the beginning you want to see what works best for you. Some of you may be more comfortable with the Index which will normally have a spread of 5 or 10 points. Some may prefer the ETF which will have a spread of 1 - 5 points. You'll have to decide depending on the size of your account and your commission structure what works best for you. There are pros and cons of both.