Just thought I'd report on my experience trading spreads in the current market.

 I've closed four spread trades using options expiring in March:

• Winner, Bear Put, $1850 gain
• Loser, Bear Call, $875 loss
• Loser, Bear Call, $865 loss
• Winner, Bear Put, $2870 gain

I have a bunch of other trades that are still open based on options expiring in March:

• Sure winner, Bear Call, $380 gain
• Sure winner, Bear Call, $400 gain
• Winning, Bear Call, $370 gain
• Winning, Bear Call, $400 gain
• Sure winner, Bear Call, $410 gain
• Winning Bull Put, $500 gain
• Sure Winner, Bear Call, $450 gain
• Sure Winner, Bear Call, $550 gain
• Winning, Bear Call, $290 gain
• Winning, Bear Call, $220 gain
• Winning, Bear Call, $400 gain
• Winner, Bear Call, $1200 gain
• Sure Winner, Bear Call, $400 gain
• Winning, Bear Call, $200 gain
• Winning, Bear Call, $550 gain

19 trades, 17 winners, a gain of $9500.  The option requirements were about $75K, since all of the trades were not open at the same time.  That's about 12% a month, during a pretty crappy month.  Unfortunately, I left another part of my portfolio long, so the success of this strategy just allowed me to bail as fast as I was taking on water.

In the spirit of full disclosure, I have seven additional spread trades open, 5 expiring in April and 2 in July.  The April trades were entered between March 10 and March 12, and they were all bearing in nature.  All five of the April trades are currently negative, but none of them are yet looking dangerous, and time decay and the general market direction are both working strongly in my favor.

This had actually been a pretty comforting month in the sense that I've gained confidence in my ability create winning trades in a bear market.  Instead of having to say, "this stock is going in this direction", I only have to say things like, "this stock will not go down by more than 20% in the next three weeks", or "this stock will not go up by more than 15% in the next three weeks".

This will never create a big winner.  But if I can even generate 3% a month on a consistent basis, I'll be retiring early. 

Well I can't edit that so let me just finish what I was going to say!

 How big of a spread do you typically run between strike prices? 

 Obviously all of these questions may have fairly confidential natures to them and you may not wish to reveal your strategies, which I totally understand and will not be offended in any way if that is the case.  But I would like to learn from someone who's being successful in such a CRAZY market!

First, let me stress that I'm not the most experienced person around, so you should verify what I've said with your own research.  Second, even with spread trades, I would be careful in the financial sector.  There is no need to focus on the most gigantic premiums.

Most of my non-index spreads have had $5 between the strikes.  The way to think about it is that the number of contracts * (difference between the spreads) is roughly the amount you are risking.  In a credit spread, it's the amount you have to keep liquid in your account.

You'll have to balance the capital you risk, against two things:  

• The cost of the trade
• Your need to be diverse.

 I tend to buy 10 of each leg.  Now that I'm getting a better feel, I'll probably raise that a little bit.  You need to look for three things in a stock:

• Option liquidity, both in volume and open interest.  If you don't see that, pick another stock.
• I use the probability calculator to insure that I have at least an 80% chance of the stock finishing out of the money for both options.  Also look at the changes of touching your short leg, if that's too high your chance of being forced out of the trade is greater.  If you do this, your short leg is almost always two strikes out of the money.
• Finally, I want a short term story to tell about the stock.  I usually pick stocks that have just gotten news of some kind that makes me willing to make a short term bet on the direction.  For instance, I just opened a bear call spread on STP when it was downgraded.

I only open these trades on options that will expire in less than 6 weeks, and most of my spreads were opened with less than 4 weeks till expiration.  Remember that the driving force of all these credit spreads is time decay.  And remember that you're in these trades because you don't want the risk of holding the stock.  Holding options for several months is a lot like holding the stock.

I haven't had too much luck using the option strategy scanner to find these trades, but frankly, they aren't hard to find.  Maybe someone else has some suggestions on better use of the strategy scanner. 

Most of all - remember that each of your wins is small - so you can't afford a big loss.  You can always find another one of these trades.  If one moves strongly against you - dump it.  The longer you wait to dump it, the worse it hurts.

I also recommend the iVolatility.com weekly newletter.  I've learned a lot from it - although it generally recommends debit spreads.  There the loss is limited to the debit, and the potential profit is generally 10 times as big.  The debit spreads required a little more active management, though.

Hope this helped.  If not, feel free to ask some more questions.  Answering them helps me think about what I'm doing.