Monday, January 23, 2012

Credit Put Spreads Part 2 - Diversification

    Diversification – I follow about 20-30 stocks on my watch list and generally just select put credit spreads from this list over and over. I dont run nightly scans of 2000 stocks like some traders do. Those 20-30 tend to be the stocks that have the most liquid options and will almost always be above $50. I try to select at least 5 different stocks for put spreads per each option expiration cycle.  The idea is to have 5 or more put spreads in different stocks so any one will not wipe out your account. Either that or stay in cash until you see something you like vs going large on just one or two stocks. Although a general market decline or a flash crash type move will affect almost all stocks since so much of buying and selling is controlled by computer programs and most stocks are correlated with the general market. Being in several stocks will spread the risk around.

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