Option Credit Spreads Destroyed My Life
Hello option traders and welcome to this discussion about credit spreads. In a few words today we'll be discussing why it's so important to have adjustment plans before you enter into a short-term credit spread options trade. Although the credit spread is very popular amongst option trading community the high risk in the trade is not always talked about. Credit spreads can be very risky trades if they are not being hedged by other option strategies, and being that most option traders do not know how to hedge this position, many of traders are losing their trading capital on a daily basis.
The credit spread is one of the most popular option spreads traded today. The reason is because the credit spread is simple, it makes money over time and it is a trade with a high probability. But this probability rating can be very misleading. The dangers of the credit spread are rarely addressed in books and online credit spread courses. The sad truth is that most people teach the credit spread because it's a good business, but not because it's a good option strategy. It's actually a very risky trade and very directional.
It's well known that an option trader can enter into a credit spread with a 90% probability that he will make money on the trade. That is well known. That is the popular belief, especially amongst beginning option traders. This is true, but do not ignore the other side of the picture. Even though you have a 90% probability to make a profit on the trade, you must consider what goes on while the trade is in play. People don't talk about the level of stress involved.
Option courses pushing credit spreads do not tell you about the risk. They do not tell you how far you can be behind on this trade just a few days after you enter it. They don't value how you can lose 90% of your trading capital in one month. They don't tell you how this 90% probability trade can lose the very first month of its existence. Just because the trade has a 90% probability, doesn't mean it makes money nine times before it loses once. This just means that it makes money 90% of the time out of a lot of trades. You might have to do 1000 trades before his trade averages its 90% probability.
Those who tell you that credit spreads are non-directional trades are not telling you the whole truth. It's true that a credit spread can make money in any direction, but the direction cannot be very far. Also, if the trade goes the wrong way from the beginning, you will be in a very dangerous position, and you will be way behind on the trade. If you are trading short-term credit spreads, you often times find yourself standing at the edge of a cliff and very close to losing all of your trading capital.
In conclusion I would just like to say that the credit spread definitely has a place in my options trading portfolio, but I only use credit spreads in conjunction with other option strategies. As a standalone strategy the credit spread can expose your trading capital to enormous risk. So if you insist on trading credit spreads, then please make sure you are trading safely by hedging them with other option spreads. - 23208
The credit spread is one of the most popular option spreads traded today. The reason is because the credit spread is simple, it makes money over time and it is a trade with a high probability. But this probability rating can be very misleading. The dangers of the credit spread are rarely addressed in books and online credit spread courses. The sad truth is that most people teach the credit spread because it's a good business, but not because it's a good option strategy. It's actually a very risky trade and very directional.
It's well known that an option trader can enter into a credit spread with a 90% probability that he will make money on the trade. That is well known. That is the popular belief, especially amongst beginning option traders. This is true, but do not ignore the other side of the picture. Even though you have a 90% probability to make a profit on the trade, you must consider what goes on while the trade is in play. People don't talk about the level of stress involved.
Option courses pushing credit spreads do not tell you about the risk. They do not tell you how far you can be behind on this trade just a few days after you enter it. They don't value how you can lose 90% of your trading capital in one month. They don't tell you how this 90% probability trade can lose the very first month of its existence. Just because the trade has a 90% probability, doesn't mean it makes money nine times before it loses once. This just means that it makes money 90% of the time out of a lot of trades. You might have to do 1000 trades before his trade averages its 90% probability.
Those who tell you that credit spreads are non-directional trades are not telling you the whole truth. It's true that a credit spread can make money in any direction, but the direction cannot be very far. Also, if the trade goes the wrong way from the beginning, you will be in a very dangerous position, and you will be way behind on the trade. If you are trading short-term credit spreads, you often times find yourself standing at the edge of a cliff and very close to losing all of your trading capital.
In conclusion I would just like to say that the credit spread definitely has a place in my options trading portfolio, but I only use credit spreads in conjunction with other option strategies. As a standalone strategy the credit spread can expose your trading capital to enormous risk. So if you insist on trading credit spreads, then please make sure you are trading safely by hedging them with other option spreads. - 23208
About the Author:
Learn Safer Strategies than Option Credit Spreads in our Live Options Trading Rooms at San Jose Options Mentoring.
posted by X - Men @ 5:48 AM
1 Comments
1 Comments:
Well, this is not a credit spread problem. This is a risk managing problem. Everyone knows about the "if everything goes wrong" 10%. And if that happens, you have to be sure that it`s not gonna "destroy your life". Don't risk more than 10% of your capital in options.
You were ambicious. Tried to maximize your profit by raising your risk level. Get rich in 2 years, etc. Congrats! Don't blame the strategy or the market. You'd fall anyway thinking that way.
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