The Credit Spread Option Trading Strategy is perhaps the most dangerous option strategy around.
The problem is that way too many new option traders slap down significant money and start trading credit spreads immediately upon discovering them without first equipping themselves with the proper knowledge and skills needed to trade them properly. They are so captivated by the stories and claims of ten percent months and 90 percent probabilities that somehow they don't stop to think about what they are going to do if their trade doesn't go exactly as planned.
And unfortunately what always seems to happen to a high percentage of them is that they promptly wind up getting their trading accounts demolished and their heads handed to them on a platter.
Now stop.
Let me explain something here before you start to get the wrong impression.
I absolutely LOVE credit spreads. ALOT. In fact, the credit spread is right up there as one of my favorite tradingstrategies.
And I think it REALLY IS a good solid trade.
And those claims and stories of ten percent monthly gains and ninety percent probabilities? They are absolutely true.
The problem is - there is something big that is being left out of all those claims and stories - and this something is causing way too many fresh new doe eyed option traders to misunderstand this strategy right from the beginning and blindly jump into them with completely wrong expectations.
Yes it's true that credit spreads and iron condors can be put on with an eighty to ninety percent probability of winning. And yes it's true that they can generate returns of over ten percent a month. BUT - they also come with a dangerous risk to reward ratio that can be in the range of ten to one.
10 to 1! That means that in order to try and make just one dollar, you need to be willing to risk ten. Or, put another way - in order to make 100 dollars, you need to risk 1,000 dollars. Or - risk $10,000.00 to hopefully make just $1,000.00!
And as my dear old mammy used to say: 'that smells a lot like an awful bad egg'. Which in fact it is. That risk to reward ratio is nothing but a low down, no good, smelly rotten deal!
Even with the ten percent monthly returns and the high probabilities - all that needs to happen is for a problem month to come along (and it WILL, believe me) - and the next thing you know you'll be staring at a gigantic loss and a zero balance account!
But...
All isn't lost. There IS hope...
Because - as I wrote previously - I REALLY DO like the credit spread strategy.
And - I consistently make money from it.
So clearly there must be a way to profitably trade this strategy without allowing that awful risk to reward issue to get in the way.
And yes, there certainly is.
It all has to do with the management of the trade.
As soon as you discover the 'right way' to place these trades initially - and then how to properly go about managing and adjusting them - that risk to reward dilemma instantly vanishes and goes away.
The problem is that way too many new option traders slap down significant money and start trading credit spreads immediately upon discovering them without first equipping themselves with the proper knowledge and skills needed to trade them properly. They are so captivated by the stories and claims of ten percent months and 90 percent probabilities that somehow they don't stop to think about what they are going to do if their trade doesn't go exactly as planned.
And unfortunately what always seems to happen to a high percentage of them is that they promptly wind up getting their trading accounts demolished and their heads handed to them on a platter.
Now stop.
Let me explain something here before you start to get the wrong impression.
I absolutely LOVE credit spreads. ALOT. In fact, the credit spread is right up there as one of my favorite tradingstrategies.
And I think it REALLY IS a good solid trade.
And those claims and stories of ten percent monthly gains and ninety percent probabilities? They are absolutely true.
The problem is - there is something big that is being left out of all those claims and stories - and this something is causing way too many fresh new doe eyed option traders to misunderstand this strategy right from the beginning and blindly jump into them with completely wrong expectations.
Yes it's true that credit spreads and iron condors can be put on with an eighty to ninety percent probability of winning. And yes it's true that they can generate returns of over ten percent a month. BUT - they also come with a dangerous risk to reward ratio that can be in the range of ten to one.
10 to 1! That means that in order to try and make just one dollar, you need to be willing to risk ten. Or, put another way - in order to make 100 dollars, you need to risk 1,000 dollars. Or - risk $10,000.00 to hopefully make just $1,000.00!
And as my dear old mammy used to say: 'that smells a lot like an awful bad egg'. Which in fact it is. That risk to reward ratio is nothing but a low down, no good, smelly rotten deal!
Even with the ten percent monthly returns and the high probabilities - all that needs to happen is for a problem month to come along (and it WILL, believe me) - and the next thing you know you'll be staring at a gigantic loss and a zero balance account!
But...
All isn't lost. There IS hope...
Because - as I wrote previously - I REALLY DO like the credit spread strategy.
And - I consistently make money from it.
So clearly there must be a way to profitably trade this strategy without allowing that awful risk to reward issue to get in the way.
And yes, there certainly is.
It all has to do with the management of the trade.
As soon as you discover the 'right way' to place these trades initially - and then how to properly go about managing and adjusting them - that risk to reward dilemma instantly vanishes and goes away.
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