The truth on trading “credit spreads”…You will learn why it is so important if you do not know how to correctly handle your option positions. Even though it is a well known trade we will take a good look at what can happen using this particular spread. This seems to be a good trade, but until you work with this trade, you will not know the high risk it can be. If it is traded alone this options “credit spread” can be very risky. By trading it alone I mean that it is not being protected by another option trade.
The “credit spread” is the first spread learned by most beginners. It is a very simple trade, but as a beginner with option trading you do not realize that this type of trade can be very dangerous. On the internet you will find many courses that teach this way of trading. The real reason is not because it’s a safe trade, but it is easy to learn and easy to sell. Teaching “credit spreads” to a beginner in option trading is a great business, but if you only trade “credit spreads,” you can lose a lot of money each year. Not only can you lose lots of money, but it is a very stressful way to live. Let’s see why.
It is a known factor that an option trader can go into a “credit spread” with a 90% certainty that he will make money on this trade. Most beginning option traders believe in this trade. This is true, but do not close your eyes to the other side of this picture. Though you may have a 90% certainty to make a good profit on this trade, you need to consider what is going on while this trade is in play. People will not tell you about the high stress that is involved.
People don’t talk about how they can be way behind on the trade sometimes the whole time they’re in the trade. People don’t talk about how they get down to the very last day and they are risking 90% just to make a small 10%, and they don’t talk about how they can’t sleep at night and how they are praying to God for their stock to go up tomorrow. Finally, one of the most important things that nobody tells you about the credit spread is that a 90% probability doesn’t mean that you’re going to make money nine times in a row and then lose one time. The sad truth is that you might lose 90% on your first trade. This happens often to new option traders.
The problem is that a “credit spread” is a very directional trade. It has Theta on its side, but it has Delta and Gamma working against it. For the little amount of Theta that you get, you are getting more danger with very high Gamma by trading this option spread. When the prices of the underlying changes, the profit and loss on the trade will also change very fast, this is why it is dangerous. This type of trade is more risky than most beginners trading options are aware of.
Now that you have learned about the high risk in “credit spreads”, I would like you to know that there are many other types of trades that are a lot safer than the “credit spread”. If you do trade “credit spreads”, please learn how to combine them with other trades so they are not so risky.
Looking to find the best education on Stock Options, then visit www.sjoptions.com to find the best alternative trades to credit spreads like Broken Wing Butterflies.
Tags: credit spreads, investing, option trading, options, stock market