Bankrupt From Trading Credit Spreads With Options
Get some tips on trading option credit spreads.
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 really 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.
In most cases the “credit spread” is the first spread you will learn. It is very simple to learn, but in the beginning you will not realize how dangerous this type of trade can be. You will find many teachers will teach this way of trading, since it is easy to learn and easy to sell, but they do not tell you the risk it can expose your account to. Teaching beginners how to trade “credit spreads” is a very good business, but if you trade “credit spreads” and nothing with it to protect your trade, you can lose a lot of money. Not only can you lose a lot of money, but it is a very stressful way to live. Let’s see why.
It is a well known that you can go into a “credit spread” with a 90% certainty that you will make money on the trade. As a beginner in option trading you will believe this, but do not close your eyes to the other side of this picture. You may have a 90% probability to make a profit on this type of trade, but you need to look at what is going on while the trade is in play. Teachers do not tell you about the high risk and stress that is involved.
There are times you can be behind in your trade the entire time you are in the trade, but the teachers will not tell you that. They do not talk about how they really feel, how worried they are, how difficult it is to sleep, all the way to the very last day, and praying for their stock to go up the next day. You are really putting at risk 90% of your money to make a small 10% profit. The truth is you may lose 90% with your first trade. No one tells you that with the “credit spread.” A 90% probability does not mean you will make money nine times in a row and then lose one time. You may lose it all the first time. This does happen with beginning option traders.
How can this happen? 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 this one. If you do trade “credit spreads”, please learn how to combine them with other trades so they are not so risky.
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