The credit spread option strategy is one of the most popular option strategies available to traders. Unfortunately, it is also possibly the most dangerous.
See here's the deal: when a new fresh faced option trader first hears of this trading strategy - he or she becomes so enamored with it that they just can't seem to help but jump right into trading them - risking way too much money - and without much thought of what they are going to do if the trade starts to go wrong.
And usually what winds up happening is that the market promptly snaps off their arms and legs, then smacks them across the face with them, then starts to jab them repeatedly in the eyes. In other words - they wind up getting really hurt.
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 trading strategies.
I think that the credit spread really IS a great trade.
And yes, I absolutely believe all those stories and claims you hear swirling around about credit spreads generating ten percent plus monthly returns and providing trades that have the probability of winning somewhere in the range of eighty to ninety percent. In fact, I KNOW those stories are true because I see it happen all the time in my very own trading account.
Here is the problem: All those fresh, green and excited new option traders have no idea what they don't know. This trading options for income thing is like an alien planet - with a whole new set of rules inside a brand new reality. And when the person who has introduced them to this new way of trading just tells them about the good but forgets to tell them about the bad - they wind up jumping in with way too much confidence, misunderstanding, and expectations that are completely wrong.
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.
That means that while trading these trades you are putting at risk 10 bucks for the chance to make just 1. Or - in reality, in the instance of say a standard ten lot index iron condor, you are risking ten thousand dollars for the chance to make just one thousand dollars.
And as my mammy used to say - that risk to reward ratio is 'an awful bad egg'. In fact, it's an honest to goodness stinking rotten deal.
Just do the math. With a risk to reward like that, even with the great probabilities and wonderful monthly returns - before long a problem month could come along and completely wipe out your entire account!
Nevertheless...
All isn't lost. There IS hope...
As I mentioned earlier - I really do LOVE trading the credit spread strategy.
Over the last ten years it's been extremely profitable for me.
So apparently, even with that atrocious risk to reward quandary, there must be a method to generate consistent income with this trade.
And there absolutely is.
It's all in how you manage 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.
Once you possess the correct credit spread trading knowledge and know how - and understand how to apply a couple super easy to implement adjustment tricks - you'll know exactly how to exterminate any problematic market threat that comes your way, allowing you to experience the http://www.creditspread.org strategy for all that it's 'actually' cracked up to be.
See here's the deal: when a new fresh faced option trader first hears of this trading strategy - he or she becomes so enamored with it that they just can't seem to help but jump right into trading them - risking way too much money - and without much thought of what they are going to do if the trade starts to go wrong.
And usually what winds up happening is that the market promptly snaps off their arms and legs, then smacks them across the face with them, then starts to jab them repeatedly in the eyes. In other words - they wind up getting really hurt.
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 trading strategies.
I think that the credit spread really IS a great trade.
And yes, I absolutely believe all those stories and claims you hear swirling around about credit spreads generating ten percent plus monthly returns and providing trades that have the probability of winning somewhere in the range of eighty to ninety percent. In fact, I KNOW those stories are true because I see it happen all the time in my very own trading account.
Here is the problem: All those fresh, green and excited new option traders have no idea what they don't know. This trading options for income thing is like an alien planet - with a whole new set of rules inside a brand new reality. And when the person who has introduced them to this new way of trading just tells them about the good but forgets to tell them about the bad - they wind up jumping in with way too much confidence, misunderstanding, and expectations that are completely wrong.
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.
That means that while trading these trades you are putting at risk 10 bucks for the chance to make just 1. Or - in reality, in the instance of say a standard ten lot index iron condor, you are risking ten thousand dollars for the chance to make just one thousand dollars.
And as my mammy used to say - that risk to reward ratio is 'an awful bad egg'. In fact, it's an honest to goodness stinking rotten deal.
Just do the math. With a risk to reward like that, even with the great probabilities and wonderful monthly returns - before long a problem month could come along and completely wipe out your entire account!
Nevertheless...
All isn't lost. There IS hope...
As I mentioned earlier - I really do LOVE trading the credit spread strategy.
Over the last ten years it's been extremely profitable for me.
So apparently, even with that atrocious risk to reward quandary, there must be a method to generate consistent income with this trade.
And there absolutely is.
It's all in how you manage 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.
Once you possess the correct credit spread trading knowledge and know how - and understand how to apply a couple super easy to implement adjustment tricks - you'll know exactly how to exterminate any problematic market threat that comes your way, allowing you to experience the http://www.creditspread.org strategy for all that it's 'actually' cracked up to be.
About the Author:
Ted is an option selling lunatic - in particular enthusiastic about trading the option butterfly spread. Visit his vertical spread strategy Website to be taught more about his Trouble-free Paint By The Numbers Plan for trading the weeklys for consistent profits.
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