Credit Spread - Oh Man, I Want My Mommy...
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The Credit Spread Option Trading Strategy is perhaps the most dangerous option strategy around.
The thing is, when rookie option traders first hear of the credit spread - very few seem to able to resist the temptation to jump right into trading them - with too much real hard earned money on the line - and not nearly enough education.
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 - wait - hold on just a second.
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.
And I think it REALLY IS a good solid trade.
And all those stories and claims about making 5 to 10 percent a month while barely spending any time looking at market - and how the odds are so unfairly on the side of the credit spread trader - and how trading credit spreads is just like becoming the 'house' instead of the gambler - yes - I believe all those claims and stories too. In fact, not only do I believe those stories - I KNOW they are true - because I experience it myself first hand on a regular basis.
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.
See, while it may be true that the credit spread and iron condor strategies can kick off yields of over ten percent monthly and that they favor the trader by offering high probabilities of winning (in some instances as high as 80 and 90 percent) - what isn't being talked about is the risk to reward ratio of these trades - which can be as high as 10 to 1.
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...
Like I said before, I LOVE the credit spread trade.
And - I consistently make money from it.
So obviously there's a way around that horrible risk to reward issue and the inevitable problematic losing months.
And yes, there certainly is.
It all revolves around how you go about handling the trade.
As long as you learn the CORRECT way to initially place these trades, then combine that with a super simple management technique and a few easy adjustment tricks - this risk to reward issue can be completely eliminated and no longer presents a problem.
You just need to take the time BEFORE jumping into the credit spread trading pool to equip yourself with the proper knowledge. A few simple 'tricks of the trade' - so when those problem months DO come along (and they WILL believe me) - you will know exactly what you need to do to immediately squash that threat, easily adjust yourself out of the problem, and experience the credit spread option trading strategy for all it's 'really' cracked up to be.
Article Source: Articlelogy.com
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