Option Credit Spreads Destroyed My Life PDF Print E-mail
Written by Morris Puma   
Friday, 30 October 2009 17:59
Hi there and welcome to this article on credit spreads. In a few words I'd like to express the risk involved in this type of option spread just in case you are new to trading options. The reason I would like to bring this up now is because I have had many phone calls from option traders who lost huge chunks of their trading portfolios in October of 2008. Some traders lost up to 80% of their trading capital using this strategy, and the reason is because although this trade has a 90% probability, the risk and the stress involved is not often addressed correctly.
by MorrisPuma


Hi there and welcome to this article on credit spreads. In a few words I'd like to express the risk involved in this type of option spread just in case you are new to trading options. The reason I would like to bring this up now is because I have had many phone calls from option traders who lost huge chunks of their trading portfolios in October of 2008. Some traders lost up to 80% of their trading capital using this strategy, and the reason is because although this trade has a 90% probability, the risk and the stress involved is not often addressed correctly.

The credit spread is one of the most popular option spreads traded today. The reason is because the credit spread is simple, it makes money over time and it is a trade with a high probability. But this probability rating can be very misleading. The dangers of the credit spread are rarely addressed in books and online credit spread courses. The sad truth is that most people teach the credit spread because it's a good business, but not because it's a good option strategy. It's actually a very risky trade and very directional.

The 90% probability credit spread is very popular on the Internet today. This is a very well-known option strategy. But how much can we make on a 90% probability trade? Usually we can make between five and 10% in one month, but is this really easy money? I think not. Those of you who have traded credit spreads for a while already know what I am talking about. When this trade goes against you, it really goes against you. It's very easy to do a lot of money on his trade.

Salesman don't tell you how far behind you can be on a credit spread in just a few days if the trade goes against you. Salesmen don't talk about how you can lose 90% of your trading capital the very first monthly trade credit spreads. Salesmen don't tell you this stress related but this particular option trade. They don't tell you that you won't be able to sleep at night.

Credit spreads are actually very directional trades. If you look at a risk graph of a credit spread, then you understand what I am saying. Even though this trade has been on its side, the Gamma is so high that it makes the trade extremely risky. If this trade goes against you, you will lose money really fast. If you are trading short-term credit spreads, and often times you will find yourself at the edge of a cliff and about to lose all of your money.

In conclusion I would just like to say that the credit spread definitely has a place in my options trading portfolio, but I only use credit spreads in conjunction with other option strategies. As a standalone strategy the credit spread can expose your trading capital to enormous risk. So if you insist on trading credit spreads, then please make sure you are trading safely by hedging them with other option spreads.

DISCLAIMER: This article is provided as information only and is not to be taken as financial advice.

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