The Credit Spread Strategy - Oh Boy, I Need My Mother

The Credit Spread Strategy is maybe the most hazardous option strategy around.

See here's the deal: when a new fresh faced option trader first hears of this trading strategy - he or she becomes so interested with it that they just can't seem to help but jump right into trading them - risking way too much money - and without any thought of what they are going to do if the trade starts to go wrong.

And usually what winds up happening is that the stock 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 - wait - hold on just a second.

I don't want you to get the wrong idea here. So let me explain something.

I actually LIKE credit spreads. I like them ALOT.

And I think it REALLY IS a good solid trade.

And those claims and stories of ten percent monthly gains and ninety percent probabilities? They're absolutely true.

The huge problem is that there is some very important information being left out of those credit spread claims and stories. Information that I'm sure would keep a lot of rookie option traders - who frankly just don't know any better - from blindly making that 'over-confident' leap into the credit spread abyss.

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 dear old mammy used to say: 'that smells a lot like an awful bad egg'. Which in fact it is. That risk to reward ratio is nothing but a low down, no good, smelly 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!

But...

There is still hope...

Because - as I wrote previously - I REALLY DO like the credit spread strategy.

It's one of my favorite trades - and it continually generates profits for me.

So clearly there must be a way to profitably trade this strategy without allowing that awful risk to reward issue to get in the way.

And there absolutely is.

It all has to do with the management of the trade.

That risk to reward problem quickly becomes a complete non issue as soon as you educate yourself on the proper way to initially set these trades up and how to correctly manage and adjust them.

You just need to arm yourself with a small amount of trading know-how. A few credit spread trading tricks that will allow you to quickly and easily adjust yourself out of sticky situations and smother any problem month threat that comes along, permitting you to experience the vertical spread options investing trading strategy for all that it's 'really' cracked up to be.

by: Ted Nino

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