The Risk With Popular Option Income Strategies

The amount of time needed to recover from a debacle is the difference between the low-risk strategies and the popular income strategies

. Recently there was a "computer glitch" resulting in a loss of fifty to seventy percent in a two week period for those trading Iron Condors as income spreads. It will probably take them ten months or more, maybe even a year and a half to make their money back. Most option traders won't be able to rebound from this crash.

For those who were using the low-risk Broken Butterfly strategy, they may have only lost between one to five percent max, if they were doing them right. Personally, I experienced about 2.5% drawdown over that period. This makes the difference rather obvious. When things go bad, they really only go bad for those trading the popular income options strategies. Strategies such as Iron Condors, Calendar Spreads, Covered Calls, Credit Spreads, and Near-The-Money Butterfly spreads were devastated by the recent "computer glitch".

Those who were trading broken wing butterflies were much better off. Some Broken Wing Butterfly traders did not have any drawdown whatsoever. Those who did have drawdown, were able to manage the losses so that they could stay in the game. Those of us doing the low-risk strategies were fortunate enough to make back our losses over the following month. Those who were trading the popular income strategies will most likely never make their money back.

This "glitch" was the perfect example of why I, myself, don't invest too much money in the popular option income strategies. It's all a little too risky for my taste. I'd prefer to make my money slower without experiencing any of the massive losses the aggressive income traders must face every year. To me, it makes more sense to protect what I have and to take whatever the market gives me. This way I know, in the long run, my option trading plan will work out much better.

Over the last few years, I've reworked the popular option strategies so they could initiate with lower risk. I have a different method to trade Iron Condors that is much safer than the popular Iron Condor. I've also developed Broken Wing Butterflies and Unbalanced Condors that have become some of my favorite overall trades. I like that I can initiate a trade with a mere two percent risk, then soon after I am in the trade, I can take off the risk almost entirely in most cases. This pretty much means I have trades that are almost risk free consistently in my portfolio. This is a great way to trade options. The only way I could ever lose on some of these trades is if the market was to drop over seven percent in one day, but if I'm loosing money, that means all those doing popular option spreads will be left with nothing at all. Even in the most extreme situations my strategies have proven much safer than anything I have seen before.

by: Donald Scott

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