subject: Credit Spread - How To Lose Your Entire Trading Account Quickly [print this page] The credit spread option strategy is one of the most popular option strategies available to traders. Unfortunately, it is also possibly the most dangerous.
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 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.
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.
The big 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 alot 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.
This means that in order to achieve those 80 to 90 percent probability trades - you need to risk ten dollars to make just one - or to be more realistic - you need to put at risk $10,000.00 for the chance to make just $1,000.00.
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!
However...
There is still hope...
Because - as I wrote previously - I REALLY DO like the credit spread strategy.
And - I consistently make money from it.
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 revolves around how you go about handling 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 credit spread strategy for all that it's 'actually' cracked up to be.
