subject: How Trading Option Credit Spreads Wiped Out My Entire Account [print this page] I want to share with you today how credit spreads turn my trade profits into the air. I wish to discuss with you the significance of adjustments and what the risks involved are if you fail to manage your option positions properly.
Taking into consideration its attributed risks, credit spread is considered by many as a high probability trading strategy. If traded by itself without any other option position, an options credit spread can be a bit riskier than you may think of.
Credit spread is a very simple trading strategy where most beginning option traders have quickly learned; yet, they have no idea what danger this strategy is giving them. With its simplicity, credit spread is particularly popular on the web with a lot of sites teaching the strategy. Its popularity though is not based on its selling capacity but plainly due to its ease. So, teaching neophyte option traders about credit spreads is relatively a good business to date. Promises of super profits can be so inviting to them. But, leaving option traders trading with credit spreads alone has resulted in a lot of them losing huge amounts of money every year. And the risks brought by credit spreads often result in an even deeper level of complexity in a trader's life.
Why complicated? Well, it is commonly known among the community that a trader has the option to get into a credit spread with 90% probability of trading profits. But what beginning options traders who are sold out to the belief fail to consider is the fact that while it is true to have 90 percent probability in making a profit on the trade, there are immense levels of stress involved while the trade is in play.
The problem with the credit spread is that it's a very directional trade. Even though it has Theta on its side, it has Delta and Gamma working against it. For the small amount of Theta that you get from a credit spread, you are picking up even more danger by trading this option spread with very high Gamma. What this means is that as the price of the underlying changes, the profit and loss on the trade also changes very quickly. This type of trade is a lot more volatile and risky than most beginning option traders are aware of.
Well to conclude this class on the risk of the credit spread, I'd just like to finish and say that there are many other types of trades that are much safer than this particular option spread. And if you do insist on trading credit spreads, try to combine them with other strategies so they are not so risky.
