Of all of the different option strategies out there, the credit spread technique is probably one of the most well-liked, the most talked about, one of the most used (or abused depending on how you look at it) – and perhaps the most harmful option approach of them all.
The thing is, when rookie option traders very first hear of this strategy – very few of them seem to be able to fight off the temptation to bounce right into trading them – with way too much actual hard earned dollars on the line – and way too little preparation, knowledge, and know-how.
And it appears that a great amount of them – if not nearly all of them – immediately wind up finding their groins bashed in, their heads chopped off, their eyes poked out, and getting really, very, badly hurt.
Now before you start to get the wrong impression here, please, let me clear up some thing.
I actually LOVE credit spreads.
I think they are an absolutely wonderful and excellent way to trade.
And all those reports and claims about generating five to ten percent a month even though barely taking any time looking at the marketplace – and how the possibilities are so unfairly on the side of the credit spread trader – and how trading credit spreads are just like being the ‘house’ as opposed to the gambler – yes – I believe and agree with all those claims and tales as well. Actually, not just do I agree and believe those claims – I KNOW they are accurate – mainly because I watch it happen first hand in my very own trading account on a standard basis.
The trouble is – there is something very large that’s getting left out of all those claims and testimonies – and this one large thing is causing way to many fresh faced ‘hypnotized’ option traders to misunderstand this technique correctly from the start – and in a way it’s actually encouraging them to leap thoughtlessly into trading them with quite inaccurate expectations.
See, even though it might be accurate that the credit spreads (and the iron condor strategy) can generate yields of over ten percent monthly, and that they favour the trader by offering higher probabilities of winning (in some situations as much as 80 and 90 percent) – what is just not getting talked about is the risk to reward ratio of these trades – which can regularly be as high as ten to 1.
10 to 1! Which means that in order to obtain those 80 to 90 % probability trades you might very well need to risk 10 dollars to create just a single dollar – or to be more accurate – you have to be willing to lose $10,000.00 for the chance to make just $1,000.00.
And as my dear mother used to say – ‘that’s an honest to goodness awful smelling spoiled rotten deal’.
Because as soon as you start to do the math you uncover the fact that even with those glorious monthly returns with 80 to 90 percent probability of winning – all it takes is just one problem month to arrive and induce a loss that may entirely obliterate the eight to nine wins you’ve accumulated – or worse – in addition it could also wind up cleaning out the rest of your account.
However – all isn’t lost…
As I mentioned earlier, I love the credit spread. And the iron condor trade as well.
And – I regularly make really good income from both of them.
So certainly there’s a way around those problematic losing months and that nasty risk to reward.
Of course there is.
It’s all in how you go about managing the trade.
See, so long as you learn the proper way to first put these trades on, then blend that with a very easy, uncomplicated management procedure (see below) and several simple adjustment tricks (see below) – this risk to reward ‘problem’ is absolutely eliminated and no longer any trouble.
You just need to take some time BEFORE you go slap on a credit spread or an iron condor – and arm your self with a little bit of our ‘spread trading insight’. Learn a couple of our ‘tricks of the trade’ – so when those tricky months DO arrive (and they definitely will believe me) – you will know EXACTLY what you must do to immediately crush out that danger, adjust yourself and your credit spread and/or iron condor out of the difficulty, and truly enjoy these trades for all they are ‘really’ cracked up to be.
To learn more about how to properly place, manage, and adjust these trades for consistent income, sign up for our free option trading newsletter by clicking here.