Welcome to this article on credit spreads. With this class we will be learning the importance of adjustments and what can happen if you do not know how to correctly handle your option positions. The best liked option spreads is called a "credit spread". We will take a good look at this particular spread today. There are those that consider this to be the best type of trade to do, but until working with this trade you will not know nor understand the high risk it can be. If it is traded by itself, an options credit spread can be very risky. This means it is not being guarded by any other option trade.
The first spread learned by most beginning option traders is the credit spread. It's a very simple strategy, but what many beginning option traders do not know is that this particular strategy can be very dangerous. There are many courses on the internet that teach this strategy, but the reason is not because it's a great strategy, but rather, it's simple, and it's easy to sell. What I mean to say is that teaching credit spreads to beginning option traders is simply a great business, but the fact is, many option traders who only trade credit spreads lose a lot of money each year. Not only do they lose a lot of money, but it's also a very stressful way to live. Let me explain why.
It's well known that a trader can enter into a credit spread with a 90% probability that they will make money on the trade. This is the popular belief, especially to the beginning option traders, and although it is true, you have to see the whole picture. You know you have a 90% probability to make a profit on your trade, but now you must consider what's happening while the trade is in play. The stress involved in this is not a popular conversation topic for most.
Sometimes they are behind the whole time they are in the trade, but they do not tell you that. They don't talk about how they feel, how worried they are right to the last day and how difficult it is to sleep at night, and praying to God for their stock to go up tomorrow. They are risking 90% just to make a small 10% profit. Finally, the sad truth is you may lose 90% on your first trade, and what no one tells you about the credit spread is that a 90% probability doesn't mean that you are going to make money nine times in a row and then lose one time. You might be the unlucky one who loses it all on the first trade. This does happen often to beginning option traders.
Short-term credit spreads is that they're very directional trades. Even though they have Theta on their side, they have Delta and Gamma working against them, and that's the trouble. For the small amount of Theta you get from a short-term credit spread, you end up picking up even more danger by trading this option spread with very high Gamma. This means as the price of the underlying changes, the profit and loss on the trade also changes rapidly. These are a lot more volatile and risky than most beginning option traders know.
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.
The first spread learned by most beginning option traders is the credit spread. It's a very simple strategy, but what many beginning option traders do not know is that this particular strategy can be very dangerous. There are many courses on the internet that teach this strategy, but the reason is not because it's a great strategy, but rather, it's simple, and it's easy to sell. What I mean to say is that teaching credit spreads to beginning option traders is simply a great business, but the fact is, many option traders who only trade credit spreads lose a lot of money each year. Not only do they lose a lot of money, but it's also a very stressful way to live. Let me explain why.
It's well known that a trader can enter into a credit spread with a 90% probability that they will make money on the trade. This is the popular belief, especially to the beginning option traders, and although it is true, you have to see the whole picture. You know you have a 90% probability to make a profit on your trade, but now you must consider what's happening while the trade is in play. The stress involved in this is not a popular conversation topic for most.
Sometimes they are behind the whole time they are in the trade, but they do not tell you that. They don't talk about how they feel, how worried they are right to the last day and how difficult it is to sleep at night, and praying to God for their stock to go up tomorrow. They are risking 90% just to make a small 10% profit. Finally, the sad truth is you may lose 90% on your first trade, and what no one tells you about the credit spread is that a 90% probability doesn't mean that you are going to make money nine times in a row and then lose one time. You might be the unlucky one who loses it all on the first trade. This does happen often to beginning option traders.
Short-term credit spreads is that they're very directional trades. Even though they have Theta on their side, they have Delta and Gamma working against them, and that's the trouble. For the small amount of Theta you get from a short-term credit spread, you end up picking up even more danger by trading this option spread with very high Gamma. This means as the price of the underlying changes, the profit and loss on the trade also changes rapidly. These are a lot more volatile and risky than most beginning option traders know.
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.
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