Today, we're going to talk about how important it is to properly manage your options positions. Credit spreads are one of the most popular option spreads on the market and they say they're a high probability type of trade, but until you experience them first hand, you probably won't understand the risks involved. An options credit spread can be incredibly risky if it is traded alone and not being hedged by any other option position.
Credit spreads are the first spreads that most beginning options traders learn, and they're a relatively simple. However, what most beginning option traders don't know is how dangerous they are. Courses that teach this strategy are easy to find on the internet. You can log on right now and find several, but it won't be because it's the best. This strategy is so readily available because it's simple and easy to sell. Teaching credit spreads to beginning traders may be a good business, but really, most options traders that trade credit spreads, alone, can loose a lot of money every year. It's a stressful way to live, to say the least, especially when your money loss is factored in.
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.
The "credit spread" is a very directional trade and this is the problem. Even though it has Theta on its side, it has Delta and Gamma working against it. For the little amount of Theta that you get from a credit spread, you are picking up more danger by trading this option spread with very high Gamma, because when the prices of the underlying changes, the profit and loss on the trade will also change very fast. This type of trade is a lot more volatile and high risk than most beginning option traders are aware of.
To conclude, there are many other types of trades that are much safer and user friendly. If you do insist on trading credit spreads, try to cut down your risks by combining them with other strategies.
Credit spreads are the first spreads that most beginning options traders learn, and they're a relatively simple. However, what most beginning option traders don't know is how dangerous they are. Courses that teach this strategy are easy to find on the internet. You can log on right now and find several, but it won't be because it's the best. This strategy is so readily available because it's simple and easy to sell. Teaching credit spreads to beginning traders may be a good business, but really, most options traders that trade credit spreads, alone, can loose a lot of money every year. It's a stressful way to live, to say the least, especially when your money loss is factored in.
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.
The "credit spread" is a very directional trade and this is the problem. Even though it has Theta on its side, it has Delta and Gamma working against it. For the little amount of Theta that you get from a credit spread, you are picking up more danger by trading this option spread with very high Gamma, because when the prices of the underlying changes, the profit and loss on the trade will also change very fast. This type of trade is a lot more volatile and high risk than most beginning option traders are aware of.
To conclude, there are many other types of trades that are much safer and user friendly. If you do insist on trading credit spreads, try to cut down your risks by combining them with other strategies.
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