Hi everybody and welcome to this article on credit spreads. In this class today we will be discussing the importance of adjustments and what can happen to you if you do not know how to properly manage your option positions. One of the most popular option spreads on the market is called a credit spread, and we will be looking at this particular spread today. Some people consider this to be a high probability type of trade but until you actually work with this strategy, you may not know or understand the risk involved. An options credit spread can be particularly risky if it is traded alone, meaning that it is not being hedged by any other option position.
[youtube:hc5zbA70-38;Trading [link:Option Credit Spreads];http://www.youtube.com/watch?v=hc5zbA70-38&feature=related]
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.
The Credit Spread is popular amongst new option traders. Without knowing the hazards involved in credit spreads, beginning traders are easily attracted to it. Because a credit spread is very simple, there are countless sites on the internet offering courses on this strategy regardless if the strategy will actually produce positive results. And these businesses have lots of clients who are unaware of the risks they are getting at the use of credit spreads. While the business of teaching credit spreads means sure profits, more option traders relying on credit spreads alone are losing money than those actually making money on the trade. But worse than losing money, traders are living a very stressful way of life.
This is how it happens. As an option trader, I can enter into a credit spread with a 90 percent probability of trade profits. This belief is particularly prevalent among new option traders. While it is absolutely true that trading a credit spread really means you can have a 90 percent probability of making money on the trade, there are lots of other issues to consider. Despite a 90 percent probability of a trade profit, a trader has to put some value into other factors working as the trade is in play. The most important of these factors is the level of stress involved.
As a trader, trading credit spreads will consume all my time in the trade. It’s possible to get really far down on a trade, such as 50 percent behind or more, and the goal is to only make about 10%. So imagine how that feels, and it happens quite often. You might just find yourself experiencing sleepless nights and calling all the names of the Saints to come to your rescue. Yet, many of those who trade credit spreads keep on trading this strategy because they don’t have the knowledge to construct safer trades. The beginning option traders are commonly affected by very disappointing results.
In conclusion we’d like to finish by saying that please do not close your mind to other types of trades! The Credit Spread is just the iceberg of what is out there. In fact, it’s the simplest form of spread trading and not even close to being a safe one. It’s a great trade for adjustments, but be warned if you plan on doing these alone!
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