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Debunk That Junk
I recently came across an article from a prominent options trader that was a true disappointment.
He brought up the question regarding credit spreads and if they constituted a viable options strategy. For some traders, credit spreads are not a viable strategy, but only because they prefer a different style of trading, not because the strategy is faulty.
One thing to remember is that not every strategy works for every trader. You must fine what works best given the type of trader you want to be and stick with it for the long-haul.
So to say that credit spreads “aren’t a good strategy” is akin to saying that Philips head screwdrivers aren’t good tools – when in fact, credit spreads and screwdrivers work perfectly when they’re put to the task they’re designed for.
No one can deny that credit spreads offer a high probability of making a profit. Even the trader who bashed credit spreads agreed.
But, where he goes astray is the assumption he makes regarding the risk. He states that along the way to realizing a gain in a credit spread trade, you have a lot of risk and stress involved. Obviously, he doesn’t clearly understand how credit spreads work and the fact that he mentions stress as a factor to stay away from credit spreads plainly discounts any opinion he has regarding trading.
Why? Because, trading is stressful. It is difficult. But, it the most rewarding and mechanical way to build wealth, especially when implementing credit spreads as a part of an overall investment strategy.
He uses the example below:
The average credit spread trader will face 100% losses on a credit spread trade several times a year while trying to make a modest 5 to 10% a month. What happens is that eventually all credit spread traders meet their doomsday. Sooner or later, virtually all options traders who use only credit spreads wipe out their entire accounts.
Tell that to all of the old floor traders on the CBOE that used various credit spread strategies, EXCLUSIVELY.
In fact, tell that to some of the top options traders in the world who trade various forms of credit spreads, including vertical spreads, iron condors and the like. Trading careers are made selling options premium. They offer the only true statistical advantage unlike directional strategies which are championed by this gentleman. Professional options traders know this; unfortunately, this writer subjects his readers to the exact opposite.
Remember, every trader has their own approach.
Mine – I use short-term extremes in the market to sell credit spreads (which gives me some margin for error if the move continues to push in the same direction) and I also buy calls/puts to fade short-term extremes.
I have been doing this for well over a decade now and will continue to do so until I am no longer capable of pushing a button to place an order. I hope you will join me on my life long journey of building wealth in the only way I know how – a “logical, intellectual and strategic way”.
I follow approximately 40 ETFs in my Options Advantage service and starting next week, I’ll make my full coverage available to my subscribers so that you can keep constant track of which ETFs are overbought and oversold. I’ll also go over the full details on these 40 ETFs next Thursday during my live chat event – but I urge you to sign up now (for free) if you’re interested.
If you have any questions or comments, please feel free to email me at email@example.com, and follow me on Twitter at @OptAdvantage.
Editor and Chief Options Strategist
— Andy Crowder - Options Advantage