The truth on trading “credit spreads”…You will learn why it is so important if you do not know how to correctly handle your option positions. Even though it is a well known trade we will take a good look at what can happen using this particular spread. This seems to be a good trade, but until you work with this trade, you will not know the high risk it can be. If it is traded alone this options “credit spread” can be very risky. By trading it alone I mean that it is not being protected by another option trade.

The “credit spread” is the first spread learned by most beginners. It is a very simple trade, but as a beginner with option trading you do not realize that this type of trade can be very dangerous. On the internet you will find many courses that teach this way of trading. The real reason is not because it’s a safe trade, but it is easy to learn and easy to sell. Teaching “credit spreads” to a beginner in option trading is a great business, but if you only trade “credit spreads,” you can lose a lot of money each year. Not only can you lose lots of money, but it is a very stressful way to live. Let’s see why.

It is known that an option trader can go into a “credit spread” with a 90% certainty that he will make money. Most beginners believe in this trade, but if you turn your back to the other side of this picture you may lose big. You need to understand what is happening while this trade is in play. People will not tell you about the high stress that is involved with just trading an option “credit spread”.

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 problem with the credit spread is that it’s a very directional trade. Even though it has Theta on its side, it has Delta and Gamma working against it. For the small amount of Theta that you get from a credit spread, you are picking up even more danger by trading this option spread with very high Gamma. What this means is that as the price of the underlying changes, the profit and loss on the trade also changes very quickly. This type of trade is a lot more volatile and risky than most beginning option traders are aware of.

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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