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The Credit Spread Option Trading Strategy is perhaps the most dangerous option strategy around.
The problem is that way too many new option traders slap down significant money and start trading credit spreads immediately upon discovering them without first equiping themselves with the proper knowledge and skills needed to trade them properly. They are so captivated by the stories and claims of ten percent months and 90 percent probabilities that somehow they don’t stop to think about what they are going to do if their trade doesn’t go exactly as planned.
And usually what winds up happening is that the market promptly snaps off their arms and legs, then smacks them across the face with them, then starts to jab them repeatedly in the eyes. In other words – they wind up getting really hurt.
Now stop.
Let me explain something here before you start to get the wrong impression.
I LOVE credit spreads.
I think that the credit spread really IS a great trade.
And yes, I absolutely believe all those stories and claims you hear swirling around about credit spreads generating ten percent plus monthly returns and providing trades that have the probability of winning somewhere in the range of eighty to ninety percent. In fact, I KNOW those stories are true because I see it happen all the time in my very own trading account.
The problem is – there is something big that is being left out of all those claims and stories – and this something is causing way too many fresh new doe eyed option traders to misunderstand this strategy right from the beginning and blindly jump into them with completely wrong expectations.
See, while it may be true that the credit spread and iron condor strategies can kick off yields of over ten percent monthly and that they favor the trader by offering high probabilities of winning (in some instances as high as 80 and 90 percent) – what isn’t being talked about is the risk to reward ratio of these trades – which can be as high as 10 to 1.
That means that while trading these trades you are putting at risk 10 bucks for the chance to make just 1. Or – in reality, in the instance of say a standard ten lot index iron condor, you are risking ten thousand dollars for the chance to make just one thousand dollars.
And as my dear old mammy used to say: ‘that smells a lot like an awful bad egg’. Which in fact it is. That risk to reward ratio is nothing but a low down, no good, smelly rotten deal!
Just do the math. With a risk to reward like that, even with the great probabilities and wonderful monthly returns – before long a problem month could come along and completely wipe out your entire account!
But…
All isn’t lost. There IS hope…
Because – as I wrote previously – I REALLY DO like the credit spread strategy.
It’s one of my favorite trades – and it continually generates profits for me.
So apparently, even with that atrocious risk to reward quandary, there must be a method to generate consistent income with this trade.
And there absolutely is.
It’s all in how you manage the trade.
As soon as you discover the ‘right way’ to place these trades initially – and then how to properly go about managing and adjusting them – that risk to reward dilemma instantly vanishes and goes away.
You just need to take the time BEFORE jumping into the credit spread trading pool to equip yourself with the proper knowledge. A few simple ‘tricks of the trade’ – so when those problem months DO come along (and they WILL believe me) – you will know exactly what you need to do to immediately squash that threat, easily adjust yourself out of the problem, and experience the credit spread option trading strategy for all it’s ‘really’ cracked up to be.
To learn these ‘tricks’ to trading the Credit Spread , go to this Credit Spread site and watch our free video. It will show you an extremely simple method for properly placing, managing, and ADJUTING credit spread option trades.
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