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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.

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 is that a “credit spread” is a very directional trade.

It has

Theta on its side, but it has Delta and Gamma working against it. For the little amount of

Theta that you get, you are getting more danger with very high Gamma by trading this option spread. When the prices of the underlying changes, the profit and loss on the trade will also change very fast, this is why it is dangerous. This type of trade is more risky than most beginners trading options are aware of. Now that you have learned about the high risk in “credit spreads”, I would like you to know that there are many other types of trades that are a lot safer than the “credit spread”.

If you do trade “credit spreads”, please learn how to combine them with other trades so they are not so risky.
Learn more about low-risk Option Trading . Stop by San Jose Options Mentoring where you can find out all about Broken Wing Butterflies and Credit Spreads .

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