Is this always true?

[TimtheEnchanter]

"With credit spreads, consider that for every $100 of income you make on a spread, you are risking $800 to $1,000. One maximum loss will wipe out the profits from the last 8 profitable trades."

I can't buy this...I watch my position closely and if it is in danger I wiggle out usually minimal loss. What do you think?

 

[old coot]

Obviously the risks are directly collaborated to the spread between strike prices. A 10 dollar spread can lose $10(minus the proceeds from the sell side) or $1000 per contract whereas a 50 cent spread can only lose 50 cents, or $50 per contract(minus the proceeds from the sell side)

 

[smallfil]

Remember one thing, risk is commensurate to reward. Selling an option seems low risk because the win rate according to them is like 90%? I tried selling options thru spreads and lost thousands in the process. I lost like 6 trades out of 7. Of course, that could be an abberation but, risking $1,000-$2,000 to make $200 seems silly to me. I prefer to buy and risk losing the entire premium of $500-$700 and take $2,000 or more in profits. Now, take note, buying options has a lower win rate. In my experience, about 40% wins to 60% losses. However, as long as the losses are small, and your gains several times larger, you will make monies when your trade works out. Consider too when you trade options, slippage is real and the market makers will be more than happy to take your monies.

 

[Same Lazy Element]

"With credit spreads, consider that for every $100 of income you make on a spread, you are risking $800 to $1,000. One maximum loss will wipe out the profits from the last 8 profitable trades."

No, it's not true. Your max loss to your premium ratio will depend on the moneyness. An ATMF spread will be roughly 2x, while far OTM spread could easily be 20x.

I can't buy this...I watch my position closely and if it is in danger I wiggle out usually minimal loss. What do you think?

You are being silly. If you wiggle out with a minimal loss, you are going to be closing a lot of positions too early and bleeding rebalancing costs. If you are going to let them decay away (as you should, if you have a strong conviction about a short vol trade), you are going to get hit for max loss once in a while.

 

[Turveyd]

Spreads sound like a lot of work for a small profit, don't think I understand them or why there called spreads mind, your trying to make the money off the spread by buying counter balancing positions, surely the spreads not worth that much ??

Confused.com

 

[old coot]

It's a hedge.
To clarify: you are selling the one position in order to make the time deterioration work FOR you. AND, you buy the other position to insure yourself against a runaway freight train.

 

[ironchef]

"With credit spreads, consider that for every $100 of income you make on a spread, you are risking $800 to $1,000. One maximum loss will wipe out the profits from the last 8 profitable trades."

I can't buy this...I watch my position closely and if it is in danger I wiggle out usually minimal loss. What do you think?

What you are saying is the same as what I said when I first started: If my covered call went against me, I rolled up and out, collected more premium and made more money. What was there not to like?

 

[Turveyd]

It's a hedge.

But how do you make money out of a hedge, how do you improve your odds that you'll be on the profitable side ??

Is it protection allowing you to use all of your account, with a directional bias ie Bull/Long but rather than losing 30% over all of your account, you'll only lose 3% or make 3% ??

Why not just trade a smaller account size ??

 

[old coot]

I edited my post. But, the concept is that if you set $X amount aside specifically for spreads,. and your average return is 6%, then you will have a fair profit in a year, and without a whole lot of exposure. Unfortunately, in most cases, 1 loss out of 4 trades will put you at a net loss. I've seen people do a spread on both the calls and the puts which improves their average, but at the same time lowers the net profit. There's no sure way except possibly a moment or 2 in extreme volatility or going into earnings. Too many giant pockets with algorithms to let a sure thing last more than a brief second..

 

[TimtheEnchanter]

In addition, I have a different question on a safer option play. Married put. Here is a scenario. How is this safer? APPL may go up and down a lot never making a new major bull run, in today's climate, you have spent a thousand for the option/insurance. Even with a dividend-paying stock, this is just as dubious.
the conservative options approach:

Buy 100 shares AAPL @ $113.10

Buy 6-month out 115 put @ $ 10.30

Total Investment = $123.40 (an obvious error) it should be $11,310 + $1030 = $12,340

Guaranteed Exit (Put) = -$115.00

Total At Risk = $ 8.40, 6.8%

The at-risk amount in this RadioActive Trade is 6.8% of the capital invested. If you opened 100 shares of stock and 1 put option, you would have invested $12,340.00, with a total monetary risk of $840.00. In a $100,000 portfolio, this position would only risk 0.84% of the total portfolio, with only 12.3% of the total portfolio value invested in the position. Generally, a $100,000 portfolio would have about 5 such conservative option positions.

This setup offers limited risk, proper position sizing, and an unlimited upside profit potential.