SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

The Risks of Weekly Credit Spreads


There are hundreds of options trading "gurus" promising you all kinds of ridiculous returns like "5% per week". What most traders don't realize are the risks that come with those returns. I would like to share with you an email I got from one of those options "gurus".

Quote

Short term weekly options trading remains a tough road in 2016 as the weekly market volatility is whipping around weekly option traders. Case in point, our newsletter experienced a losing trade last week as bulls hammered markets higher. The loss was unfortunate but what really stood out to us were the reactions and sheer surprise of some traders.

 

Below is a copy of what we sent to our members over the weekend to remind them of just how aggressive (and volatile) weekly options trading can be:

 

Last week's loss stings, of course. The market ground higher all day Friday eating further into the expiring call spread. What was worse was that prudent adjustments for the trade were nonexistent.

 

Our weekly credit spreads are highly exposed to Gamma (the option greek) and the latest trade was a textbook example of it. As SPY ground higher debits to adjust exceeded $0.10 to simply the move the trade out a week and up $0.50. Doing so would have resulted in the new adjusted trade still being well in the money. We have been bitten before by that bug (paying to adjust higher while not actually reducing the risk to the new adjusted trade) before in March 2016 and did not want to repeat that experience.

 

The issue with weekly credit spreads is that everybody likes the fast pace weekly profits of weekly credit spreads until they take a loss. The weekly credit spread game is that there are many, many small profits and the losses are ALWAYS larger than the gains. That is how it works. That is risk curve of weekly credit spreads.

 

Although, when a loss occurs, retail traders become flabbergasted. The biggest misstep most retail traders make is underestimating the aggressiveness of our newsletter (and weekly credit spreads in general) due to its years of fairly smooth profits.

 

Retail traders are lulled into a false sense of security with weekly credit spreads forgetting that along with extreme profits (>4% per week and >100% per year) comes a healthy dose of risk. Look at it from another view: If large profits like that were easily available at low risk wouldn't everybody be producing them? Mutual funds and the like?

 

Weekly credit spreads are very volatile and aggressive; despite how their ease and consistency can lull you into a sense of safety. Think about, you don’t make >4% PER WEEK by not taking risk.

 

The real success and consistency over the long term in selling options is using expirations further out. 

 

 

I appreciate the email. Those are very wise words. Too bad this email came after three devastating losses the newsletter experienced in 2016 (150%, 78% and 69% losses before commissions).

image.png
image.png
image.png

Unfortunately, it looks like they didn't really learn any lessons from those losses. The newsletter members already booked two more devastating losses of 96% and 89% in the first five months of 2017. 

image.png

Definition of insanity is "doing the same thing over and over again and expecting different results".

 

From the FAQs of this newsletter:
 

Quote

 

Q: How much money can I lose?

 

A: You can lose $100 per spread traded, less whatever we received as a credit when we entered the trade. We do everything we can to prevent large losses and have yet to have greater than a -15% loss on any trade. Statistically and as experienced in our Track Record, losses should not occur very often.

 

 

 


As we mentioned here: Often times you'll find this in a credit spread newsletter where the big loss just hasn't happened yet (it will).

 

Here is the problem with weekly credit spreads: most of the time, they will do fine, but if the market really does go south the position will be in trouble well before the short options go in-the-money. If the market drop is fast and severe (e.g., flash crash) there will be nothing you can do - the trades will be blown out with no way to recover, your entire investment will be gone. 

 

We warned about those "easy gains" several times. This is what we wrote in Can You Really Make 10% Per Month With Iron Condors? article:

 

Here are some mistakes that people do when trading Iron Condors and/or credit spreads:

  • Opening the trade too close to expiration. There is nothing wrong with trading weekly Iron Condors - as long as you understand the risks and handle those trades as semi-speculative trades with very small allocation.
  • Holding the trade till expiration. The gamma risk is just too high.
  • Allocating too much capital to Iron Condors.
  • Trying to leg in to the trade by timing the market. It might work for some time, but if the market goes against you, the loss can be brutal and there is no another side of the condor to offset the loss.

Unfortunately, many options gurus present those strategies as safe and conservative. Nothing can be further from the truth. As mentioned (correctly) in the above email, weekly credit spreads are very volatile and aggressive. You should allocate only small portion of your options account to those trades.

 

Related articles:

 

Want to learn how we reduce our risk?

 

Start Your Free Trial

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Leveraged Anchor: A Two Month Review

    Steady Options has now been tracking the Leveraged Anchor from the unlevered version for just over two months.  The results so far have substantially beat expectations, though there is a possibility for improvements discussed at the end of this piece. 

    By cwelsh,

    • 0 comments
    • 103 views
  • Options and Diversification Myths

    Options traders often overlook the nature and role of diversification. In picking one strategy over another, and in deciding which companies to use for options trading, diversification should be one of the attributes worth study. Why do options traders need to think about diversification?

    By Michael C. Thomsett,

    • 0 comments
    • 327 views
  • SteadyOptions Managed Accounts

    One of the most common questions Steady Options receives relates to managed accounts. Lorintine Capital is offering managed accounts for both Anchor Trades and Steady Momentum. This post will detail the current Steady Options managed account offerings and how they work.

    By cwelsh,

    • 0 comments
    • 241 views
  • IVolatility Tools: Probability Calculator

    The S&P 500 Index advance continues from its December 26th low at 2346.58, but it’s yet to exceed the December 3rd high at 2800.18.  Will it continue?  Will it crash? Will the bulls get their way? Find out in our short market review, followed by strategy suggestions, created using our Probability Calculator, currently available to all Steady Options subscribers.

    By Levi Ioffe,

    • 0 comments
    • 514 views
  • SteadyOptions Strategies Analysis

    SteadyOptions trades a variety of option strategies – straddles, hedged straddles, calendars, butterflies and iron condors, volatility trades, etc..  Frequently these trades are designed to work together and complement each other, so for the last several years Steady Options has only analyzed total performance.

    By cwelsh,

    • 0 comments
    • 408 views
  • Equity Index Put Writing For The Long Run

    One of my all-time favorite investing books is Jeremy Siegel's Stocks For The Long Run, which is currently in it's 5th edition. It's a true classic that I refer back to often.  Professor Siegel lays out the compelling case for equities over extended time horizons such as 20 or 30 years.

    By Jesse,

    • 1 comment
    • 535 views
  • Why You SHOULD Learn Options Trading

    Few days ago I came across a Seeking Alpha article called Why I Never Trade Stock Options. This is probably one of the most misleading articles I have read in years. I would like to put things in perspective and provide a rebuttal to some of the claims in the article.

    By Kim,

    • 0 comments
    • 505 views
  • Are Uncovered Calls Always High-Risk?

    The “common knowledge” about uncovered calls is that they are always high-risk. Conservative traders should avoid them. But is this always true? Risk by  most definitions is associated with specific strategies. So covered calls are low-risk and uncovered calls are high-risk. But this assumption is not always a fair one.

    By Michael C. Thomsett,

    • 0 comments
    • 503 views
  • IVolatility Tools: Advanced Options

    Perhaps the toughest part of trading options is figuring out what to do. For this we have advisors, seminars, newsletters and more. Yet, one tool that all investors need, but few utilize adequately, is data. This concept is parroted across the industry, but how does the average investor move from the desire to utilize data to the actual practice?

    By Levi Ioffe,

    • 2 comments
    • 828 views
  • A Global Equity Put Write Portfolio

    Many that sell equity market put options focus on the S&P 500 (SPX, XSP, SPY). Some will add small caps by selling puts on the Russell 2000 (RUT, IWM). An investor could also make their put selling strategy globally diversified by adding MSCI EAFE (EFA) and Emerging Markets (EEM).

    By Jesse,

    • 0 comments
    • 771 views

  Report Article

We want to hear from you!


Guest David

Posted

Kim,

Great article. 

Unfortunately I tried too many services that implemented those risky strategies. Booking Alpha, Avant Options, Bullogic and more. Most of them are out of business after devastating losses. Those weekly spreads can work well for a while, but one big loss erases months of gains. You don't get how risky they are until it happens to you.

Thank you for all the great education you provide! 

 

Share this comment


Link to comment
Share on other sites


Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs