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

  • Building a Short Strangles Portfolio

    In my last article I showed you what you can expect selling short strangles and straddles and how much leverage is appropriate. Today I want to show you how to build a well diversified short strangle/straddle portfolio and how to trade it through difficult times.

    By Stephan Haller,

    • 7 comments
    • 250 views
  • Selling Short Strangles and Straddles - Does it Work?

    I have seen a lot of discussions on Twitter lately about the issue if selling naked strangles or straddles is a great strategy or a recipe for disaster. If you have read my books or if you are following my sample portfolio, you know that I'm a huge fan of selling short strangles and straddles.

    By Stephan Haller,

    • 46 comments
    • 802 views
  • Who Wants The Last Nickel?

    “The safest way to double your money is to fold it over and put it in your pocket.” Kin Hubbard. In this article I will discuss the reasoning behind buying back the short options and not waiting till expiration. Two of my basic trading tenets are related:   

    By Mark Wolfinger,

    • 0 comments
    • 40 views
  • Debunking the "Trading Options for Income" Myth

    "Real trading system returns are too irregular in the short term for consistent weekly returns every time and the only 'trader' that every had regular monthly returns was Bernie Madoff" - Steve Burns. So true. This is why "trading options for income" promoted by some options "gurus" is so misleading.

    By Kim,

    • 0 comments
    • 337 views
  • Selling Naked Strangles: The Math

    Selling short (naked) strangles is heavily promoted by some options "gurus". Is it a good strategy? It might have an unlimited (theoretical) risk, but what about the return? Is the return worth the risk? We decided to do some math, based on real prices, not some theoretical "studies".

    By Kim,

    • 6 comments
    • 535 views
  • Don’t Buy Thanksgiving Turkeys as Investments

    Nassim Taleb tells a great story about Thanksgiving turkey’s in his 2007 book, The Black Swan. "Consider a turkey that is fed every day…Every single feeding will firm up the bird's belief that it is the general rule of life to be fed every day by friendly members of the human race 'looking out for its best interests,' as a politician would say.

    By Jesse,

    • 0 comments
    • 144 views
  • Obey Reality and Win by Not Losing

    “I’ll do anything to lose weight (except diet and exercise),” is the same kind of magical thinking by investors who will do anything to outperform the market except study and practice discipline. It takes novice investors about a year to realize that you can’t consistently beat or time the market buying individual stocks or funds.

    By Kim,

    • 0 comments
    • 164 views
  • Follow Your Plan: Don’t Engage in Reckless Trading

    Setting up some internal rules for your trading looks like a must first-step before setting up your account and getting into your platform. You need to get your own trading plan and then stick to it. Self-discipline and avoiding recklessness can be huge for your balance.

    By Kim,

    • 0 comments
    • 231 views
  • 4 Patterns For Forex Profitability

    What makes a forex trader profitable? Looking at a wide array of real data, four patterns are found. Timing is critical. The best time to trade is not necessarily what you thought it would be, and it certainly depends on the trading style.

    By Kim,

    • 0 comments
    • 276 views
  • Long and Short Straddles: Opposite Structures

    Simplification: We can all better understand options trading by removing the complexity so often seen in articles. One of the best ways to understand the profit potential and risk levels of any options strategy is through diagrams and a demonstration of the formula.

    By Michael C. Thomsett,

    • 0 comments
    • 321 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