THE NUANCES OF VERTICAL CREDIT SPREADS ( ( report # 27 )

The NUANCES of CREDIT SPREAD VERTICALS Report #27

In studying the Vertical Credit Spread, there are some misleading stuff out there. It only takes ONE TRADE in which the market sweeps through your CREDIT SPREAD to maximum destruction, to wipe out the small accumulation of profits you gained for the whole year. In 2008 a lot of CREDIT SPREAD TRADERS got wiped out. COMPLETELY! They of course were pyramiding. They had to start back again from rock bottom. The 90% winners garbage quoted for CREDIT SPREADS is very misleading.
The best advice I read was a guy who said he closed his CREDIT SPREAD when he had gained 80% of the TIME DECAY and swallowed the cost of paying the extra commissions. I've tried this in practice. It works out, but the CREDIT SPREAD is a low earner at the best of times, versus the money you have in margin at risk. Closing out when you have only 80% of the value earned is not I feel the right answer.
On the other hand, I've experimented ( paper trading and virtual account trading ) and there are some rules you can apply. A bull market goes up more slowly than a BEAR down market. If you are going to be threatened, it is most likely a rapid DOWNWARD BEAR MARKET drop will wipe you out. You will not have the time to place the order, or get it executed, Particularly in short term weekly trading expirations. Maybe in Longer monthly expirations? Mostly the problem is GREED and the tendency to keep pyramiding profits. You should be taking money off the table, or out of the account regularly. Say every quarter?
In a BULL MARKET you can start entering your order, about 2 OEX points before your SOLD side is touched by the market action. In a BEAR MARKET plunge, you should be closing out your SPREAD at least 6 points away from your SOLD side being touched. Better to end up with nothing, or a minor plus couple of dollars than lose everything?
Narrow channels and weeklies are most dangerous. You don't have enough time! A Friday expiration that coincides with news reports can drop right out from under you and in such short term trading, will sweep through your bet so fast, all your profits for the year will be gone.
- Just something to think about! -