The credit spread is one of the most popular option spreads traded today. The reason is because the credit spread is simple, it makes money over time and it is a trade with a high probability. But this probability rating can be very misleading. The dangers of the credit spread are rarely addressed in books and online credit spread courses. The sad truth is that most people teach the credit spread because it’s a good business, but not because it’s a good option strategy. It’s actually a very risky trade and very directional.

It’s well known that an option trader can enter into a credit spread with a 90% probability that he will make money on the trade. That is well known. That is the popular belief, especially amongst beginning option traders. This is true, but do not ignore the other side of the picture. Even though you have a 90% probability to make a profit on the trade, you must consider what goes on while the trade is in play. People don’t talk about the level of stress involved.

Salesman don’t tell you how far behind you can be on a credit spread in just a few days if the trade goes against you. Salesmen don’t talk about how you can lose 90% of your trading capital the very first monthly trade credit spreads. Salesmen don’t tell you this stress related but this particular option trade. They don’t tell you that you won’t be able to sleep at night.

Those who tell you that credit spreads are non-directional trades are not telling you the whole truth. It’s true that a credit spread can make money in any direction, but the direction cannot be very far. Also, if the trade goes the wrong way from the beginning, you will be in a very dangerous position, and you will be way behind on the trade. If you are trading short-term credit spreads, you often times find yourself standing at the edge of a cliff and very close to losing all of your trading capital.

In conclusion I would just like to say that the credit spread definitely has a place in my options trading portfolio, but I only use credit spreads in conjunction with other option strategies. As a standalone strategy the credit spread can expose your trading capital to enormous risk. So if you insist on trading credit spreads, then please make sure you are trading safely by hedging them with other option spreads.

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