Credit Option Spreads are a good way to make money, but that system seems to lack the built-in money management of RadioActive Trading. Also, credit spreads have a limited upside, whereas a RadioActive Profit Machine setup does not.
As long as the market direction cooperates with your Expectation, a credit spread can be good. On the other hand, you can lose more than you collected in credit if that expectation proves wrong. For example, let’s say we believe WMT is headed down and sell a $47.5/$50 bear call credit spread for an $0.85 credit. That’s fine until WMT pops up above $50 and you’re on the hook to pay back $2.50. The difference is a loss of $1.65, almost twice what you received!
You would need $250 in margin to trade each pair of contracts. Say you had $2,500 and decided to do 10 pairs of contracts. The most you could possibly make would be the .85 per spread or $850 total, which means a total 3.4% gain.
If the underlying goes against your Expectation, you lose $1,650, or a 6.6% loss.
Plug a 3.4% profit target and a 6.6% loss limit into your trade simulator tool and see what you come up with. While you can do very well with credit spreads, over a long enough time horizon they are a losing proposition unless you can be right a significant amount more often than you are wrong. AND…! If you ARE right more often than wrong, it would make more sense for you to be taking on positions with unlimited upside rather than limited.
Because of the risk/reward ratio in these credit spread trades, one trade that goes full loss can wipe out five to ten fully profitable trades. A way to mitigate this is to close early for a smaller loss rather than letting the stock price move all the way through both strike prices, but, not every investor has that loss cutting resolve – most just get paralyzed and watch the spread go full loss.
I'm Kurt Frankenberg, and I have discovered how to truly put the odds on the side on the individual investor.