In this episode, we discuss the risks of credit spreads and go into detail on how to adjust a credit spread when the market moves against you by a lot.
People often associate credit spreads with high probability success — which is true, but they also fail to mention that in the meantime, there could be significant volatility in your account, particularly if the market moves against you immediately after putting on the trade.
For each day that goes into expiration, you get a little help with time decay – and a market reversal can do wonders do position that has been in the red, but still – stomaching through the possibility of losing many multiples of what your max profit could be is not easily done.
This past week would have resulted in max profit – but due to the large drop in the market against our position (which we initially intended to leg in an iron condor – but never had the chance t0) — we adjusted the short strike down from 215.5 to 213. In the process – we did not increase the quantity of the 213 strike enough. As a result, we were only slightly positive, rather than fully positive for this week – even with the market expiring above our short strike.
Wednesday Weekly SPY Options
Additionally, we now have Wednesday weekly options in SPY in addition to Friday weekly options. SPX is even better – with Monday, Wednesday, as well as Friday options.
This makes it easier to collect time decay on weekends — since the weekend is that much closer to expiration with Wednesday options than it was with Friday options. That said, directional risk is still the number one concern with executing an option spread — unless you are able to leg in an iron condor at the right times.
Eventually, we will get daily options — it’s just a matter of time.