Review of "The Top 3 DEADLIEST Credit Spread Mistakes To Avoid!"


 

Summary

This video contains three random tips for designing and managing credit spreads.

Do not hold spreads to expiration

It is tempting to hold a spread to expiration, thereby maximizing return, when all legs expire worthless.  However, two risks come into play:

  1. Risk of early assignment - There is a chance of assignment if a position is ITM and close to expiration.  It is also a risk if there are dividends coming up.
  2. Empirically, holding to expiration decreases performance (see the Tasty Trade table) as the risk of max loss increases.

Prefer wider spreads over many smaller spreads (assuming a given short strike)

  1. Having more contracts (i.e., many smaller spreads) increases commission costs.
  2. Having a farther out long position decreases its price.
On the other hand, there could be more premium with multiple contracts since the incremental premium probably descreases with increasing width.

Do not create naked positions

I can't have naked positions.  But this is obvious to me. 

Upshot

For me, the takeaway is to reduce risk and overhead via wider wings.  The first point I already knew of.  The third is not relevant to me.

Comments

Post a Comment

Popular posts from this blog

Review of "The Winning Mindset of Successful Traders"

Image
  1.  Prepare for / embrace risk - Accept losses.  Have plans before getting into positions.  Don't let emotions get in the way. 2.  Max losses will happen - Due to probability. 3.  Losing streaks will happen - Size trades appropriately. 4.  Ask, Can I accept max loss? 5.  Have the mindset of a "clerk" - stick with a plan. Very nice video that lists not just attitudes successful traders should have, but also includes a checklist of questions that must be answered before entering a trade. There is also a bit of cheerleading here.  Davis tries to let people know that losses will happen, even to him, so one should not be discouraged when they occur.
Read more

Review of "Generate Monthly Income With The IRON CONDOR"

Image
  Summary This video lays out in detail how to design iron condors for monthly income. DTE:  45 days - shown to be profitable Strikes:  15 to 25 delta and $5 or $10 wings Should get 25% - 30% premium for the width of wing (e.g., $1.50 for $5 wings) Should spend no more than 5% of capital per trade Trade management Close when hit 50% profit Or, at 21 days Because the gamma risk increases after 21 days Can close Or, if close to 50%, close Or, if not close, but inside breakeven price, wait. Optionally Can roll around Narrator does not generally adjust The rest of the video shows how Thinkorswim can generate PnL curves. Upshot This is a very nice video and shows a very clear, well motivated way to implement iron condors.  It is also presented as a framework in the sense that it can be adjusted per investors' tastes.
Read more