Overview: There are serious risks involved with some of the popular option trading tactics commonly being used and taught today. Here's why Naked Puts and Credit Spreads tend not to fare well given today's typical market volatility.
If you're like most option traders you've likely had some successes. You've also very likely had some equal or more significant failures. You're not alone.
If you're like most option traders you've traded using short puts. This is where you sell a put, collect a premium, and then hope the underlying price doesn't move. The general idea is that you wait for the option to expire without any worth, cap your premium, and begin your next trade.
This sounds good and seems to make sense but things don't always go as planned. Everyone knows this but option traders have a particularly keen awareness of this basic fact. When the price goes down, sometimes way down, you can make some defensive adjustments, but if the price continues to drop you're really just locking in your losses.
As a variation on this theme, you can trade a put spread, in an effort to minimize your potential for loss. But a deep look reveals the same basic structural limitations. Once you again you're selling a position, buying a position, collecting a premium and hoping the price stays above your credit spread.
You can make some adjustments if the price drops yet that erodes the premium you collected. Plus, you're still at significant risk if the underlying price keeps going down. You'll just start locking in your losses. Most frustrating of all, you have no control over the market price and you knew this going into the trade.
These types of difficulties are very common. In order to avoid these trading issues, then you really need to learn a completely different way to trade options.
If you're like most option traders you've likely had some successes. You've also very likely had some equal or more significant failures. You're not alone.
If you're like most option traders you've traded using short puts. This is where you sell a put, collect a premium, and then hope the underlying price doesn't move. The general idea is that you wait for the option to expire without any worth, cap your premium, and begin your next trade.
This sounds good and seems to make sense but things don't always go as planned. Everyone knows this but option traders have a particularly keen awareness of this basic fact. When the price goes down, sometimes way down, you can make some defensive adjustments, but if the price continues to drop you're really just locking in your losses.
As a variation on this theme, you can trade a put spread, in an effort to minimize your potential for loss. But a deep look reveals the same basic structural limitations. Once you again you're selling a position, buying a position, collecting a premium and hoping the price stays above your credit spread.
You can make some adjustments if the price drops yet that erodes the premium you collected. Plus, you're still at significant risk if the underlying price keeps going down. You'll just start locking in your losses. Most frustrating of all, you have no control over the market price and you knew this going into the trade.
These types of difficulties are very common. In order to avoid these trading issues, then you really need to learn a completely different way to trade options.
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