How To Trade Credit Spread Options – Top Reasons Why You Should Learn 90% Probability Index Iron Condor and Credit Spread Options First Before Putting Time Into Any Other Strategy

Wondering what options strategy to start with?  Curious how to trade certain types of options?  Here are the top 10 reasons why you should learn how to invest in credit spreads, specifically 90% probability index credit spreads, FIRST before spending time on any other derivatives strategy. 

By Brad Reinard, Editor-in-Chief, monthlycashthruoptions.com
Last Update August 19, 2009

1) Ninety % Probability Index Iron Condor Options are popular because the are easy to learn, understand, and visualize without the need for complicated and expensive options analysis software.  For more on what these trades look like, please go to Credit Spread and  Iron Condor.

2) Ninety % probability Index iron condors & credit spreads are popular with professional derivatives traders and hedge fund managers because they produce an excellent return of 6% to 10% per month, or 45% to 65% return per year.  The Monthly Cash Thru Options advisory newsletter that teaches how to trade these derivatives achieved a 69% YTD return in 2009 (as of August), 33% return in 2008, 63% in 2007, 42% in 2006, and a 50% return in 2005.  For more details on our returns please visit the ROI Track Record page.   

3) Getting on the “other side” of the trade and selling (writing) index credit spreads & iron condors derivatives to speculators & amateurs can truly change your life financially.  It’s one of the few investment strategies available today where you can truly quit your day job after building up a few years of experience.  As you probably have heard, 80% of derivative traders who buy calls and puts speculatively lose the premium that they paid to purchase the options;  i.e. the options expired worthless.  In contrast, by getting on the other side of the trade and selling these calls and puts to the speculators & amateurs, like being the “house” in a casino, 80% of our trades are profitable.  And we actually take a more conservative approach where close to 90% of our trades are profitable. This is why the strategy around selling options can generate a consistent 6% to 10% return monthly and truly change your life financially.

4) Index Iron Condors & Credit Spreads derivatives represent a non-directional, income generating strategy that makes money when the market trades sideways, is choppy, or moderately trends upward or downward.  Thus, you can make money in all market conditions.  History has shown us that the stock market usually makes big upward or downward moves of greater than +/- 10% in 45 days or less about once per year, and then the market usually remains pseudo range-bound, choppy and/or gradually trends upward or downward for the remaining 10 months of the year.  As a result, this strategy is profitable the majority of the year requiring very little effort.

5) Ninety % probability iron condors have fewer losing months/year, about 2 to 3, as compared to 70% probability trades.  During the 2 to 3 “difficult months” of the year when the markets move quickly and where we’ll most likely have a losing month, because we trade the more conservative 90% probability trades, we have a good track record of typically keeping our losses below 10%.

6) You’ll sleep better at night knowing that your Iron Condor has a very wide “safe zone”.  When the markets get volatile, 90% probability iron condors give us more time to react and make adjustments if necessary.

7) The Index Iron Condor & Credit Spread derivatives strategy only takes a few hours each week as compared to other trading systems that take significantly more time and effort.  The “traditional” option strategy speculatively buys directional calls, puts and/or debit spreads on individual stocks and bets that the stock or index moves in the correct direction.  A big negative for purely focusing on directional option trades is that they take a lot more time & effort in identifying the trades, placing the trades and the stop losses, managing the stops and then exiting the trades; also about 50% of the time directional trades go the wrong way and stop-out, thus requiring the trader to handle the stress of taking a loss and needing to continually replenish the trades.  In contrast, the non-directional strategy of being on the “other side” of the trade by selling calls and puts to the speculators & amateurs takes less effort and only requires a few hours per week.

8) You’ll pay less taxes on your gains.  Why?  Because we place at least half of our trades on broad-based indexes such as the RUT (Russell 2000 Small-Cap Index) and MID (S&P 400 Mid-Cap Index) which are taxed per the 60/40 tax rule.  Section 1256(a)(3) in the IRS tax code states that gains from option trades on broad-based, cash settled indexes can take advantage of the 60/40 rule which states that 60% of gains are taxed as long term capital gains and 40% of gains are taxed as short-term capital gains, i.e. ordinary income.   Overall, the 60/40 tax treatment is very generous and gives option traders who trade cash settled, broad-based indexes a tax advantage and the opportunity to make higher returns than option traders who focus on other financial instruments such as stocks or ETFs.  We also trade a few ETFs such as the SPY that tracks at 1/10th of the S&P500 index, and the gains on ETF options are taxed at one’s ordinary income level.  Please make sure to talk to a tax professional on this topic as we’re not licensed tax professionals and we are not authorized to give tax advice.

9) For investors with at least 2 years of experience in trading 90% probability index iron condors & credit spreads, they have the option to allocate up to 75% of their portfolio, holding 25% in cash, into just a few monthly trades.  As a result, the investor doesn’t need to trade any other stock or options strategies if they don’t desire or don’t have the time. 

 

About The Author
Brad Reinard is Editor-in-Chief of Monthly Cash Thru Options LLC, a leading index credit spread & iron condor options advisory newsletter, which has the following track record:   69% YTD 2009 (thru Aug); 33% 2008; 63% 2007; 42% 2006; 50% 2005.  For more information on the technical analysis that we perform on the S&P 500 and Russell 2000 (RUT) indexes, along with how to trade trading tips on iron condors and credit spreads please visit www.monthlycashthruoptions.com or call Brad directly toll-free at 877-248-7455.  Monthly Cash Thru Options LLC is located in San Jose, California, the heart of Silicon Valley.

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