Andy Crowder: I recently came across an article from a prominent options trader that truly disappointed me. The gentleman brought up the question as to whether or not credit spreads were a viable options strategy. For some, credit spreads are not a viable strategy, but only because they prefer a different style of trading, not because the strategy is faulty.
Remember, not every strategy works for every trader. Traders must find what works best given the type of trader he or she wants to be and stick with it for the long haul.
So to say that credit spreads “aren’t a good strategy” is akin to saying that Phillips-Head screwdrivers aren’t good tools – when, in fact, credit spreads and screwdrivers work perfectly when they’re put to the task they’re designed for.
No one can deny that credit spreads offer a high probability of making a profit. Even the gentleman who bashed credit spreads agreed.
But, where he goes astray is the assumption he makes regarding the risk. He states that along the way to realizing a gain in a credit-spread trade, you have a lot of risk and stress involved. Obviously, he doesn’t clearly understand how credit spreads work and the fact that he mentions stress as a factor to stay away from credit spreads plainly discounts any opinion he has regarding trading. Why? Because trading is stressful. It is difficult. But it is also the most rewarding and mechanical way to build wealth, especially when implementing credit spreads as a part of an overall investment strategy.
He gives the following example:
The average credit spread trader will face 100% losses on a credit-spread trade several times a year while trying to make a modest 5% to 10% a month. What happens is that eventually all credit-spread traders meet their doomsday. Sooner or later, virtually all options traders who use only credit spreads wipe out their entire accounts.
Tell that to all of the old floor traders on the CBOE that used various credit-spread strategies, EXCLUSIVELY.
In fact, tell that to some of the top options traders in the world who trade various forms of credit spreads, including vertical spreads, iron condors and the like. Trading careers are made selling options premium. They offer the only true statistical advantage, unlike directional strategies which are championed by this gentleman. Professional options traders know this; unfortunately, this gentleman subjects his readers to the exact opposite.
Remember, every trader has their own approach. Mine – I use short-term extremes in the market to sell credit spreads (which gives me some margin for error if the move continues to push in the same direction) and I also buy calls/puts to fade short-term extremes. I have been doing this for well over a decade now and will continue to do so until I am no longer capable of pushing a button to place an order. I hope you will join me on my lifelong journey of building wealth in the only way I know how – a logical, intellectual and strategic way.
My List of 40 Liquid ETFs
Many of you have requested that I publish my list of 40 ETFs that I follow on a daily basis for the Options Advantage portfolio. Well, per all of your requests I have decided to make my list available for weekly viewing in the Strike Price and daily viewing in my Options Advantage service.
A little background about the indicator.
One of the biggest mistakes I see new traders making is that they keep digging into the toolbox for a new widget every time they see something they like.
I can’t tell you how many traders I know who want to follow bull flags, bear flags, candlestick patterns, channel retracements, Fibonacci retracements – the list goes on and on. They will try and teach you about their long list of indicators to make themselves look impressive, but in reality most are horrible traders over the long term because they overwhelm themselves with a stream of the latest and greatest indicators only to move on to another indicator that happens to fit their current market perspective.
I keep it super-simple when I trade. I pick one tool and I use it for its specifically intended purpose. For me as an options trader, I’m looking to make steady, reliable gains without too much of a holding period.
So in order to make options trades I use a tool that helps me do a few things:
1) It alerts me that a profitable trade may be on the horizon – which gives me time to prepare.
2) It tells me when I should think about getting out.
3) It lets me adjust my time horizon to craft a trade that fits my needs.
As I said before, I keep it very simple. I use a few basic versions of ONE simple tool model to take advantage of sentiment and technical extremes on highly liquid ETFs.
So, with that being said, I would like to share with the most powerful technical indicator that I use in my proprietary model.
|Options Advantage – Crowder Indicator: Most Liquid Stocks (Options)|
|As of the end of trading on 6/25/12|
|Oil and Gas Expl. & Prod.||XOP||54.1||Neutral|
|S&P 500 VIX Futures||VXX||41.7||Neutral|
|US Dollar Index||UUP||23.1||Overbought|
|Ishares 20+ Treasury||TLT||61.9||Neutral|
|Direxion 3X Bear||FAZ||33.0||Neutral|
|Energy Bear 3X Shares||ERY||33.2||Neutral|
|Financial Bull 3X||FAS||64.9||Neutral|
|Small Cap Bull 3X||TNA||58.2||Neutral|
|Smal Cap Bear 3X||TZA||38.9||Neutral|
|Ultra Long S&P 500||SSO||67.9||Neutral|
|Ultra Short S&P 500||SDS||30.5||Neutral|
|Ultra Short 20+ Treasury||TBT||36.0||Neutral|
Basically, my indicator allows me to gauge the probability of a short- to intermediate-term reversal. It does not tell me the exact entry or exit point, but it helps me to be aware that a reversal is on the horizon.
Knowing that a short-term top/bottom is near I am able to increase the probability of a potential trade. Conversely, knowing that a reversal is on the horizon I am able to lock in profits on a trade.
Related: Dow ETF (NYSEARCA:DIA), Russell 2000 ETF (NYSEARCA:IWM), Nasdaq 100 ETF (NASDAQ:QQQ), S&P 500 ETF (NYSEARCA:SPY).
Wyatt Investment Research is led by founder Ian Wyatt, who serves as Publisher and Chief Investment Strategist. Our team also includes a group of talented research analysts and editors who aim to uncover great investments and present those investment ideas to our growing group of loyal subscribers.
Ian Wyatt is an active investor, a well-regarded investment expert and an Internet entrepreneur. He is the Chief Investment Strategist at Wyatt Investment Research, and plays a leading role in each of the company’s investment newsletters and trading services. As a well-regarded market expert, Ian has written for Marketwatch, Zacks Investment Research, Seeking Alpha, Yahoo! Finance and The Burlington Free Press. He has been interviewed or quoted in articles in well-known publications including AOL Finance Blogging Stocks, Kiplinger’s Personal Finance Magazine, Barron Magazine, Barrons.com, Forbes.com, The Dick Davis Digest, The Dick Davis Income Digest, The Wall Street Transcript, TheStockAdvisors.com, Money Show Digest, The New Jersey Star Ledger, The Wisconsin State Journal and The Seattle Times.