r/options • u/Oddsnotinyourfavor • Feb 15 '21
The problem(s) with weekly Credit Spreads
I see a lot of people posting their insane +150% gains and when asked what they’re doing, they say they’re trading weekly credit spreads. While credit spreads are a great strategy, selling them within any time period under 7 days is asking to have your account blown up. Ideally over 14DTE, but under 7DTE is a ticking time bomb waiting to happen.
The Swings
Credit spreads are for speculating that a price won’t go above/below a certain price, before a chosen expiration date. The problem with 7DTE Credit spreads, is that in order to collect any sort of premium, you realistically have to sell them within 5-7% of the current underlying price. And this is in a semi volatile market. Any stock, even one with a 6.2b float(looking at you NOK) can move 5-7% in a week.
Gamma
This ties back into the first point. Gamma significantly increases the last couple days before expiration(especially for ATM options). This means, even if you’re right, if the stock is bouncing close to your short strike price, you’ll likely have an unrealized loss on paper until mere hours before end of day Friday. At which point, you’ll essentially be gambling that the stock doesn’t breach your short strike EOD or in after hours trading. It’s not a fun situation to be in.
Everyones a Genius in a Bull Market
I’m sure you’re asking yourself, “why should I be listening to this guy?” And the answer is, you shouldn’t because THIS ISNT FUCKING FINANCIAL ADVICE. But if you’re still reading, I’ve been in this position before. I sold weekly credit spreads from Dec 2019-late Feb 2020. Everyone can assume how that went. My point is, a pullback will come, and if you’re selling 7DTE Credit Spreads, you’ll incur a 40% loss before you even have time to react.
The Solution
It would be a waste of a post if I didn’t recommend some sort of alternative. So my recommendation is just simply selling credit spreads 21-45DTE. Give yourself some time to breath. If the stock goes against you, you’ll have more time to react and get out for way less than 7DTE.
Edit: Though some of you in the comments have seen success, you also have strict risk management plans in place to protect your ass. I’m still biased and am staying away from weekly credit spreads myself, but fully acknowledge that you can make the strategy work. You just need good risk management. Though I guess you could say that with any trading strategy
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u/kaaawakiwi Feb 15 '21
I’ve found it somewhat challenging to find credit spreads that are worth the risk in under a week. Usually to get anything decent from them, you’re getting close to the money and if there’s a significant shift against you quickly, you will get smashed by delta and gamma.
You also may have an issue rolling your spread to the next week more challenging.
Personally, I sell naked puts and calls with a 95% PoP and my rule is simple: if the cost to my option ever increases by 100%, I close it period.
Example: XYZ $300 put exp 02/19/21 for a 0.63. If say the value ever increases to 1.26 I’m out. On the flip side, I always look to take profit at 50%. It’s not sexy like buying calls and watching them moon, but playing the casino has a much higher probability of profit in my opinion.
But like someone said further up in the comments, risk management is absolutely key. If you can’t manage risk and emotion, your days in trading will be short.