Wednesday, October 5, 2016

Why Credit Spreads are a stupid idea if you don't know what you're doing, actual case study

This is an email (copied and pasted below) that landed in my inbox yesterday, a day before gold broke below its 3 month support level of around 1308 and free fell over 2.5 standard deviations in just 1 day.  Yes, i got an email from "The Strike Price" and their "Chief Options Strategist" Andy Crowder on "How To Make 14.9% in gold over the next 2 weeks."  That was the title of the article, verbatim!  Well, this article very quickly proved "How to Lose 100% of Your Money in Just One Day".  I don't know who these people are, i never heard of "chief options strategist" Andy Crowder before and I'm sure I won't hear his name again.  You know these services, they're a dime a dozen and they all like to spam your inbox.  This one by far was the worst of the lot.  I'm sick of all these punters who talk about making measly percentage gains of a few percent claiming 80-85% success rate with credit spreads.  What Andy Crowder doesn't tell you in his spiel is that 14.9% return is based on your capital at risk, which means you are risking almost 7 times what your potential gain is, that's terrible risk reward.  Oh, but we're talking about an 85% probability of winning, so it's ok.  Gimme a break. This is just how dense these people are.  The probability of these trades working is actually far less, and Andy's analysis is so simplistic, obtuse, and uninformed.  His rationale was that oh gold is oversold, oh look at my trusted indicator the RSI....geez, what r u in 3rd grade????  you're gonna base risking 7 times the loss based on a frickin RSI?  Did you look at the COT report?  no... Did you look up the demand out of china and india?  no!  Did you read my article just a few days earlier about how the dam is about to crack any day now in gold and swing the floodgates wide open?  about how more calls were being bought and stacked on with every down move, sending up contrarian warning flags?  no your brain lacks that sophistication.  Did you even study the chart pattern of gold and acknowledge the clear bearish descending triangle?  of course you didn't even do that.  Andy Crowder, shame shame...

How to Make 14.9% in Gold over the Next Two Weeks
By: Andy Crowder
Tuesday, October 4, 2016
As a special service to our readers, I will be offering a free webinar tomorrow (Wednesday). It will be for educational purposes (with several live trades) to throw some light on my process and strategies when trading weekly options.

Today, I want to go over a trading opportunity in Gold (GLD). I will also go over the today’s trade in far greater detail in the upcoming webinar tomorrow, including my risk parameters. 
In this special issue I’ll also reveal some of the key aspects of knowing when to make a trade.

Trading Opportunity in Gold
Let’s examine how a weekly options trade works using one of my two approaches.
The commodities market – more specifically gold, is in a “very oversold” state again, according to my favorite mean-reversion indicator, RSI.
Once I see confirmation of an oversold state in one of the highly-liquid ETFs I follow, like GLD, I immediately look for a trade.

With GLD trading for roughly $125.11 and in a very oversold state, I want to use a strategy like a bull put spread. A bull put spread will enable me a margin of error just in case the current short-term directional trend – in this case a bearish trend – continues.

The next step is to choose the actual spread. I want to start by looking at the Prob.OTM column in search of a probability of success around 85%.
Above is the November options chain for GLD. I always start with the probability of success. I’m only interested in trades with a greater than 80% probability of success.

After I find the odds I like, I then look at the premium. I know lots of options investors struggle with how to choose a specific strike. My advice is always to calculate the yield on cash or yield on margin to gauge the percentage you’ll earn.

If I were to choose the strike price closest to 85%, I would need to sell the 119 strike. However, since I would need to buy the 117 strike which would only bring in a premium (bid price – ask price) of $0.18.

So, the next step is to move further up the options chain towards the 120 strike. This lowers my probability of success to roughly 81%, but it allows me to bring in an ample amount of premium to make it a worthy trade.
I can sell the 120/118 bull put spread for $0.26 ($0.59 – $0.33). By selling the strike with a slightly lower probability of success, I am able to make a return of 14.9%, compared to 9.9% by selling the 119/117 bull put spread. The margin of error on the 120/118 bull put spread is $4.89. Again, the decision always rests with how much probability of success you want to have on your trade. In this case, we are going with an 80.97% probability.
As long as GLD closes above the 120 strike at November expiration, the trade will receive the max profit of 14.9%. But remember, the goal is to take the trade off within a week or two, hence the weekly options trade. Yes, I will integrate weekly options trades with only 7-14 days left until expiration, but this has been my method as of late. Anyway…the break-even point is $119.74, which is the strike price of $120 minus the premium received of $0.26.
Again, given the extreme oversold nature of GLD, I am comfortable pushing forward with the trade. Again, I will go over this trade and most likely 3 to 4 more in the upcoming webinar on Wednesday.
As I said before, I do things a bit differently than most people when trading weekly options. I do not make a trade every week. I wait for overbought/oversold extremes to enter the market and then I begin to look for a trade.
All of the numbers can be confusing, but if you focus on the probability first, and then calculate the yield, you can more easily gauge whether the trade makes sense for your portfolio.
In this case, we’re looking at a 14.9% gain in 45 days, with an 80.9% probability of success.
I encourage you to familiarize yourself with the tools made available to you by your broker. If they don’t offer them, consider switching brokers. Once you get used to the kind of baseline income that’s available from different options scenarios, you will start to recognize the difference between good, average and bad opportunities – and you’ll become a better trader.
And one of the most important aspects of trading is being able to make that kind of informed decision.
For us to randomly select a trade based on the fact that it is Thursday or Friday, or any specific day for that matter, is irresponsible. The market doesn’t work that way. I mean, what’s the hurry? Why do we need to make trades every week, especially for arbitrary reasons? We are in this for the long haul, so let’s take a more methodical, long-term approach.
Again, on Wednesday I will be discussing in far greater detail my approach to weekly options. If you would like to learn more, please click here.

During this event, I’ll be going into much greater detail about this GLD trade, as well as 2-4 other income trades you can make live, during my event.
Andy Crowder
Andy Crowder
Chief Options Strategist


  1. Trading a bull put credit spread is usually riskier than trading a bear put spread. Trading credit spreads on individual stocks or ETFs is also riskier than trading credit spreads on a stock index. And, there are other ways to significantly reduce risk on trading credit spreads. Andy is apparently unaware of these. I also understand that he does not believe in money management (adjusting trades). That is simply unbelievable! I'll use my own trading plan over his trading system any day.

    1. correction: I meant a bear call credit spread, not a bear put credit spread.

  2. The entire information is really good and some good insights available. Looking forward to do more clicks.

  3. I looked at the GLD historical data and the trade was a winner. Andy stated that the trade would be closed within the next week to two weeks and there were many days in that time period where the trade was in profit. Profitability in options comes in taking profits and trading actively. Holding to expiration is often a losing strategy while taking profits early can be wildly profitable. I do not subscribe to his service but what he teaches does work. Selling premium during high volatility events and taking profits quickly when IV contracts back toward normal levels is tried and true and results in win rates far above the expected rates.

    1. Agreed. I also checked the historical chart of GLD and confirmed that this bull put spread trade would have been profitable if entered when GLD was extremely oversold (RSI 2 & RSI 5 both under 20) around 10/4/16-10/7/16 and exited within the next 20 trading days. A clear signal to close the trade was given when GLD became extremely overbought (RSI 2 & RSI 5 both above 80) between 11/2/16-11/4/16. Incidentally, this also would have been a good entry point for a bear call spread for the Dec 2016 expiration and would have made close to max profit within 1-2 weeks.