Weekly Options Credit Spread Horror Story

Option Credit spreads are a very simple trade.

You sell one option, buy another for protection and hope that your sold option is not in the money on expiration day.

In other words you sell the 100 put and hope the stock stays above 100. Or sell the 150 Call and hope the stock stays below 150.

And since option credit spreads have such a high probability of profit, most traders make money with them most of the time. But when they lose….. ouch. Option Credit spreads are not very forgiving when you lose.

I learned this firsthand. I had been trading credit spreads in Apple, FXI, and Google. Doing well for several months in a row. But then there was a drop, and all the gains I had made, plus a lot more was wiped out.

It takes a while to recover mentally from a loss like that. I was reminded of this event when a member emailed me his credit spread horror story yesterday which he gave me permission to share with you.

Keep in mind that this member has been trading for 17 years so he is not new to the game.

“I now try to follow a strategy I read last year in the book of Proverbs from the Bible, of all places:  it says:
” … whoever gathers money little by little makes it grow.”
(Proverbs 13:11).

I was shooting for 1 or 2% per Week with trading weekly options.  It does not sound like a lot and takes a long time – but after 1 year, it is 50 – 100% for the year, which is great.   It is like your 5% per month strategy.  Making a little money on lower risk option credit spreads over and over again adds up over time.

Trading weekly options can be risky

Yes whatever you do – NEVER CHANGE your Strategy if it has proven to work.   – and NEVER get greedy.  When you make your 5% or so – get out.  Do not try to get more.  Every time I do that, I end up loosing the 5% and then loosing even more.  I just lost $3,500 on a NETFLICKS Credit spread 2 Friday’s ago (a weekly position), in the last 45 Min, when NETFLICKS spiked up 8 points in  that final 45 min after being flat the entire day.  I went from a $200 gain to a $3,500 loss – all in that 45 min – going into the close (Expiration Friday). I was so devastated.  it will take me months to recoup that  – as soon as I get up the nerve to start trading again.

Urgh, I was so, so destroyed by that one trade.  Prior to that trade, I hade made 29 out of 30 trades over the past 3 months – all making about $150 each (ie, “little by little”).  Then BANG – all gone in 45 min.”

Option credit spreads may hurt you

So as I mentioned, credit spreads can hurt if they go against you. Add the high gamma of weekly options and you can be broke in a few hours. I know that weeklies have become very popular. But they are very risky.

Before you play the weeklies, I would suggest you get good at the regular monthly option trades and know exactly how and when you will adjust or exit. Once you have some consistent winners, then try the weeklies.

Weeklies are not the holy grail they have been made out to be.  Use them with caution.

What do you think? Please leave your comments below. Also, be sure check out our previous blog posts for options trading system tips and strategies on trading stock options.

40 Comments

  1. Thomas Zhang on April 16, 2011 at 6:27 pm

    I have been trying weekly options with buy write strategy,not with credit spreads which when selling far out-of-money credit spreads,in essence,we are selling time.(weekly options don’t have enough time).what I have been doing is to buy write certain securities such as uso,slv,gld,with selling out of money,in the money and out of money calls while holding shares.If called away, fine,if not,do it next week.Once in a while,I sell out-of money naked puts to aquire shares next week to sell covered calls,but I proceed with caution.

    • carl on August 12, 2012 at 7:08 am

      use stops or triggers to exit a trade such if u sold a weekly spy 141 call and got .40 and the option was worth .6 put a stop in at a 1.00 or when the spy gets to 141 it automatic buys the short option back and leves the long option in place for a profitable trade that went the wrong way good luck trading

      • kurtis spitzer on May 30, 2018 at 8:20 pm

        Would like very much to talk to you about your play.

    • John on November 12, 2017 at 11:45 am

      Hey man have you had success?

  2. Phoebe on June 5, 2011 at 4:27 pm

    Thank you for this. I am new to trading options. I have been trading monthly contracts on indexes successfully and recently started paper-trading weekly contracts. What a difference! You really do need to follow the above advice to the letter! I thought I must be “doing it wrong”, but understand more now.
    I like the above statement- “Never Get Greedy”

    • Jack on June 18, 2017 at 5:29 pm

      Hi Phoebe!

  3. Jay on July 24, 2011 at 1:50 pm

    I have had best success with weekly’s selling, out of the money, .10 delta or below covered puts. They need to be a good bit below the secondary downside support level. Problem is that most indexes/ETFs are not going to give much in premium, but you can find indexes that have the out-of-money delta and minor premium that will work. If you do on straight equity, make sure there are no earning reports that week.

  4. Keith Harrison on September 26, 2011 at 4:41 pm

    Many thankks for the excellent information. These are very interesting examples, but a real puzzle remains for us papper traders and neophytes. You warned me about starting with options a while back because you had a large loss the previous month. Similarly in the key example above cCONSISTENT high gains by your correspondent were wiped out in ONE trade that went against him. I was working on the assumption that your method with the classic Iron Condor strategy protected you from huge losses (though not from ANY loss). Similarly, surely your very experienced trader above would be alive to the possibility of losses and protect against HUGE losses and turn them to smaller loses by adjusting. Your method seems to include the idea of protective puts in the Condor for just that reason. You recent adjustment on the SPX is a case in point. Am I missing something? It would be nice to know before I – or anyone of the other paper-traders start trading for real. I’d much appreciate clarification on this ESSENTIAL point. Keith H.

    • abiotv on May 29, 2018 at 4:27 am

      Condors don’t protect you from anything, they only they help you make more $ because you are garanteed to make money at one end or the other. I used to trade Condors and I am back with them. I stopped because I thought that any time soon the market was going to take a big dip and I was going to burn at the bottom. My saying was that S&P can drop 60 points on any day but I it doesn’t go up 60 points on any day so I kept away from the put bear spreads. I trade daily at the SPX but I am tense most of the time. In todays market the S&P can move up or down twenty points for no reason at all. I have my regular job and can’t be on top of the market 100% of the time. Once on the 15 minute motorcycle ride to my house from work I lost close to 100M. I am thinking on going back to 4-5 weeks out. Will make less but it gives me more time to adjust and make moves before I loose my shirt. When I had 29 days of winning bets I thought I found a new easy way to earn a living but in the 30th day I lost it all and a lot more.
      Be careful and don’t get greedy.

      • LaDon on November 24, 2018 at 12:24 pm

        Greed is exactly what blew up my acct. I was brand new to trading. In the first three weeks, I had 24 winning trades in a roll. I felt invincible. I started trading condors instead of credit spreads so I could double my income. I also changed my lot sizes from 5 to 50 so I could hurry up and make “Real Money”, the next day, the market moved over 600 points. 2 – 5 wide iron condors went to max loss almost immediately. $50k less $12k credit received left my acct in just 1 day. $15k more left right after while trying to get emotional getback.

        What did I learn? 1. There are no shortcuts to success. 2. Trades and emotions don’t mix, and if there is emotion, you should probably do the exact opposite of what your feeling are telling you to do.
        3. Weekly income trades are great, but never the without the stops. (You May stop out of something that may have turned around, but the wealth preservation is well worth it in my opinion. It’s probably gonna take an entire year to get my $ back, but through we’ll calculated trades, prayer and good asset allocation, it will happen.

  5. John Bailey on October 9, 2011 at 6:20 am

    Right now I’m working on covered calls with weekly options on etfs. Every trade is backed up with a protetive put a few months out. If the stock gets called out, I just replace it, if not I just sell another call. If the market tanks, I’ve got protection. So far, so good. JB

  6. Hawk on October 16, 2011 at 11:00 am

    I’ve been buying 8 to 10 weeks out calls and selling weekly options, most of the time in the money, the premium I am getting per week is almost 25% of what I paid for the spread. Doing so on not so volatile shares such as GE INTC and MSFT. Since I am adding every week from the revenue and adjusting the position the average strike price is staying close to the stock price. The killer will be a wild swing on either direction. Any feed back or suggestions regarding this will be appreciated.

    • Genius on October 17, 2011 at 2:05 pm

      If you are selling ITM calls you have the risk of early assignment which would leave you short the stock since you dont have it and are using calls as a substitute.
      A move to the upside will not hurt a smuch because you can roll the weekly call higher.
      A move to the downside will hurt but the risk is defined. So if you are making 25% a week, do it for 4 weeks, take your money out, and play with the house’s money because eventually there will be a down move.

      • Hawk on October 18, 2011 at 7:04 am

        Thanks for the feedback. I don’t understand why will someone assign the calls if he can sell and pocket the time premium ?

      • Jerry Jones on February 7, 2012 at 8:59 pm

        NFLX implied volatility is like 61.65% very risky! I have had very good success trading SPX weekly credit spreads. My record so far is 10 wins and 0 loses. Last week my 1350/1355 credit spread expired worthless, I made $0.30 on that trade. This week I have 2 SPX put spreads 1280/1275 and 1315/1310. I brought in $0.30 for each credit spread. It’s not a lot of income but I think it’s decent income for a week.

        • Jerry Jones on February 7, 2012 at 9:05 pm

          SPX Implied volatility is 15.24% much less than NFLX!

        • Genius on February 8, 2012 at 11:22 am

          Just be careful. I am reminded of a fellow who created a system last year to trade SPX weeklies. He would sell iron condors as far away from the money as he could as long as he made 1% on each side – so 2% minimum for the trade. He tested it and made money something like 30 weeks in a row. Then one week it went against him and he lost all he made and more.

          • Tim Bishop on February 18, 2019 at 3:39 pm

            How do people lose all of their money in one bad credit spread trade? They should be allocating no more than a few % of their account size for the margin requirement, which is the full amount at risk (defined risk), and using a stop which will prevent losing all of that. If there is a large gap, then you may lose the whole margin (spread minus credit rec’d). But that’s it. Are people betting their whole account on way too many contracts?



        • Abiotv on May 28, 2018 at 6:29 am

          At one point I did that for 29 successful weeks and lost one week many times what I made in the 29 weeks. be careful. I lost more than half of everything that I had. After a while winning does it feel half as good as loosing feels bad.
          PS. guess I never learn. Trading daily SPX Condors.

  7. Hawk on October 18, 2011 at 6:57 am

    Thank you for the advise , but don’t understand why will someone assign early if he can sell the call and benefit more because of the time premium?

    • Genius on October 18, 2011 at 11:11 am

      If your sold option is in the money – there is always a chance of early assignment. It won’t happen often, but can happen. So it is something you have to be aware of. Sometime whoever owns the call just wants the stock. Normally though it is will calls way in the money but you never know.

  8. Mike on November 8, 2011 at 4:33 pm

    Your strategy is very similar to playing craps in the casino. Win small for a little time and loose all when 7 rolls out. Can’t win when you know “7” is waiting for you around the corner…

    • Genius on November 9, 2011 at 11:17 am

      Actually we dont sit around waiting for the 7. In craps you have no control over the dice. Here we can exit when we think the 7 is coming. So no it is nothing like craps.

  9. Tom Dahlby on December 30, 2011 at 6:14 pm

    I like Thomas Zhang’s strategy of selling naked puts with the intent of acquiring the stock at a discount if it gets put to you then writing covered calls. Seems to be a fairly safe strategy if you like the underlying stock at the put strike price.

    • Jim on January 18, 2012 at 12:28 pm

      Ton Dahiby: I would be interested in learning more about the Thomas Zhang’s strategy for selling naked puts.

      Thanks, Jim

  10. Harald on February 3, 2012 at 10:04 am

    He’s been trading for 17 years and still trading for $150 gains?? What’s the big deal about a $3,500 loss ?? Thats’ chickenfeed !! Hardly credible !! The solution is easy — don’t trade iron condors, or credit spreads on individual stocks, only on indexes such as SPY and IWM. Individual stocks can get downgraded, upgraded, file for chapter 11 or 7, or get bought out, all of which can result in a huge move in the stock. None of these things can happen to indexes. For individual big mover stocks try short butterflies a few days before earnings, as was recently the case with GOOG, AAPL, NFLX, CAT. All of those short butterflies came out smelling like a rose !!

  11. Lloyd on February 5, 2012 at 1:36 am

    Trading Index options vs. Stock Options

    Study the volatility of the Security underlying the option = VARIANCE statistic.
    A large volatility will yield a large option $ PREMIUM and a large Time Value for the options.

    Individual Stocks can have large volatility.

    Indexes have low volatility and low $ Premium and a low Time Value for the options.

    02/01/12
    Recent volatility / variance examples:
    Stocks:
    AAPL 25.42
    BBY 33.98
    DECK 36.25
    PCX 84.26
    SHLD 79.85
    X 49.67

    INDEX ETF:
    QQQ 09.68
    SPY 08.53

    Indexes options are safer than stock options, but the time value and profit potential for selling Index ETF options is nuch much lower.
    The Index ETF options are safer but the $ return is lower.

  12. Rupendra on March 7, 2012 at 9:34 am

    Thanks for sharing this. I agree that weeklies can be very volatile and dangerous. What is described has happened to me a couple of times as well..most recently with Mastercard [MA]. But then I trade weeklies on securities only once in a while. One has to take it in stride. What I normally do on a consistent basis is wait for Wednesday morning and check out the iron condors on SPX, NDX etc. With just 2 days in the trade and a large spread – I have had 100% success so far. 48 hours in the trade for 2% – 5% is not bad. Also I keep myself well ‘diversified’ – collars, monthly spreads, weekly covered calls and one or two weekly option spread trades. Thanks again, all.

  13. Hayes on March 18, 2012 at 8:51 pm

    I’m interested in weeklies, would like to know what indicators the successful traders on the post are using to trade with weeklies?

  14. junglekid on August 22, 2013 at 6:13 am

    Weeklies should not bet touched by the retail trader at all if you want consistent profits because there is a fundamental flaw to selling them.”hardly no time value at all” so your theta is close to Zero and you are gambling on Delta (Price) Moves or lack of it to profit. In the case of a credit spread a move aganist you will hand you your head on a platter.The main benefit for the option seller,selling a wasting asset ,is just not there in Weekly options.The big winners

  15. junglekid on August 22, 2013 at 6:15 am

    the big winners in the weekly option markets will always be Brokerages and Market Makers.The retail investor will always be a loser long term

  16. taurus3909 on January 6, 2014 at 6:38 pm

    No one should fear early exercise. Just buy the stock and resell the option to harvest the time value as a profit and you are in the same position as before exercise, but richer.

  17. ibrahim petkar on May 11, 2016 at 4:46 pm

    not being funny here but clearly the strategy needed to be adjusted for potentially bigger moves. buying a put or a call in the next expiration out of your credit spread at inception will obviously assist your t0 curve. yes it would reduce your max profit but risk and reward go hand in hand. I would be happy to lose a little max profit if it meant I can sleep at night knowing I can ride a potential gap in the wrong direction. You cant let something like this knock you down. Maybe stick to ETFs like some people have mentioned.

    You should never let yourself hit max loss of the trade anyway. you would get out if you feel you are getting close to your pre-defined loss (which isn’t the max loss of the expiration curve). You could always set yourself a time stop too i.e. regardless of what is happening in the price chart say you enter a trade on a weds for expiration the following week, plan to be out by end of Friday or Monday at the latest (remember time decay comes out of the options around thurs afternoon so high probability quick in and out trades of say 2 days is possible. Don’t stay in the trade after Monday as gamma/delta risk is just too great…In addition you need to set your adjustment points much earlier. Never let a 1 week losing trade wipe out your cumulative gains, aim is to minimize your loss as much as possible if things go against you. if you cant do this then trading is not right for you

    anyway that’s my 2 cents

    • MobileHman on September 18, 2018 at 8:32 pm

      I agree with Ibrahim. You can set a text message alert through your broker to let you know when the stock price gets close to your target stop. At that point you can decide to close the spread. Or if you have enough free cash in your brokerage account to close out your sell side of the credit spread and let the stock continue to go against your original supposition; or if you don’t have enough cash in the account, just close the whole spread and buy another further out of the money credit spread to cut the loss some or in some cases end up with an overall profit. But you must be able to react quickly when you get that alert, and determine if the stock price is going to continue the move. At this point in the position, you are looking for either a fast profit in a few minutes, or a new credit spread that will be far enough out of the money to hold until expiration at the end of the week. I am sure there are other ways to adjust the trade, but those are the strategies that I have used with NFLX which can be volitile.

    • mobileHman on September 18, 2018 at 8:36 pm

      Also position sizing or portfolio management is really important. Not risking more than about 5% of my brokerage account with any one trade (credit spread) is my rule right now.

  18. Rob on May 31, 2017 at 9:33 pm

    Hi, I’m a newbie to options trading (although I have 20 years in trading stocks, index funds, etc.). I just watched a webinar on creating an income stream from credit spreads. I just don’t understand why you would do credit spreads instead of simply selling calls on stocks to create the income. If I sell a call at 100, why does buying a call at 105 “protect” my trade?

    Thanks,
    Rob

    • Ameen Kamadia on June 6, 2017 at 5:27 pm

      Hey Rob,

      When you sell a call by itself, if the stock price goes above the strike price you sold, you will be sitting on a loss. So if you sell the 100 strike call, and the stock goes to 200 a share, you have a loss of $100 per share. And option is made up of 100 shares so that is a $10,000 loss. If you buy the 105 strike call and the stock goes to 200, you only use $500. Why? because the value of the call you bought goes up and offsets the loss from the sold call.

    • abiotv on May 28, 2018 at 6:36 am

      Just protects the amount you can loose. If the stock goes beyond 100 you loose indefinitely. If you buy the 105 you would loose the difference, 5, times the amount of options you bought minus the premium you received no matter how much the stock goes up beyond 105.

  19. Misha on November 19, 2018 at 10:32 pm

    I noticed SPX weekly PUT bid-ask spread become wider near the end on expiry day, it can reach $9.
    are they excahanges that are better for buying options and others for selling options??

  20. Tim Bishop on February 18, 2019 at 4:11 pm

    How do people lose all of their money in one bad credit spread trade? They should be allocating no more than a few % of their account size for the margin requirement, which is the full amount at risk (defined risk), and using a stop which will prevent losing all of that. If there is a large gap, then you may lose the whole margin (spread minus credit rec’d). But that’s it. Are people betting their whole account on way too many contracts?

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