The Risk With Popular Option Income Strategies
The biggest difference in trading low-risk option strategies compared to the popular income strategies is that the time to recover from a debacle is very different. For example, over the recent "computer glitch," those who were trading iron condors as income spreads lost about 50 to 70% over that two-week period. If you think about this, it'll take about 10 months to a year and a half for them to make back this money. Most option traders will never rebound from such a debacle.
For those of us using low-risk strategies such as the broken wing butterflies, we lost around one to five percent at the worst, if they were done right. I personally experienced a 2.5% drawdown. As you can see, the big difference is that when things go bad for us, it was much worse for those trading the popular income strategies. Calendar Spreads, Iron Condors, Covered Calls, Credit Spreads, and At-The-Money Butterfly Spreads were all annihilated due to the recent "computer glitch".
As you can see, traders trading Broken Wing Butterflies were much better off. Some didn't have any drawdown whatsoever and those who did were able to manage their losses and stay in the game. Those of us trading the low-risk strategies were lucky enough to make our losses back over the following month while traders trading the popular income strategies will probably never make their money back.
The results speak for themselves and are a great example as to why I personally don't invest too much money into the popular income strategies anymore. That game they play is just a little too risky for my taste. I'd much rather make my money a little at a time while never having to take any of the huge losses that the aggressive income traders face every year. Doesn't it make more sense to protect what we have and to take whatever the market gives us? In the long-term, I know my option trading plan will work much better this way.
Over the years, I've reworked and tweaked these popular option strategies to be low-risk. My trades initiate with lower risk, and my alternative way of doing Iron Condors has proven to be much safer than the popular Iron Condor. I've also developed Broken Wing Butterflies and Unbalanced Condors that have become some of my all time favorite trades. I like that I can initiate a trade with about two percent risk, be in the trade, and then remove the risk almost completely in most cases. That's right; sometimes I actually have trades that are basically risk free. The only way I'd loose on these trades is if the market drops move than seven percent in one day. Think of this though, if I'm loosing money, then those trading the popular option spreads don't stand a chance and will be left with nothing at all. Even in the most extreme circumstances, my strategies have proven to be much safer than anything I've seen out there.
Article Source: FxTradingStock.com
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by: Donald Scott
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Word Count: 501
Date: Fri, 2 Jul 2010
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