3 Common Misconceptions About Credit Spreads You Should Know

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The options market has been very busy lately. The volume of options being trades is growing rapidly with more and more investors jumping in. And as the audience grows, so do the articles about how "risky" options trading is for beginners. And it's completely true if you trade blindly, but there are 3 very common misconceptions about Credit Spreads in particular that I wanted to cover.

1) They Are Used For Day Trading

The most common misconception is the ignorant comparison to day trading. Day trading and Position trading with Credit Spreads are completely different. Unlike day trading, Credit Spreads derive their income from a low risk strategy.

Day trading however involves extreme intra-day risk, massive amounts of capital, nearly constant attention and huge commission costs. It can be extremely time consuming. On the other hand, many investors choose to use Credit Spreads as their primary income vehicle for any market.

2) You Will Get Rich Overnight

I don't care what seminars you have been too or what books you have read, Credit Spread trading is income oriented and will not make you a millionaire overnight. It's not a "Get Rich Quick" strategy and you had better understand that right now.

As Warren Buffett says:

Risk comes from not knowing what you are doing.

Learning any options trading strategy involves a certain amount of personal discipline and education. Once you grasp the basics of Credit Spreads you will have a very solid and consistent strategy in your trading arsenal.

Start The FREE Course on "Options Basics" Today: Whether you are a completely new trader or an experienced trader, you'll still need to master the basics. The goal of this course is to help lay the groundwork for your education with some simple, yet important lessons surrounding options. Click here to view all 20 lessons ?

3) Credit Spreads Are Only For "Professional" Floor Traders

The reality is this strategy is for anyone looking to make consistent income returns on their money minimized risk. Whether you are a professional or a beginning trader doesn't matter to the market, so long as you know the in's and out's of the strategy. Great trades make money and bad ones lose money; regardless if you are a professional or not.

Actually, most traders use credit spreads because of the relatively low capital needed to start profiting. Unfortunately, many people never even get started because they think they need to have thousands of dollars saved up. This is a far more costly mistake.

Other Trading Misconceptions

As you have gone through your own trading experience, what are some common misconceptions you wish someone had explained to you earlier? Feel free to add your comments below so that others may learn!

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he’s a Full-time Options Trader and Real Estate Investor.

He’s been interviewed on dozens of investing websites/podcasts and he’s been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and two daughters.