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The Death of the Blind Spread Seller

It was an easier time back then.

Funny, how we can be nostalgic of different market conditions that existed just a month ago.

When the market starts to get "easy" again, we often see marketers create new products and services around complex or leveraged instruments geared towards newer retail investors.

Forex robots were a huge market back in 2009 due to how well currencies trended. One look at a chart of the euro ($FXE) and you can see how those systems have been chopped up over the past few months.

Another class that is more near and dear to my heart are the Super Simple Spread Selling Systems.

They work until they don't.

The Holy Grail of Options Trading

The main marketing message here was that you could have guaranteed "income" with a 90% win record, and how you could take only 10 minutes a day to make money in the market. Their track records would show gains of 100% on positions, even though their performance metrics were way off base.

And to be honest, those kinds of systems work pretty well, under very specific conditions.

A Not-So-Hostile Environment

Up until recently, the $VIX and other implied volatility readings had continued to trend lower and yet still trade at a premium to realized volatility. So selling high-odds vertical spreads or iron condors worked.

This in turn causes a lack of discipline, where the kind of option trade took precedence over risk management or market analysis.

And then, the market turned. The cycle switched. Volatility stopped being an easy sale, and the risk/reward equation completely shifted. For the agile options trader, a change in course with respect to strategy was needed. Incorporation of volatility hedging or getting long gamma was needed to survive the most recent move lower.

But for a blind "system," one was to continue to sell vol because now the premiums were "fat."

About that 90% win rate: if anyone tells you that, ask what their net expectancy is. Odds are, because they have high odds, their risk and reward are skewed. So when they lose, they lose big.

The takeaway here? You must never, ever, get attatched to a single options trading strategy. When you are trading options, you are trading multiple sources of supply and demand. If you don't recognize how to best structure your risk, you will eventually get burnt.

If you want to become more aware when you trade options, check out my video course, OptionFu. It's not easy, you've still got to put the work in-- the course is over 19 hours long. But the returns from the knowledge given will be greater than any simple system out there.

 

by Steven Place

Steven Place is the founder and head trader at investingwithoptions.com/