High Volatility means Huge Credit Spreads

With what has occurred over the last week in the markets we have some really high volatility, which means very high premiums for credit spreads. So what does this mean for the conservative trader?

Do not be greedy!
The first thing everyone that trades spreads thinks of is great I can make more money on my spreads, I can find more credit spread trades that meet the criteria! However there is one problem. There is a reason that the premiums are more - the risk is more! A high volatility means that the stocks move more, the noise is louder, and weak supports and resistance mean almost nothing. You are risking a big move against your position which can have very disastrous results on your profits and your overall performance.

The conservative trader will do one of two things - 1. Get out of the market until things settle down a bit or 2. move your positions so you are still getting only a 10% rate of return (ROR) on your credit spreads. What this does is brings your trade positions above or below the noise by enough that you can get out of the trade if it moves against you.

Right now with how much the markets are moving and the government is still playing causing much more uncertainty, which in turn raises volatility, I personally closed my credit spread positions and I am waiting. Will I miss out on the really high volatility high premiums? Yes probably but I will still be able to get in one the higher than last year premiums and find more trades in a week or two than I have been when volatility was low.

credit spreads, option trading, volatility