Credit Spreads Risk Management (Risk $1 To Make $1)

10% Credit Spreads
3 min readNov 6, 2023

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Today, I’ll show you how to effectively manage risk and size your trades when trading credit spreads. This way you can keep your credit spreads risk management in check. By the end of this article, you’ll understand how to keep your risk management in check while aiming for consistent profits.

Credit Spreads Risk Management Basics

Credit spreads are a popular options strategy known for their naturally high win rates. However, there’s an inherent risk when trading credit spreads, which is the possibility of encountering losing streaks. Losing streaks occur when you face a series of consecutive losing trades, and they are part and parcel of trading.

The answer lies in understanding your maximum loss tolerance during a losing streak and using it as a guide for determining your trade size. By setting this limit, you ensure that your trading size aligns with your emotional stability, ultimately helping you to navigate the markets with confidence.

Calculating Your Maximum Loss Tolerance

Calculating your maximum loss tolerance is a personalized process, and it’s essential to make it fit your unique financial situation and risk tolerance. Here’s how you can determine your maximum loss tolerance:

  1. Know Your Account Size: Start by identifying your current trading account balance. This is the total amount of capital you have available for trading.
  2. Determine Your Loss Tolerance: Consider how much you’re willing to risk during a losing streak. This is the maximum amount you’re comfortable losing before you feel the need to reevaluate your trading strategy. It’s a highly individualized number based on your financial situation and risk tolerance.
  3. Calculate Your Maximum Loss Percentage: Express your loss tolerance as a percentage of your account size. For example, if you have a $100,000 account and are comfortable risking $20,000 during a losing streak, that’s 20% of your account.
  4. Factor in Historical Losing Streaks: As a prudent risk manager, you should consider the historical performance of your chosen strategy. For example, if you’re following the “Mother Credit Spread Trading Strategy,” you might find that in the past, it has experienced losing streaks of a specific length, such as five consecutive losing trades.
  5. Divide Your Maximum Loss Percentage: To determine your trade size, divide your maximum loss percentage by the number of consecutive losing trades you’re considering. For instance, if you’re comfortable with a 20% loss, and the historical data suggests a losing streak of five trades, your risk per trade would be 20% ÷ 5 = 4%.

Trade Sizing As A Credit Spreads Risk Management Strategy

Now that you’ve calculated your trade size based on your risk tolerance, it’s essential to stick to it consistently. This approach ensures that your trading account is well-protected, even in the face of temporary setbacks like losing streaks. A key point to remember is that your trade size is not set in stone and can be adjusted periodically as your account grows or your risk tolerance changes.

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By adhering to this risk management approach, you set yourself up for the best chances of success. You’ll find that the power of consistently sized trades means that one winning trade can offset the impact of multiple losing trades.

Effective risk management is the linchpin of successful options trading. By determining your maximum loss tolerance, aligning it with your account size, and sizing your trades accordingly, you can achieve a comfortable balance between risk and reward.

While credit spreads offer the allure of high win rates, understanding the potential for losing streaks and mitigating that risk is the key to sustained profitability. It’s not about avoiding losses entirely, but rather managing them in a way that keeps your trading journey on a steady course.

Thanks for reading 🙂
Austin Bouley

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10% Credit Spreads

I help people who work-full time or have a family make 10% a month using credit spreads! If you don't make money with my alerts and strategies, I refund you :)