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Trade Credit Spreads Very Carefully

Credit spreads are a popular options trading strategy that involves selling an option with a higher premium and simultaneously buying an option with a lower premium. 

The difference between the premiums is the maximum potential profit for the trader (typically 4% return per credit spread trade), which is credited to their account when the trade is opened. 

Credit spreads can be used in both bullish and bearish markets, making them a versatile strategy. 

However, they also come with their own set of risks. 

Credit spread potential profit is capped,

but potential loss is your entire investment.

One of the primary risks associated with credit spreads is that they have limited profit potential and a much higher risk. The trader’s potential loss can amount to their entire investment

To manage this risk, it is essential to have specific entry, exit, and defense rules in place.

Entry rules should include specific trade entry criteria, such as technical indicators, market trends, and risk-reward ratios.

Exit rules should dictate when to close the trade based on price targets, stop losses, or other predetermined criteria.

Defense rules should detail the actions to be taken if the trade moves against the trader, such as adjusting or closing the position to limit losses.

Without these rules, credit spreads can quickly become dangerous and lead to significant losses.

We only recommend credit spreads for seasoned traders who have a well-defined trade plan and are disciplined in sticking to their plan.

Credit spreads should be monitored and managed for their duration to avoid a major loss.

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