Credit spreads are a popular options trading strategy that involves selling an option with a higher premium and buying an option with a lower premium. This allows you to collect a credit for placing the trade. This strategy is used to generate consistent income and grow your account even if you work full-time.

When trading credit spreads, it’s important to understand that the profit and loss (P&L) of the trade is not always the best indicator of whether or not the trade is successful. In fact, focusing too much on the P&L can lead to emotional decisions that can undermine the long-term success of the strategy.

Reasons To Ignore Your P/L:

Credit Spreads are High Probability Trades

Credit spreads are designed to be high probability trades, meaning that the likelihood of success is relatively high. Depending on the delta used, most credit spread trades have a 70-80% win rate. However, when you trade credit spreads in the direction of the market like my Inner Circle Members and I do, you can easily increase your win rate to 90%+.

However, just because the trade has a high probability of success does not mean that every trade will be profitable. Some trades will inevitably result in losses. While some trades will go against you when you are in the trade despite it coming back into a profitable range by expiration. This is why it’s important to focus on the long-term success of the strategy rather than individual trades.

P&L Can Be Misleading

The P&L of a credit spread trade is based on the difference between the premiums received and paid for the options, minus any transaction costs. While this is a useful metric for evaluating the success of a trade, it can be misleading when taken in isolation. You should also factor in the trend when trading credit spreads.

Despite account for the trend and following a proven credit spread trading strategy, there are times when the trade will go against you while you are in the trade. During these periods, it can get emotional to stay in the trade as you are seeing a huge loss in the open P&L. This can convince you to close trades early even though your strategy didn’t instruct you to. Therefore, ignoring P&L can help you control your emotions and stick to your plan.

Focus on Risk Management

Instead of focusing on the P&L of individual trades, traders should focus on risk management. This means setting appropriate stop-loss levels, managing position size, and having a plan for adjusting or closing trades if the underlying asset moves outside of the expected range. By focusing on risk management, traders can minimize losses and avoid emotional decision-making based on short-term fluctuations in the P&L.

Even though my Inner Circle Members and I use strategies with a 90%+ win rate, I always ensure they are following two major rules: 10% sizing and 10% profit. You should never put more than 10% of your total account into any one trade. You should also never enter a credit spread if you can’t collect at least 10% in profit so that you can be profitable and have enough to offset any future losses.

Long-term Success is the Goal

Ultimately, the goal of trading credit spreads is to generate consistent income over the long-term. This requires discipline, patience, and a focus on risk management rather than short-term P&L fluctuations.

By ignoring the P&L of individual trades and focusing on the long-term success of the strategy, traders can avoid emotional decision-making and achieve their goals.

In conclusion, when trading credit spreads, it’s important to remember that the P&L of individual trades can be misleading and should not be the sole focus of evaluation. By focusing on risk management and the long-term success of the strategy, traders can achieve consistent income and avoid emotional decision-making.

Thanks for reading 🙂
Austin Bouley
CEO & Chief Strategy Officer