You probably hear all the time how you need to manage risk and set stop losses. I used to be one of those people and still am when I trade stocks. However, if you are trading vertical credit spreads, you should not be setting stop losses. Let me explain…

Credit spreads are an options strategy with a directional bias. This means if you are trading put credit spreads, you are assuming the market will move higher. If you are trading call credit spreads, you are assuming the market will move lower. Credit spreads are also defined risk trades which means you know you max profit and max loss before you ever enter the trade.

The max profit and loss of a credit spread are quite easy to collect. It is dependent on the amount of credit you collect when you open the trade and the width of your spread. For example, if you are trading a put credit spread with a width of one, then you have a max loss of $100. A width of one means that you are selling the $100 strike and buying the $99 strike. Your max profit on the other hand is the amount of money that you collect for putting the trade on. Let’s say for this example, you collect $15 for putting this trade on ($.15 per spread). That makes your max profit $15. Now, your theoretical max loss changes from $100 to $85 when you collect the $15 credit. Because although your max loss is $100, you received $15 that you get to keep regardless so your new max loss becomes $85 (or $100 – $15).

Why are stop losses not important?

Now, this idea of stop losses not being important is primarily based on my trading experience and the strategies that I trade. If you are trading using TastyTrade mechanics, then this won’t pertain to you. However, let me explain, make my case and even win you over to the no stop loss side.

The strategies I use were all backtested with the idea of letting the contracts expire. This means that regardless of how much the trade goes against, I am trading based on years of historical data that says it will be in my favor by expiration more than 90% of the time. Statistically speaking, a stock will go below my credit spreads breakeven price roughly 20% of the time. This means out of 100 trades, 20 trades will go below my breakeven. However, out of those 30 times where I could hit my max loss, it recovers over 50% of the time.

Now you may be saying, “Austin, if you are telling me the truth, then you are saying that you have over a 90% win rate?”

That is correct! The strategies I developed and are trading all have 90% historical win rate in every type of market: bullish, bearish, crashing, sideways, and everything in between. If you want to learn more about these strategies, you can check out my strategies here! If you are someone who works full-time, has a family or just super busy and wants to have alerts sent straight to your phone, then check out my Inner Circle Program where I share my personal trade alerts. This program is backed by my “Make Money Or Don’t Pay” guarantee.

Long story short, trade with the trend and always follow your strategy! Find a strategy that matches your personality and skills, master it, and only trade it. If your strategy advises that you use stop losses, then please use stop losses with credit spreads. However, my personal strategies are based on set and forget it trading methods.

Thanks for reading 🙂
Austin Bouley
CEO & Chief Strategy Officer