This phrase is a common description for selling high probability defined risk options strategies like credit spreads.
With high probability, the capital required and risk is extremely high compared to the reward. The two NDX credit spreads I had left open overnight from yesterday was risking $9,400 to make $600. At the time of opening the options, they had a probability of profit of about 88%.
Unfortunately, this morning at 8:30am, the monthly unemployment report came back significantly under expectation. Therefore the economy wasn’t recovering according to schedule, which means the Federal Reserve will keep inflation rates down. And with the reduced fear of inflation, the indices popped up. NDX rose by near 200 points in the premarket fully breaching both credit spreads past max loss.
After much panic, I managed to close my positions for a $4,400 loss within 15 minutes of market open.
There’s no way to really guess what the stock market will do. What we CAN do is manage the amount of capital we put under risk.
Credit spreads leave almost no room for adjustment when things go South. I’ll be changing my strategies away from credit spreads moving forward. And any spread positions I put on, it’ll be much much much smaller. $10k on one underlying is 25% of my account, I can’t afford to risk that much. Risk should be 2% max of the account, which is now $700 thanks to that $4,400 hit.
So that’s what it feels like to be run over by a freight train.