Credit Spreads With 50+ IV Rank… Do They Really Work?

Tasty Trade Teaches that 50+ IVR Credit Spreads Consistently Produce Winning Trades

The bull put credit spread is a very common options strategy, but is it really profitable when you just put it on based on POP calculations and do not apply any risk management?

Some gurus tout profits are as easy-as-pie with this method, and they promise that you will be profitable from day one as an option trader.  You will find these guys all over the web.

Other marketers backed by billion dollar corporations, such as the Tasty Trade financial network, claim IVR (IV Rank) alone can be used as the “magical gateway” to financial freedom.  They teach it’s easy to profit from credit spreads – you just put them on when IV Rank is over 50, and let it ride.

Their tagline used to be, “manage your winners and let your losers go.”  In 2015 it appears they changed that rule to “manage winners at 50% and stop losses at 200% the original credit.”  This means losers are 4X the winners, so their system would require a POP of over 80%.  We’ll test that formula later.

In this study, we just wanted to test their original formula, which was to let the losers ride, assuming many of them will come back.

Don’t end up on the couch like this pasty trader™.

10-Year Backtest

Since it’s common to trade multiple credit spreads for diversification, we selected various products with high volume to perform the back test.

Each credit spread is sold near the -.10 delta and we buy the .-05 delta to complete the vertical.  We used the “Let your losers ride” trading method, which was recommend by Tasty Trade.  $10,000 was allocated to each product.  We compounded returns so that $10,000 was total investment and max risk of each.

Back Test #1:  AAPL 2005 to 2015 (-100%)

In our attempts to back test Apple for the 11 year span, in 2008 the $10,000 was reduced to only $152.  Over the following 5 years it never reached $200 again.  By 2013 it was down to $11, so we ended the back test.

Back Test #2:  IWM 2005 to 2015 (-93%)

In our attempts to back test IWM for the 11 year span, in 2008 the $10,000 was reduced to only $870.  By 2015 it never recuperated and finished at $728 for a total loss of 93%.

Back Test #3:  MSFT 2005 to 2015 (-86%)

In our attempts to back test MSFT for the 11 year span, it lost consistently until it bottomed in 2014 with only $1150 left.  A small rebound in 2015 gave MSFT a total loss of 86%.

Back Test #4:  QQQQ 2005 to 2015 (-100%)

In our attempts to back test QQQQ for the 11 year span, in 2006 the $10,000 was reduced to only $2726 and in 2008 finished at $14, so we ended the test.

Back Test #5:  SPX 2005 to 2015 (-100%)

In our attempts to back test SPX for the 11 year span, in 2008 the $10,000 was reduced to only $74.  By 2015 it was down to $8.

Back Test #6:  WMT 2005 to 2015 (-74%)

In our attempts to back test WMT for the 11 year span, we found this to be the best performing of the bunch, only losing 74%.  In 2007 it lost 37%, 39% in 2012, 46% in 2014 and 72% in 2015.

Credit Spreads + IVR 50 + No Management = Losses

As you can see the “high probability” credit spread may not actually work long-term when trades are based on IV Rank as recommended by Tasty Trade.  Although you have a great chance of a winning trade, the losses, though less frequent, are much larger, so this method frequently blows up completely when it’s traded long-term.

These 6 products are commonly used for credit spreads.  They are high-volume products which is what is recommended.  The back tests were limited to periods of 50 IV Rank or higher, just as the financial networks claims is the “winning formula.”

That said, let’s look at the positive side of these trades.  Some years credit spreads produce quick profits.  It’s possible to make over 50% if everything goes perfectly.  If you have a way to avoid the bearish moves, this trading style could be a winner, but trading based on IV Rank alone does not seem to be the answer.

As always, best of luck with your trading and remember to manage your risk!  Do not rely on POP calculations alone.  In most cases that method will fail.

Disclosure:  The back tests performed were automated and we do not guarantee the accuracy in any way.  Please do your own research and make your own conclusions.