Deceptively Simple Credit Spreads
Brad Reinard, who is editor-in-chief of Monthly Cash Thru Options LLC, has extensive experience in directional and nondirectional option trading strategies. He has consistently returned greater than 40% annually in his own personal trading account since 2002, primarily leveraging out-of-the-money credit spread and iron condor options on the broad indexes. He has a bachelor’s of science in electrical engineering from Columbia University and a master’s in business administration from the University of Chicago Booth School of Business.
Stocks & Commodities Editor Jayanthi Gopalakrishnan and Staff Writer Bruce R. Faber spoke with Reinard on December 11, 2012.
Brad, why don’t you start by telling us about yourself and how you got interested in trading options.
I am an electrical engineer by trade. I worked in the General Electric Spacecraft Group in New Jersey for three years and then got an MBA from the University of Chicago. From there I moved out to Silicon Valley, and I stayed in high-tech. My expertise was in chip design software. I was selling to all the semiconductor companies like Intel, AMD, and Fujitsu.
All that time, I was trading stocks. Even with the day job, I was constantly trading stocks, especially the high-tech ones. I was in and out of stocks and did pretty well, but I kept hearing about options, so in 1998 I took a training course. I just started from there.
My recommendation to people who ask me, “I want to get started [trading options]. What do I do?” I tell them to take a two-day class, because they’ll come home with books and materials, DVDs and CDs. Put time into it and start learning. Once they find a strategy they like and gravitate toward it, sign up for a newsletter and follow someone who has five or more years of experience in that strategy and learn from them; they have already gotten kicked in the teeth over and over. They already lost money as they learned the strategy. So there is no reason to lose money if you can just follow someone who has already been through it. After about a year you will get pretty good at that strategy.
Credit spreads are deceivingly simple, but they are hard to make consistent money without giving a lot back.I did all that, and I gravitated toward selling versus buying options. I really like the selling side. I like bringing in premiums using credit spreads and iron condors. I followed a couple of newsletters for about a year and a half, and after a couple of years I realized I could do a better job than what these folks were doing. So I launched MonthlyCashThruOptions.com [MCTO] in 2004.
Then I started getting customers in 2005. Now we have customers in all 50 states and 35 countries. We let customers self-manage because we have a newsletter that we send out every Sunday, plus we autotrade for about 75% of our customers. We do that through a few different brokers: OptionsXpress, TD Ameritrade, TradeMonster, Global AutoTrading, and others. I went full-time in this about four years ago and just started focusing on the newsletter. I am now building out a trading firm.
We have a couple of traders on board and are in the process of bringing on a third, and we are building new funds. We are going to launch them as retail products that can be autotraded. They will have low correlation to our current strategy, which are the credit spreads and iron condors. This allows our customers to diversify because they are constantly asking us, “What else do you have? You are telling me not to put more than 35% of my money into any particular strategy, so I have 35% dedicated to MCTO. What else do you have for me?”