Getting Paid When You’re Wrong: How Smart Money Profits From SPX Credit Spreads

 

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The Uncomfortable Truth: Why 85% of Options Traders Lose

Let’s start with the numbers most people don’t want to hear.

85% of retail options traders lose money in their first year.

That’s not a typo. That’s not cherry-picked data from a bad year. That’s the structural reality of how most people approach options trading.

A study from the London Business School found that between 2019 and 2021, retail traders lost over $2 billion in options premium alone. Not in stocks — just in options.

Research from the University of Florida published in 2025 showed that retail traders lose an average of 16.4% over three-day periods when trading complex options around earnings announcements. MIT Sloan research confirmed that retail investors consistently make “wealth-depleting mistakes” in options markets.

So why do they keep losing?

Because retail traders are trained to do one thing: predict direction.

Call it up. Put it down. Pick a side and pray.

It sounds logical. The market’s going up, so I buy a call. The market’s going down, so I buy a put. Simple.

Except it’s a losing game. And the maths proves it.

The Triple Threat Working Against Option Buyers

When you buy an option, three things need to happen for you to make money:

1. Direction — You need to get the market direction right
2. Timing — You need to get the timing right (before expiration)
3. Magnitude — You need the move to be big enough to overcome what you paid for the option

Direction. Timing. Magnitude. You need all three. Miss any one of them, and you lose.

Think about that for a moment. How often do you get all three of those right at the same time?

This is why retail traders keep losing. It’s not because they’re stupid. It’s because the game is structurally rigged against option buyers from the start.

But here’s where it gets interesting — because there’s a reason the game is rigged. And once you understand it, you can get on the right side of it.

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The Volatility Risk Premium: The Edge Nobody Talks About

It’s called the Volatility Risk Premium (VRP). And it is the single most important concept in options trading that most retail traders have never heard of.

Here’s what it means in plain English: options are overpriced. Not sometimes. Not in unusual market conditions. Almost always.

The data goes back to 1990. According to research from the Chartered Alternative Investment Analyst Association (CAIA), implied volatility — the market’s prediction of how much the S&P 500 will move — exceeds realized volatility approximately 85% of the time.

Let me say that differently: the options market consistently overestimates how much the market is going to move. Which means the price you pay for an option is almost always more than what the option is actually worth.

The Insurance Company Analogy

Think of it like home insurance.

If 10 houses in a neighbourhood burn down every year, the insurance company prices their policies as if 20 houses will burn. That gap between what they charge and what they actually pay out? That’s their profit.

Options work the same way.

The market prices options as if the S&P 500 is going to move more than it actually does. And the people who sell those overpriced options? They’re the insurance company. They collect that premium gap. Day after day. Week after week.

Since 1990, that gap has averaged about 4 volatility points. But after the 2020 crash, it expanded to over 6.5 points — some of the most profitable years in the history of premium selling.

This isn’t theory. This isn’t some YouTube guru’s opinion. This is the structural edge that pension funds, hedge funds, and market makers have been exploiting for decades.

And Wall Street doesn’t advertise it. Because they need someone to buy those overpriced options.

That someone? Retail traders.

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The Problem With Selling Options Naked

You might be thinking: “Alright, so I should sell options. Become the insurance company. Got it.”

But there’s a problem.

Selling options naked — without protection — has unlimited risk. One bad day and you can blow up your entire account. That’s not a strategy. That’s Russian roulette with extra steps.

This is where credit spreads change the game.

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How Credit Spreads Work: Getting Paid When You’re Wrong

A credit spread is simple:

1. You sell an option at one strike price
2. You buy a cheaper option further out as protection
3. You collect the difference as a credit

That credit is yours immediately. It goes into your account the moment you place the trade.

And here’s the key: you get paid even if you’re wrong about direction — as long as the market doesn’t blow through your strike price by expiration, you keep the money.

The Three Scenarios

Scenario 1: You’re Right You think the market is going up. You sell a put credit spread below the current price. The market goes up. You keep all the premium. You were right. Great.

Scenario 2: You’re Wrong (Sideways) The market goes sideways. Doesn’t move at all. You were wrong — you expected a move up and got nothing. But you still keep all the premium. Because the market didn’t come down to your strike. Paid when wrong.

Scenario 3: You’re Wrong (Small Move Against) The market actually goes against you. It drops. But it doesn’t drop far enough to reach your strike. You still keep the premium. You called the direction wrong. You still got paid.

The Only Time You Lose: The market crashes through your strike AND past your protection. That’s your defined, known-in-advance maximum loss.

Three scenarios where you win. One scenario where you lose. And you know the maximum loss before you ever place the trade.

This isn’t gambling. This is the opposite of gambling. This is the house.

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Why SPX? The Institutional Choice

Why SPX specifically? Why not just trade options on any stock?

SPX options are what institutions trade. According to CBOE data, SPX accounts for approximately 40% of all US option notional volume every single day. Not Apple. Not Tesla. Not GameStop. SPX.

There are four reasons smart money lives in SPX:

1. Cash Settlement

When an SPX option expires, you never get assigned shares. It’s cash in, cash out. No stock delivery headaches. No surprise assignments on a Friday afternoon.

2. European-Style Exercise

These options can only be exercised at expiration — not before. You’ll never get pulled out of a position early. You set it and you know exactly when it resolves.

3. Favourable Tax Treatment

SPX options qualify for the 60/40 rule under Section 1256. 60% of your profits are taxed as long-term capital gains, 40% short-term — even if you held the position for one day.

4. Deep Liquidity

Tight spreads. Massive volume. You get in and out at fair prices. This matters more than most people realise, because poor fills eat into your edge over hundreds of trades.

This is why institutions don’t trade Apple options for income. They trade SPX.

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The Five-Element Framework

Understanding the pieces isn’t enough. You need a framework. There are five elements that make a credit spread strategy work consistently:

Element 1: Context

You need to know the market environment. Is the trend up, down, or sideways? Is volatility high or low? A credit spread in the right context has a completely different outcome than the same spread in the wrong context. This is where your chart reading actually matters — the skills you already have become your edge in choosing when to sell premium.

Element 2: Strike Selection

How far out of the money do you place your short strike? Too close and you get more premium but more risk. Too far and the premium isn’t worth the trade. The sweet spot depends on volatility and market conditions. This is where data guides you, not your gut.

Element 3: Time Decay

Every single day, the option you sold loses value. That’s called theta. And it works in your favour as the seller. Time literally pays you. The option melts like an ice cube. You sold the ice cube. You want it to melt.

Element 4: Probability

When you sell a credit spread out of the money, probability is on your side. Backtests on SPX put credit spreads show win rates between 70% and 90%, depending on strike selection and timeframe. Not 50/50. Not a coin flip. The odds are structurally tilted in your favour.

Element 5: Defined Risk

Your maximum loss is known before you enter. It’s the width of the spread minus the credit you received. No surprises. No margin calls. No waking up to find your account wiped out.

When you combine all five, you don’t need to predict the market. You need to position yourself so that the market has to move a LOT against you before you lose. And most of the time, it doesn’t.

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The Shift: From Gambler to Insurance Company

This is the transformation. And I need you to really understand it.

Retail traders think in terms of right or wrong. “I was right about Apple. I was wrong about Tesla.” It’s a batting average. And they feel like failures when they don’t hit above .500.

Smart money doesn’t think that way at all.

They think in terms of expected value. They ask: “Over a hundred trades, does this strategy make money?” If the answer is yes, then any individual trade being wrong is irrelevant. It’s a rounding error. It’s the cost of doing business.

When you sell credit spreads on SPX, you’re not making a prediction. You’re making a probability bet. You’re saying: “I don’t think the market will crash 20% in the next week.” And you get paid for being right about that — which you are, the vast majority of the time.

You go from being a gambler trying to predict every move to being an insurance company that collects premiums and pays out occasionally.

That’s the shift from retail thinking to institutional thinking.

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The Question

So let me ask you this.

If you knew there was a strategy where:

• Options are overpriced 85% of the time in your favour
• You get paid even when your directional view is wrong
• Your risk is defined before you enter
• Time literally works for you every day
• The win rate is backed by decades of data

Would you keep buying lottery tickets?

Or would you become the house?

That’s the question. And now you know the answer.

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Watch the Full Breakdown

This post covers the core concepts, but I go deeper in the video — walking through the exact mechanism, the three scenarios visually, and how this connects to systematic income generation.

You don’t need to predict the market. You need to position yourself so the market pays you for showing up.

That’s not a secret. That’s just maths.

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Sources & Further Reading

• CAIA Association: “What Is the Volatility Risk Premium?” (2024)
• London Business School: Retail Options Trading Study 2019-2021
• University of Florida Warrington College of Business: “Retail Investors Play a Losing Game with Complex Options” (2025)
• MIT Sloan: “Retail Investors Lose Big in Options Markets” (2022)
• CBOE: SPX Options Volume Data and Market Intelligence
• Option Alpha: SPY Put Credit Spread Backtest Results
• Early Retirement Now: Options Trading Series (15+ year track record)