Quote from cactiman:
<<< If the broker told me, "No, if all those 'what ifs' happened we wouldn't be responsible, you would."
What would I do, never trade another Credit Spread? Close my account? I don't want either of those choices.
That's why I don't need to ask them. >>>
I'm not suggesting you stop trading credit spreads if that is your prefered strategy.
I am suggesting you keep your degree of leverage to a reasonable degree.
Leverage of 10, 20 or 30 times your acount value leaves you with no choice, but to close a deteriorating trade very early, or risk a potentially devastating loss to your account value.
Or even worse, have the stock put to you and be unable to sell it before it drops on monday morning.
Again, the probability of this occuring is "remote".
But it is rarely the things we think about or expect, that wipes out investors accounts. It's those remote events that do it.
BTW, the issue is rarely just one stock spread. My discussion is about the risks of multiple credit spreads.
<<< It's good you've told me all this however.
I've only been Assigned once, and that was early on in my spread trading.
My rule is to close all losing Spreads 30-21 days before Expiration, to avoid the Rapid Time Decay near the end, and avoid a Max Loss.
I've always stuck to that rule, except once.
After what you've told me, I'll never break it again! Thanks. >>>
I'm a little confused. Don't you want your credit spread to have that rapid time decay of the last few weeks?
It is NOT the time until expiration that should determine when to close down a deteriorating stock.
It is how close the stock is getting to your upper strike that is the determining factor.
Once the stock is inside and between your strikes, that is where your rate of loss begins to really speed up.
The deeper between your strikes the stock gets, the larger your loss.
Thus, it's always best to close a deteriorating stock BEFORE it hits your upper strike.
That's why the otm safety cushions of credit spreads are an "illusion".
Very risky to let a stock touch your strike. Because once it's inside, and between your strikes, your rate of loss really picks up steam.
And once it's inside, you know you can not consider buying the stock because of the excessive margin of credit spreads.
(The higher the strike, the higher the leverage.)
