Credit Spreads

J

just21

I intend to post my trades here to get some conversation going on credit spreads. Interested what people look for before selling options. I cannot predict market direction so try to guess where the market is not going to be on expiry. I expect a pullback before the rally continues into year end.

Today I have sold the COF 25 DEC puts and bought the COF 20 DEC puts for a credit of 0.75 per contract.
 
Hi,
thanks for posting your credit spread trade. I hope you will get some useful replies that we can all learn from. I am currently learning about options at the moment, but have not yet made any option trades. I think my first option trade will be a credit spread trade something similar to the one you have posted here.

Do you have a target in mind of where you would close this trade or do you intend to let it run until expiration. Also how far would you let this trade go against you before you closed it?

I am sorry I can't help you with this trade but I hope it is profitable for you.
 
Just 21, I have a question.

If I am understanding this correctly, you have a net credit of .75 at this time.

Yet you stand to lose 1.00 for every point that COF closes under 25 on Dec 20. Up to a limit of 5.00.

That seems to be a small reward for a sizable risk. I mean it certainly within the realm of my imagination that COF could attain 25 within the next 10 days. ( 5 days even)

What would you do tomorrow morning if COF gaps to 26?

Am I not understanding something?

:confused:
 
If COF gaps to 26 tomorrow, he's golden. The $25 puts he sold would be worth less than the $20 appreciation on the puts he bought.
 
Bone,

OK, probably not a good example. I am figuring that the volatility spike is what you are referring to as making Just 21 golden

Let's say that COF slowly grinds to 25 by mid December. Then it seems any hiccup to the down side exposes Just 21 to a potential obligation of between 1.00 and 5.00 on Dec 20.

Am I understanding this right? It just seems to me that the reward/risk is out of whack.

Maybe it depends on your conviction that COF won't make it to 25 before expiration.
 
Just21,

I trade these all the time. I pick mine a little differently. Usually, I try to sell a put spread on a liquid stock that has cratered, playing for a two or three day reversal. Then I close it out, or at least the short leg. Still, this COF play looks pretty good. COF would have to make a new low for the year for you to get hurt too bad.

Tony,

The risk/reward for a credit spread always looks lousy in that you are risking more than you can make. But that is only half the equation. You start with money in your pocket, and the stock has to move significantly against you for you to lose. If it does move against you strongly, you can always cover the short leg and hold the long side.
 
If the stock vacillates around $25, or rallies, he's Golden. And since he owns the $20 puts, and his time horizon is quite limited before expiration, and quarterly earnings for COF have been posted, his downside is limited. Tony, he did the right thing in selling a 'teenager'; that is, a very limited lifespan option. I say the kid knows what he's doing.
 
I started out selling naked puts and trying to hedge them when they went in the money but found most of them bounced by expiry leaving me with losses on the short stock position. I have increased my size and am uncomfortable with the unlimited risk. Last month I lost money as I was short CI 55 nov puts. Still up since starting this in may. I intend holding these positions until expiry as they are too illliquid to get out of without giving up the spread.
 
Today have sold EXPE 65/60 PUT spread dec for .80 credit.
CCMP 45/40 Put dec spread for .80 credit. COF spread went out to .95/$1 at the close.
 
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