Credit Spreads

Quote from just21:



Today I have sold the COF 25 DEC puts and bought the COF 20 DEC puts for a credit of 0.75 per contract.
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I have to admit, I like the Dec COF 25 put sale, it looks like a smart trade. Good premium and risk/return, stock hasn't touched that price since August.

I might piggy back you on the 25 put and sell 100 contracts. Not the cover side though, I'll assume the risk. I hope you don't mind.
 
Go for it, how would you hedge if it went down to 25? Does the delta get to one then? Would you just short 10,000 shares? Or wait for it to go down to 23.70 (strike-premium received)?
 
I have legged the SRCL 30/25 dec put spread for an 0.80 credit. Took 3 hours 50 minutes to get the hedge on. I have a few naked call positions that I am trying to hedge but the otm options haven't traded today.
 
I would probably cover before it ever got exercised. I have substantial equity and can cover the naked put's margin call. However, I wouldn't even sell the puts if I thought they would be exercised. I have to be fairly confident that the stock will not touch the strike, let alone strike + premium, before I sell any naked puts. I generally do better in my option trading than I do in my stock trading, although I am pretty good at stocks too. In this case I am very confident it will not hit the 25 strike. Thanks for bringing it to my attention.
 
Just21,

Have you thought about selling some stock before it got near 25? Not delta neutral, but, enough to offset some downside. If your spread is long 400 deltas, maybe, sell 100 shares?
 
Here is some more food for thought. In a credit spread if the underlying stays flat or goes in the direction you want you win. If it goes against you you lose. So of three ways to go you win on 2 and lose on 1. This helps your odds. By taking in .75 or .80 on a 5.00 strike difference you are risking at about 6 to 1. One loss means you have to have 6 total wins to break even. With a 2.50 strike difference you have to win 3 times to offset the 1 loss. If your picks are 50/50 then your odds aren't too good. I don't know if you are doing this but you really need to use a risk graph to analyze these things.
 
I have thought about it but when I have done it the stock would bounce. I like the fact that i can win in 2 out of 3 scenarios and with the fact that 9 out of 10 options expire out of the money, I think Ican win trading a diverse portfolio.
 
Quote from just21:

I have thought about it but when I have done it the stock would bounce. I like the fact that i can win in 2 out of 3 scenarios and with the fact that 9 out of 10 options expire out of the money, I think Ican win trading a diverse portfolio.
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Where did you find the statistic that 9 out of 10 options expire worthless? I've heard it countless times yet I've never seen a documented quote from a respected journal or source.

I personally think the question is to vague when one asks, "What percentage of options expire worthless?"

Are you talking ALL options (deep in the money, in the money, at the money, out of the money and deep out of the money) -- or is the question asking, "What percentage of OTM options expire worthless?"
 
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