Good idea to sell spreads and take off the protection?

P

pauper

The other a day a friend was explaining to me a put spread strategy he's doing for the 88.63 and 88 APRIL14 QQQ options he sold a few days ago.

He says that when the underlyer moves past his long strike its a good time to sell the protective put so he can make a lot of money off it, and then close off the short put later when the market reverses and the underlyer moves back above his strike. This way you make more money than if you were to close out the spread at the same time.

Also since the underlyer is a diversified ETF, he doesn't mind getting put the shares if the market doesn't recover before expiration because owning diversified ETFs is not really a loss as he can now just write a covered call against it and make back the difference.

Is legging out like this a viable strategy to rolling down/out? Also wouldn't closing the protective side suddenly expose him to a HUGE increase in margin requirements that he may not have?
 
The change in your risk exposure throws your sizing out of whack.

You may be doing a tight 5x5 debit spread with moderate delta., but you remove one side and you suddenly have a huge exposure that may not be consistent with your sizing methods that you made in your original trading plan.

As for credit spreads, that's not very prudent because your gamma risk increases over time. You will remove protection when you most need it.

Imho, adjustments is just over trading. I fall into that pattern myself.
 
The whole point of selling premium is defined risk. predicting direction when you're trading options is just speculating with no edge. That's not a very good spread anyways since its so tight and commissions would kill it.
 
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