Help me understand limit on closing a bull spread credit
- Thread starter Wantboost
- Start date
If it is a credit spread, that means you collected money when you established the position. When you close it, you will pay something--hopefully less than what you collected when you established the position. When you close a credit spread, you want to pay as little as possible.
Many traders place orders at the midpoint. Unless the stock is extremely volatile, you are not likely to get filled at the bid. You could try entering the order for a bit less than the midpoint, or a bit more than the bid. With the numbers you posted above, for example, you could try to close the position for a net debit of $2.98, or $3.02, or something like that.
How much of a credit did you get when you set up the position?
BMK
Many traders place orders at the midpoint. Unless the stock is extremely volatile, you are not likely to get filled at the bid. You could try entering the order for a bit less than the midpoint, or a bit more than the bid. With the numbers you posted above, for example, you could try to close the position for a net debit of $2.98, or $3.02, or something like that.
How much of a credit did you get when you set up the position?
BMK
On a credit spread, you want to close the position for the lowest possible amount of money.
I realize that this is hypothetical because you are paper trading.
If you collected 2.05 when you established the position, and you now close it for 3.17...
That means you collected $205 when you opened the position, and paid $317 when you closed it, for a loss of $112. These figures do NOT include commissions, and are based on a single contract (i.e., short one put and long one put).
When you sell a put spread, the best outcome is for both legs to expire worthless, and you would keep all the money you collected when you established the position.
BMK
I realize that this is hypothetical because you are paper trading.
If you collected 2.05 when you established the position, and you now close it for 3.17...
That means you collected $205 when you opened the position, and paid $317 when you closed it, for a loss of $112. These figures do NOT include commissions, and are based on a single contract (i.e., short one put and long one put).
When you sell a put spread, the best outcome is for both legs to expire worthless, and you would keep all the money you collected when you established the position.
BMK
keep watching how the spread moves through space and time.
if you sold a bull put vertical you received a credit.
$XYZ @ $100
90/95 spread is quoted @ 0.98
You sold the 95 put, bought the 90 put, thus receiving a credit. Spread is $5 wide (5-0.98=$402 risk). If you’re familiar with the differences of vertical debit/credit/bull/bear combo’s I’ll spare the explanation. But if you’re receiving a credit to open, you’ll pay a debit to close. You can click “close position” and your broker platform will route your order to the limit price (fill or not). If you want to close out only one leg.. the 95 put you’ll buy back, or the 90 put you’d sell back.
of course receiving $98 and risking $402 isn’t my cup of tea, but it’s good for the neophyte to trade a bunch of different spreads and see how they act and react.
And remember to remember: Max Profit/Max Loss figures in risk profile for spreads are illusions. They don’t exist. The likely hood of your fly pinning to the exact penny is highly probable, so when trading spreads always secure a percentage of the total profit/loss and manage your trade when your goal or heuristic method primes you to do so.