Yep. This is the only correct way to do it. If you get $50 credit on $500 spread, your maximum gain is 11.1% if it expires worthless.
Options premium income. How much is too little?
- Thread starter allamut2009
- Start date
And a very foolish gain to take the maximum. Options are unique in that your (absolute) risk increases as the position moves in your favor.
Probably a good point to add, always evaluate your trade as a position you would open today (but use the more favorable market maker's side of the trade, with commission coming to you to evaluate your effective "cost" to keep open--the reverse of what your closing trade would be)
100% agree.
My rule of thumb is to close around 80% of the maximum gain. This is one of the reasons I believe you should not get credit less than 7-10% - so you are able to close early and still have decent gain.
Robert Morse
Sponsor
You are calculating return on margin. That is an important value. Do you do the same math in a PMA? Now the return on margin is higher. I’d say this a good metric, but can get confusing when two people do the same spread but have different types of accounts. Then they have a different return on margin but the risk is the same.
Yes, I believe calculation should be the same in PMA.
I play much closer to the money (I aim for 30% of the spread over a 5-6 day position), so I'm happy to take much less gain as a percent of maximum. It also depends how long I've been holding it--a quick move on the underlying, which gets me too 30% of max gain the day after opening I'll jump on, but a slow and steady move and I may take nearer 80% towards the end of life. The rare times I hold till expiry is only on symbols I'd be happy to take delivery of the shares as an investment position.
And don't all brokers require 100% margin on these positions? In my experience, leverage and options are like oil and water...or more accurately napalm and water.
Robert Morse
Sponsor
Not in a portfolio margin account. The requirement would be the loss from a 15% shock-equity options, plus any risk add ons from your clearing broker.
But the loss from a 15% shock will likely be very similar to total spread minus credit?
Robert Morse
Sponsor
That general statement might be true. There are too many variables for me to confirm that without a specific example. Broken spreads and any ratio spreads are much better with PM.