Ques. about options being called - Credit Spreads

C

calif

Hi all - I've traded for some time but am fairly new to options. I am interested in credit spread strategies (Bull-Put, Bear-Call, Iron Condors) and I have some questions regarding them:


When establishing a credit spread, the scenarios that I have been looking at are basically an initial credit that can evaporate depending on the direction of the stock while it is open.

If I take a "Bear-Call Spread" as an example:

I establish the trade as BUY 1 OTM Call + SELL (write) 1 ITM Call. I have a net-credit placed in my account. Depending on where my breakeven price-level is, I should be positive if the price moves downward anytime and finally upon expiration. However, if the price moves upward, my account begins to lose the initial credit and also part of my margin.

- Therefore, I would like to know what happens (how probable) it is that the 'write' option that is included in the spread will be called before expiration since it will be ITM.

- Who is the other side that I actually 'sold' this part of the trade to?

- How can I implement these types of options trades and be sure that I can always allow them pan-out and to fully-expire?




Thanks for any input.
 
Calif

You need to look into 2 scenarios here:
1) the probability of the short option been in the money at exp
2) the probability of your short becoming ITM.

Some platforms will give you this information, TOS does as an example.

I think the simpler solution for you is to use the delta of the short option as guide.

Of you sell a 15 delta option, this mean that you have a 15% chance of your short expiring ITM.
 
Quote from George Quinones:

Calif

You need to look into 2 scenarios here:
1) the probability of the short option been in the money at exp
2) the probability of your short becoming ITM.

Some platforms will give you this information, TOS does as an example.

I think the simpler solution for you is to use the delta of the short option as guide.

Of you sell a 15 delta option, this mean that you have a 15% chance of your short expiring ITM.
More...


Thanks for the reply George,

Initially what I was researching were credit-spread combos that involved 'arbitrage' strategies. I was imputing scenarios and examining the spectral map of the P/L of the trade at various price points/dates until expiration.

They are not easy to set-up, but my goal was to find various strategies that would have a high probability to close or let expire while keeping as much premium as possible. I have attached a screenshot to show what I am referring to.

When considering the trade, I was curious about the following:

- If the price would remain anywhere in the 'green' area, then I would always remain with a net-credit. But if, for a brief period, the price were to match-up inside the red area, then my account would 'show' a loss, but nothing would happen if I just held onto the trade, correct?

- Would this area therefore directly coincide with the 'highest' probability and part of my trade being 'assigned' and therefore meaning that I must immediately close the trade and take the loss?

---

I am just trying to understand all the possibilities when implementing 'spread' trades whereby I have sold contracts that "could" be assigned, and what that "assignment" means for my overall trade depending where it is on the spectral map.

I've found a few other articles online that highlight points about 'ITM' strikes which I have sold being assigned just before ex-dividend but the articles do not delve deeper into the total outcome of potential P/L for the trade overall.


'Nazzdack' - not sure what you're referring to.
 

Attachments

Quote from calif:


'Nazzdack' - not sure what you're referring to.
More...

I think he is saying both of you are the same person or, at least, posting from the same computer. Which brings to my mind a couple of questions:

1. Who has the time to even attempt to figure that out.
2. If he is right and it is one person asking and then answering their own question, what would be the point?

But then stranger things have happened here.
 
Quote from nazzdack:

?....The "two" of you have the same I.P. address. :( :mad:
More...

How can one know that if they're not a mod or an admin ? I thought you weren't one
 
Calif

I dont like the picture you showed me, I cant read it.

Tell me the trade

stock , cycle , month , qty, trike , price , greeks at time of trade opening and underlying price.

and let me look at it.
 
Quote from George Quinones:

Calif

Of you sell a 15 delta option, this mean that you have a 15% chance of your short expiring ITM.
More...


Say What !!!!:confused:
 
Quote from calif:

... Therefore, I would like to know what happens (how probable) it is that the 'write' option that is included in the spread will be called before expiration since it will be ITM.
More...
The closer you get to expiration, the higher chance that your ITM option will be exercised. If the option still have lots of time premium, chances are the option won't get exercised.

Quote from calif:

... How can I implement these types of options trades and be sure that I can always allow them pan-out and to fully-expire?
More...
You can't. The only thing you can do is to adjust your options position based on your expectations over time.
 
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