Risk Managing a Credit Spread?

F

fakie99

i have recently begun trading option credit spreads. on one occasion recently, i unloaded both short and long options becuase the underlying's price was approaching my short strike. (it backed off and is fine now, of course - i panicked).

aside from just liquidating the spread, what are some other management alternatives when price begins to move against a short strike? (note i cannot buy or hold naked options in my trading account).

are there any good books that are dedicated to this facet of credit spread trading?

thanks,

jim
 
Quote from fakie99:

Say you have a bear call spread (credit). You sold an ATM call and bought the next call out. I like to leave this in until the Friday before expiration and this is why. One, if it is DITM, your loss is limited anyway, but you can close out this trade earlier to recapture some time premium. The most you lose is the difference in strike price plus the premium received. If it is DOTM, you can close out the Friday before expiration for the same reasoning--time premium left in the long leg. If it is between the strikes, again the same thing. Some recommend allowing the spread to expire, but then you risk a rebound and possible loss when you have guaranteed gain.

i have recently begun trading option credit spreads. on one occasion recently, i unloaded both short and long options becuase the underlying's price was approaching my short strike. (it backed off and is fine now, of course - i panicked).

aside from just liquidating the spread, what are some other management alternatives when price begins to move against a short strike? (note i cannot buy or hold naked options in my trading account).

are there any good books that are dedicated to this facet of credit spread trading?

thanks,

jim
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thanks. i see what you are saying about closing early to take advantage of time premium, but that same time premium in the long leg would also work against me in the short leg, right? (causing me to buy back the short leg at a higher price)

how far away from the short strike are you comfortable letting the underlying price get?

jim
 
doesn't matter--your loss is limited no matter how deep itm you go. It is the OTM situation that causes a problem. Should you just let the short expire and close out the long leg? I feel that this is a gamble. It is best to just close out your spread the Friday before expiration. Do not even consider accepting assignment or being assigned, for you just increase the commissions.
 
would that bull put spread be intiated with the same months' expiration?

and would that technically be an iron condor then?
 
OK...so how close to that short strike are you willing to let it get before finding the need to do something.

(i ask becuase i ALWAYS feel the need to act, thereby absolutely guaranteeing that i lose money. i need to develop a reasonable threshold)
 
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