dagnyt,
If you sell two 5-point spreads equivalent in size, let's say 10contracts.
1435/1440 @ 2.00
1475/1480 @ 0.50
Absolute risk on the first (CTM) is $3000, while on the second (FOTM) it is $4500. So your risk is higher even though the size is the same. The potential profit is also lower. The only thing you've accomplished is higher PoP. The common argument is that one would never let the FOTM position reach the point of max loss. But the same can be said for the CTM spread. What I was getting at is that on a quick adverse move, the FOTM approaches the max loss point faster than the CTM counterpart. That sucks because it already has more risk. This makes the CTM more managable. On a quick move if you have to take a loss on the two spreads, it will be much more damaging on the FOTM, and it will likely take the better part of a year to recoup. OTOH, the CTM will recoup within a month or two.
I'm not trying to promote CTM because you do have to have some directional skill, but I just want to point out the factual disadvantage of FOTM.
In considering different ways to manage a CTM.... covering when the short is breached makes no sense at all, unless you've placed the short on a percieved s/r level. You might consider covering once the PoP drops to a certain level (e.g. the short has a 30% chance of going OTM again), or you might offset to realize a loss of 50% of the absolute risk. If you like daytrading you might buy back the shorts and let the ITM longs run to recoup the losses. There are many ways to do it.
Just some suggestions, but really you should realize that the only way FOTM works is if you can anticipate the big move and get out of the way.
If you sell two 5-point spreads equivalent in size, let's say 10contracts.
1435/1440 @ 2.00
1475/1480 @ 0.50
Absolute risk on the first (CTM) is $3000, while on the second (FOTM) it is $4500. So your risk is higher even though the size is the same. The potential profit is also lower. The only thing you've accomplished is higher PoP. The common argument is that one would never let the FOTM position reach the point of max loss. But the same can be said for the CTM spread. What I was getting at is that on a quick adverse move, the FOTM approaches the max loss point faster than the CTM counterpart. That sucks because it already has more risk. This makes the CTM more managable. On a quick move if you have to take a loss on the two spreads, it will be much more damaging on the FOTM, and it will likely take the better part of a year to recoup. OTOH, the CTM will recoup within a month or two.
I'm not trying to promote CTM because you do have to have some directional skill, but I just want to point out the factual disadvantage of FOTM.
In considering different ways to manage a CTM.... covering when the short is breached makes no sense at all, unless you've placed the short on a percieved s/r level. You might consider covering once the PoP drops to a certain level (e.g. the short has a 30% chance of going OTM again), or you might offset to realize a loss of 50% of the absolute risk. If you like daytrading you might buy back the shorts and let the ITM longs run to recoup the losses. There are many ways to do it.
Just some suggestions, but really you should realize that the only way FOTM works is if you can anticipate the big move and get out of the way.
Translation, please?