Index Credit Spread Options Trading Tip

Question: SPY Oct 94/96 Bull Put spread is now 1 cent.  Is it worth closing it out to avoid a catastrophic move in the market and to free up our maintenance early? 

Answer:   Yes, this is a good options trading strategy.  The minute that you feel you want to take your money off of the

 table, which reduces the risk of any type of catastrophic event in the last week of trade, that’s always a good trading strategy.  

Question:  I was not able to invest all of my cash this month. Is this typical?

Answer:  This month was difficult to get all of our capital invested.  Because we were extra careful this month in October waiting for certain economic data to be released, we had to wait through most of October before having the opportunity to open our trades;  and then when we finally did have the opportunity to open our bottom spreads we only had a few days to put our money to work.  That’s just the nature of this business;  some months we’re able to continuously “collect” our credit spread options over a 2 week period allowing us to put all of our money to work, and other months we’re lucky if we get half of our cash invested.

Comments (5)

jimOctober 14th, 2009 at 12:39 pm

anytime we are that close to the option expiring worthless i think it is a good idea to close out early

bradrrOctober 14th, 2009 at 3:54 pm

Yes, this is always a good strategy. Assuming we have a profitable trade, for those of you who don’t feel comfortable going through settlement (for European style options like the RUT) or who don’t want to risk taking the options on the SPY all of the way through Friday’s close, (options on the SPY, an ETF, trade American style and trade up through Friday’s close) it’s always prudent to take money off of the table to reduce risk.

Nancy GradyOctober 14th, 2009 at 4:39 pm

I tried to close out RUT trades early as the profit was close to what they would have produced at option expiration; however, I neglected to include “all or none” on the order. Only one contract was closed out and the commission absorbed a lot of the profit. I’ll now wait for the others to expire. A lesson learned.

bradrrOctober 14th, 2009 at 7:13 pm

Another thing to think about. When closing out credit spreads early and close to expiration, we have two options: 1) close out the complete spread. or 2) buy back just the short leg. Sometimes the only option is to buy back the short leg since liquidity is very low on the other leg. For me personally, I test both; when I want to close out a spread early just before expiration I put an order in to close out the complete spread and I see if it fills, and if it does I see what price I have to pay to close it out. I then buy back a small number of the short leg to see what that costs me. (and buying back the short leg usually fills immediately…there is always a lot of liquidity for a single leg option) And then I move forward and close out the balance of my positions with the approach that has the lowest cost and that fills quickly.

Phil EDecember 15th, 2009 at 10:07 pm

Brad:
Since there is a lot of liquidity in single leg spreads, what do you say about opening the opposite side, long leg early at a very low price, and then wait for the oscillation to occur and open the short leg later for higher premiium?

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