Comments on: Index Credit Spread Options Trading Tip

By: Phil E

Phil E — Wed, 16 Dec 2009 04:07:38 +0000

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?

By: bradrr

bradrr — Thu, 15 Oct 2009 01:13:36 +0000

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.

By: Nancy Grady

Nancy Grady — Wed, 14 Oct 2009 22:39:36 +0000

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.

By: bradrr

bradrr — Wed, 14 Oct 2009 21:54:06 +0000

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.

By: jim

jim — Wed, 14 Oct 2009 18:39:47 +0000

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