Question about what price we use when filling our RUT, SPY and IWM credit spreads

Question:   In your advisories you usually provide a range of prices ( e.g.  “open this spread if it’s filling for between .45 to .70 credit).    So when you place an order in my account (this subscriber is enrolled in the MCTO auto-trade program)  what price do you use?

Answer:   As long as the recommended spread is filling for between 45 and 70 cents, we open the recommended spreads using the price that it’s currently filling at on that particular day, and we use about 20% of the available cash for that day.  We then pause and wait for the next day when it’s filling again betwen 45 and 70 cents.  (i.e. we collect premium over time, which helps reduce risk)    If at any time it starts to fill for 71 cents or more, the spread no longer has a 90% probability of expiring OTM and profitable, but it has an 83% (just a guess…but probably close)  probability of expiring profitable.   Because we have the goal of opening 90% probability credit spread options, we then would move our strike prices away from the underlying index “one-click” so we can bring the probability back to the 90% level.

Comments (4)

AdamNovember 27th, 2009 at 11:44 am

If the spread begins to trade for 71 cents during a very brief period one day, then the market stalls or pulls back slightly the next day putting the spread back within 45 to 70 cents, do we go ahead and fill the advised spread again or do we now remain clicked-up to the new strike since the range was “breached?” Thanks.

anthony chevalierNovember 27th, 2009 at 1:10 pm

On this same subject, do you ever post what the exact entry is? Your overall performance would obviously be affected by how profitable your entries are and this would provide more credibility to your published performance

bradrrDecember 10th, 2009 at 2:19 am

In the ROI Results Page shown at http://www.monthlycashthruoptions.com/ReturnOnInvestment.htm we show the range of credit prices and dates that we opened the credit spreads for our own personal accounts. We follow our advisories just like our subscribers do, and this is where we pull the ROI results from. The credit price range is usually not that wide, so it does practically show the exact credit prices filled.

bradrrDecember 10th, 2009 at 2:53 am

Per Adam’s question, let’s use the example that we recommend the RUT Dec 640/650 bear call spread for a credit of 45 to 70 cents; and we state that if this spread starts to fill for more than 70 cents credit to cease filling it and to click-up a strike and open the new spread for between 45 to 70 cents credit. Let’s say that the 640/650 starts to fill for 71 cents credit. Per our instructions we would cease to open the 640/650, we would “click-up” and attempt to bring in at least 45 cents for the 650/660. Usually, however, if the fill price just exceeds our recommended range, the spread “one click up” will most likely not be filling yet for the 45 cents minimum. Usually, the underlying will need to climb more before the new 650/660 will start to fill for at least 45 cents. In this situation, I personally would fill the 640/650 up to the limit…maybe opening a few as high as 73 cents, but I then would pause, stop filling the 640/650 and wait a day or so until I am able to click-up to the 650/660 and bring in at least 45 cents credit. If over the next few days the underlying pulls back and the original 640/650 starts to fill again for between the recommended 45 and 70 cents range, I then would continue to bring in premium with the original spread. For most months, I recommend that we “collect” our spreads over time (put another way we are collecting premium) using 15% to 20% of our cash on each day that the recommended spreads are filling within the recommended credit price range.

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