Questions about opening index credit spread options in the last 2 weeks of trade before options expiration

Question:    I am enjoying my new membership, all of your updates and excellent narratives.  I have a few questions:  Why do you send out the trades in the last week before expiration knowing that they probably will not get filled?   AND do you ever make trades the week before expiration?  I usually start looking for RUT trades the week before expiration…for example, I was filled on the 510/520 bull put spread for $1.10, the week before last months expiration.  

Answer:   Periodically, we’ll have a short term spike or sell-off in the underlying index in the last two weeks of trade before expiration giving us a final chance to open some additional spreads.  So in the last few weeks of trade, I continue to show the currently recommended strike prices and price ranges, even though there is a low probability that we’ll have another opportunity to open more spreads.  In general, when we are down to the last 2 weeks of trade before expiration, premium usually dries up and we won’t have the opportunity to open additional credit spreads.  (especially for the top spreads)    We do monitor the recommended strike prices and credit price range daily and we’ll move them up or down, or remove them completely when the risk/reward characteristics of the trade no longer make sense.    

Per opening credit spreads that are 5 weeks in duration, yes, it usually works and you can bring in excellent levels of premium.  However, just due to how the market has been behaving in the last 4 months, I’ve shied away from 5 week trades and have focused on 2 to 4 week trades to reduce the time exposure risk.  We are also able to open shorter duration, 2 to 4 week credit spreads because volatility, VIX, is elevated making them more expensive and allowing us to bring in higher levels of premium.

Comments (1)

Adam MDecember 9th, 2009 at 8:55 pm

I would much rather trade 2-4 week spreads than 5+ weeks. There is a reason 5-week spreads pay more premium–there’s more risk! Ask me how I know…
From the ROI chart, a lot of the past spreads that went under pressure or ITM were more than 4 weeks. This year’s shorter duration spreads ended up with a higher ROI in the long run. No losing months in 09!

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