Registered: Jul 2012
08-23-12 07:24 AM
Quote from quatron:
Sorry, I did not mean that you are doing something wrong. Of course everyone has their own style.
What I meant is by closing out your position early you are giving away profits. Unless both options worth a penny which I highly doubt. As you go into expiry you can have more longs for each short, just maintain the ratio. It has similar risk as you have in the back month. In the end of the day all we need is theta and it flourishes in the front month.
Can you give an example of a completed trade with prices you took to open and close position and where the underlying was? Thanks.
I understand what you are saying about adding longs as you enter the final days/weeks to expiration, but the way I do it is to close shorts or close spreads, I think its the same idea in keeping the ratios with excess longs. The shorts are my focus, not adding to the trade with so little time. I'm not concerned with the small money give back.
The RUT SEPT puts 680/660 (4.20 and 2.87) on 08/01 was a decent size, I closed most of these down as the market ran up and vols came wayyy down for small money. RUT was trading at around 780. So, I am closing not just the whole thing but I chop it down piece by piece. This is part of a larger trade which includes another back ratio call spread at 860/880 (1.28 and .49), which was nearing an adjustment so I added an additional put back ratio at 710/690 to finance a potential trade to protect the call side.
This is like an iron condor but much safer. Since the OP opening post was about the dangers of way of the money credit spreads, I had mentioned an alternative of back ratios. It kind of got out of control because some traders are curious and want to make safer bets. This is just one way. As you say, all traders develop their own style but this is one of my favorite trades and has been good to me.
Just remember, this DOES take on the same characteristics as an iron condor as you get close to expiration, you will have gamma risk, this means the options further out of the money will be almost worthless and the shorts closer to the money will still have value, so if you have big moves, its going to hurt. This is where we have disagreement but I understand your point, to collect all the premium and ride it into expiration is fine, its very popular. No trade is perfect but I always focus on what potential losses could look like and if I want to trade size, I can, confidently.