I usually use short-term T-bill rate, but it's not really important these days given that all short rates are, for practical purposes, zero. In fact, when looking at Sharpe of a derivatives strategy, you might as well use nothing at all since you are earning o/n interest on your margin deposits.
While that may be a nice thought (your broker will close it for you) You could be liable for more. They generally don't automatically close it...instead your account goes into "liquidate only" mode which means you can only liquidate and not open any positions. The risk is obviously that APPL closes higher than gaps lower in the am. So the short put of 600 now could be 80 bucks lower and you have lost more than the original spread. DEFINITELY talk to TOS and I'll bet their advise is to close the spread before expiration. Remember as well the short put can be exercised before expiration and the same thing happen...your long put could be lower(or higher) when you go to sell it.
Thanks for the info. I always close my ITM Credit Spreads before Expiration, but I was curious what could happen if I didn't. (i.e. If I went into a Coma or Died with open positions, would my family end up with an empty account or in debt?) I'll present a few scenarios to t.o.s. tomorrow and post their replies in this thread.
Thanks...since acquisition by TDAmeritrade I haven't felt they had the flexibility to work with you that they did when they were a small stand alone co.
I'll start with a comment about closing spreads on stocks. There is no question you should close them unless you plan on acquiring the stock and have the money to do so. Fortunately, for the RUT, the SPX, and the NDX, assignment risk is not a problem. However, the settlement process is, so it usually isn't too smart to carry all the way to expiry for them either. A second comment for hedgeman-- I'm not so sure that it is easier to adjust calls than puts with an IC. There are a couple of practical realities that make call adjustments upward generally difficult. 1) The market has a tendency to grind upward when it moves up. This means that you wind up adjusting the puts and calls upward more than once, often three or four times before the market takes a breather. As this is happening the IV (as mentioned) grinds gradually lower meaning that each time you adjust, you will capture less and less premium from a roll up in the calls or the puts. 2) The shape of the skew means that when the market drops, the calls basically lose swiftly and dramatically, but puts tend to keep some of their value so adjusting down isn't as painful, especially if the moves are modest. When the market rises, calls still increase in value dramatically even though slightly less than you might expect due to declining volatility. At the same time, the declining volatility means that moving the puts upward captures less premium than you might expect. A further general comment. Adjusting becomes more and more difficult, (and this is not a linear increase, but an exponential increase) as you approach expiry. We are now in the last two weeks of this position. It could get very tricky, indeed.
ok just for the record... i asked this question to Interactive brokers a while back..... just as if a butterfly is deep ITM or OTM there is no closing trade required... you lose all the money you bought the spread for.. and boom all the rights and obligations take care of themselves and your not at risk.. remember a butterfly is a combo of a debit and credit spread... that being said.. if you sell a bull put spread for credits and the underlying blows through the strikes.. you don't have to close the position.. your just out the difference between the strikes for every combo you have on... if one leg is partially in the money and the other isn't you can close your trade for a reduced loss.. that being said.. if you do not close the trade and one is itm and one is otm .. your broker will step in and not allow the rights and obligations to be out of sorts unless you have the margin to handle an assignment.. meaning if your short one bear call credit spread.. and the lower strike is itm and the upper strike is otm... if you don't have 68,000 dollars to go short on the assignment.. (thats considering aapl and a trading price of 680) interactive brokers will close down the spread before the bell.. they have a department that handles that! this is direction from the customer support... if you have doubts.. call for yourself... either way its obvious if you can salvage even 50 bucks out of the trade on a 5 wide striked credit spread... you would be stupid not to close it yourself. i forget what happens to the salvaged money if IB closes it for you..
most of the traders i've seen that have shown a good track record are completely out several weeks before expiration.. either when they have 80 percent of their profit or they have the N number of days to expire.. and N number of days is always more then three weeks.. Managing gamma risk approaching expiration isn't worth the thetas it pays .. is what i hear everyone say... me personally i've traded alot of credit spreads a week before expiration..and i don't like how it racks my nerves... i think about how many directional trades i could have taken with one blown credit spread.. i'd rather be long convexity going into expiration for the asymmetric pay off.. that or i want a butterfly.. i think sometimes people forget ... the distance between your strikes on condors is your position size.... so unless your getting super agro trying to leap up and grow an account super quick.. 5 to 10 percent on one condor is enough... takes forever to make up for blown credit spreads.. if your not nimble and not into martingaling up as the underlying moves... then its just not for you.. the idea i think really behind some of these aggressive trading strategies is.. the crime has to pay enough before you get caught.. like in any situation.. turn your account from 100 to 300k and then get a huge draw down back to 225k... the crime pay superseded the punishment pay..
<<< if you do not close the trade and one is itm and one is otm .. your broker will step in and not allow the rights and obligations to be out of sorts unless you have the margin to handle an assignment.. meaning if your short one bear call credit spread.. and the lower strike is itm and the upper strike is otm... if you don't have 68,000 dollars to go short on the assignment.. (thats considering aapl and a trading price of 680) interactive brokers will close down the spread before the bell.. they have a department that handles that! this is direction from the customer support... if you have doubts.. call for yourself... >>> This is true. HOWEVER. It' is not a law. It is something they do to protect the company. Not you. In fact, they do it to protect the company from you! HOWEVER, since it is not a law, you have to HOPE they protect you and the company from investors being reckless. If they are not swamped with this occuring to an excessive number of traders, they probably will step in. But if they are just too busy to get to all traders,... you are on your own. And that will be a VERY long and stressful weekend for you. I don't have to tell you how volatile and busy option expiration day can be. And what if there is a "market event" that suddenly occurs in just the last few hours of trading that friday Not enough time to protect all spread traders from themselves. This is another example, of why the excessive leverage of credit spreads can be so dangerous. Particularly since many spread traders don't realize they are even on margin. When in fact, the average spread trader has probably leveraged his account 8 - 10 times his account value. So don't assume the company will always step in to protect you from yourself. Your protection is merely a "goal". Not the law.