johno....sorry, i am skipping around a bit. i guess the main reason for the question on early exercise was the risk it brings to short options positions. i trade a few spreads and i am a bit nervous about the possbility that my short strike in a spread could be exercised early if it gets ITM with a week or so to go. normally i, if i have calculated my probabilites right, i would just leave it alone, expecting it to go back OTM prior to expiration. but the possibility of an early exercise on that short option part of the spread makes me nervous and would cause me to perhaps unload the entire spread if it got close to going ITM. i hope that clarifies - thanks....
A common approach is to close out a risky spread before it goes ITM, often at your stage of the trade it will be in profit. This approach is attractive as the market is obviously moving against your position and RR will no longer be in your favour! I know that you said that often you would simply leave it alone expecting it to go back OTM but this time you feel seems different, have you considered converting your position to a Debit spread! Regards Johno
thanks johno....what are your feelings on how close to ITM, percentage-wise, you'd let it get before liquidating the spread? also, i assume this would be done at least a week prior to expiration to try and maintain at least some time premium and avoid a loss?
Hi Fakie99, I have no idea regarding what type of spreads you have on [vertical,diagonal, calender] or whether Debit or Credit. The dynamics and therefore required actions to maximize profits and /or minimize losses can be quite different for the various scenareos.Unfortunately I don't have any charts or the necessary data to run option simulations on your positions. One thing I can say though, thinking in fixed/percentage stops is not the right way to go. You need an options modeling tool [I use Optionscope from Metastock,only because I've had it for 10/12 years] I'm sure there are many well priced effecive programs out there, perhaps someone can chime in with recommendations! Sit down and think objectively about,where you believe the market is going and whether volitility is increasing/decreasing then run simulations/projections based on this information. The action required should then be obvious! If the original premises prove to be incorrect respond accordingly. Sorry I can't be more explicit but there are just so many potentiol scenario's. Good Trading Johno
You can also look at <a href="http://www.marketgear.com/index.jsp">OPUS</a> for about $60/month OR if you use Think or Swim for a broker they have these tools built into the platform for free. Is Optionscope built into MetaStock or is it separate? How much is it?
Sorry Maverickz I've never enquired if it was available as a stand alone! The program I have has three seperate area's - Downloader, Metastock Charting and Optionscope - so it may possibly be available on it's own! Regards Johno
I've run into two situations where it's preferable to exercise options early. 1) Thinly-traded options with large spreads where you can't get a fill inside the spread and the bid is less than the option's intrinsic value. This often occurs when the underlying stock makes a big move and the options go into the $3.00+ range where spreads go to 10% or more. For instance, you may find with a stock at $70, the $65 calls are $4.80x$5.20 and you can't sell your option at $5.00 or even $4.90. You could sell them for $4.80, but if you own 5 or 10 options this is a $100 to $200 hit. Instead, you can exercise them and sell the stock to get the full $5. (Actually, to lock in the price you want, you'd short the stock at $70 and then ask that the call option be exercised. It would be exercised overnight, and the following morning you'd be flat in that stock.) This really does occur. One time I had, I think, DJ $55 puts, which I was willing to sell for $5.00. DJ went to $50 and I didn't get filled. I didn't get filled until DJ went down to $49.85. 2) A stock you hold long options in makes a big move after hours in a direction that makes your options much more valuable. You can't trade options after hours, and you're afraid the stock will reverse direction and erase your gains. To lock in the price you want, buy the stock (if you're long puts) or short the stock (if you're long calls), and exercise your options when the market opens, and the following morning you'll be flat that stock. Of course, you give up time premium when you do this, but it could still be worth it.
Hi loufah, I've found it's always better to swim between the flags where there's usually someone to bail me out if I get into trouble! Regards Johno
johno, i trade mainly vertical credit spreads on indices and some equities (although i really just started doing this) i agree with you on not thinking in terms of % stops that would be the same across the board. options sinply move too erratically for that to be of any value. but, i am looking for a way to identify thresholds for where i would liquidate the spread if the underlying came close enough to my short strike. it would seem that i do not want it to get ITM whatsoever. (becuase of early exercise, but also becuase it might not make it back out.) sorry i was not more explicit in the types of trades i was doing. again, thank you for your insight on this!
Hi Fakie, For Credit Spreads your spot on the money! You might want to consider Condors as a way of improving performance! Regards Johno