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I know it was just a theoretical example, but if one were going to bail out at the slightest dip of being ITM, I would suggest using more narrow strike gaps than 5 points.... if offered. The more narrow the strike gap, the less negative affect any potential spike in IV will have on your trade, when closing it down.
yeah, I figured that was next to come on this forum. Instead of answering the question, some nerd was going to offer his expert opinion on why he would not put on a put spread on a hypothetical ul named XYZ.
Traveler, diaoptions, TskTsk, & Put Master: Thanks for your serious, non sarcastic comments and info. Personally, I think it's interesting finding out about what Options Contracts really are, and how they actually change hands, etc. I certainly haven't read or heard much about it anywhere. As to closing out positions when a sold contract goes ITM, I think you're probably referring to being Exercised. I generally wait until 30 days before Expiration (when the Rapid Extrinsic Value Decay begins) before I decide to hold or bail on a Credit Spread. Want to give the trade every chance to work, but don't want to get stubborn and take a Max Loss or risk Assignment either.
Yep. The process of novation (for those interested - like cactiman above) is where the counterparty transfers from user to clearer.
<<< I generally wait until 30 days before Expiration (when the Rapid Extrinsic Value Decay begins) before I decide to hold or bail on a Credit Spread. Want to give the trade every chance to work, but don't want to get stubborn and take a Max Loss or risk Assignment either. >>> I'm not sure waiting for the last 30 days before deciding is really such a good idea. Time decay is still pretty slow out there. But we each have our own risk tolerances, criteria, preferences, ect.... Personally, I don't mind getting assigned on some trades, but not others. Depends on degree of potential margin I might be on, whether earnings are pending, how volatile the stock and/or sector is, how diversified or concentrated I am, whether the stock pays a dividend, how strong the tech support is near my strike, how stable the companies fundamentals are (debt levels), and so on. Not to mention, I react differently to a $60 5 point spread going bad, than I might treat a $20 5 point spread.
All good points. Weighing out all those factors and making a judgement call is where the fun is! (Of course it's more enjoyable if you get it right rather than wrong.) 30 days was my simple answer, but sometimes I can tell way sooner the trade is a lost cause and I get out. Other times it's right on the line and I wait till last day and I get exercised! Just sell the stock that was "Put" to me and eat the loss.... I'm interested in your thoughts on Time Decay. You don't agree with the 30 day line then? When do you find the Rapid Fall begins?
<<< I'm interested in your thoughts on Time Decay. You don't agree with the 30 day line then? When do you find the Rapid Fall begins? >>> It really moves the last week, but it starts to pick up steam the last 2 - 3 weeks. But that's not really the issue. The issue is when it's time to get out, it's time to get out. However, if i think i have a strong stock fundamentally, and technically, but it's just being taken down by a bad market, I have no problem having it put to me, and selling calls. Sometimes I may sell a naked call during the last week, even before it gets put to me, if I'm pretty sure it's going to get put to me,... if i like the credit. It then becomes a covered call. But that can be risky. Bottom line..... if you really don't know much about your company, because you have not done a proper analysis, then it's probably best to take a loss when things go bad. Hence the benefit of doing a proper analysis. That being, it gives you more choices to select from during those difficult decision times. The only thing worse than taking a loss, is taking a loss and then seeing your stock recover days or weeks later. Hence the reason I don't automatically close out a position that is going bad. There is value to taking time to study a companies fundamentals as well as technicals. It helps when it's time to make those difficult decisions. (As a side note, when i speak of fundamentals, I'm refering to whether the company is using excessive debt, are they paying their bills on time, is their inventory building up more than usual, how much cash do they have, and is that cash because they are selling their product or because they are selling off their assets and/or cutting back on R+D spending, and so on) If company has deteriorating trend of it's fundamentals, and I'm in the stock, you'd better believe I'm quick to close down the trade when stock dips below my strike. But if trend of fundamentals are ok, I'll give it a chance to recover.