I have been watching the put spread of an index with following numbers which makes me think that it looks like almost a gauranteed locked in profit trade. I am not an options expert & would appreciate any comments. The index all time high was 4200. Index is now at 3600. During the trading hours the deep in the money put spread, namely Buy 4100 put & Sell 4000 put spread showed a value of 90 points. If I bought that spread for 90 points & if the index closed below 4000 at expiration, have I locked in a profit of 10 points ? ( Commission is only 1 point which leaves 9 point profit ? ) If not, What is my risk ? I have seen this spread trading below 100 points several times during the day. What does that really mean ? Am I getting almost gauranteed profit as long as buy that spread for under 100 points ? Thanks
You're risking 90 to make 10. It is a high probability trade (~90%), but if you don't know what you're doing you will get killed on that 1 out of 10. Read thru Coach's SPX Credit Spread thread in the Journal. It goes though a lot of the why's and some of the why not's.