Options premium income. How much is too little?

Yep. This is the only correct way to do it. If you get $50 credit on $500 spread, your maximum gain is 11.1% if it expires worthless.

 

And a very foolish gain to take the maximum. Options are unique in that your (absolute) risk increases as the position moves in your favor.

Probably a good point to add, always evaluate your trade as a position you would open today (but use the more favorable market maker's side of the trade, with commission coming to you to evaluate your effective "cost" to keep open--the reverse of what your closing trade would be)

 

100% agree.

My rule of thumb is to close around 80% of the maximum gain. This is one of the reasons I believe you should not get credit less than 7-10% - so you are able to close early and still have decent gain.

 

You are calculating return on margin. That is an important value. Do you do the same math in a PMA? Now the return on margin is higher. I’d say this a good metric, but can get confusing when two people do the same spread but have different types of accounts. Then they have a different return on margin but the risk is the same.

 

Yes, I believe calculation should be the same in PMA.

 

I play much closer to the money (I aim for 30% of the spread over a 5-6 day position), so I'm happy to take much less gain as a percent of maximum. It also depends how long I've been holding it--a quick move on the underlying, which gets me too 30% of max gain the day after opening I'll jump on, but a slow and steady move and I may take nearer 80% towards the end of life. The rare times I hold till expiry is only on symbols I'd be happy to take delivery of the shares as an investment position.

 

And don't all brokers require 100% margin on these positions? In my experience, leverage and options are like oil and water...or more accurately napalm and water.

 

Not in a portfolio margin account. The requirement would be the loss from a 15% shock-equity options, plus any risk add ons from your clearing broker.

 

But the loss from a 15% shock will likely be very similar to total spread minus credit?

 

That general statement might be true. There are too many variables for me to confirm that without a specific example. Broken spreads and any ratio spreads are much better with PM.