risk management suggestions for credit vertical spread

Discussion in 'Options' started by nixodian, Aug 24, 2010.

  1. nixodian


    l read moneyshow.com about how to profit from theta when trading options, http://www.moneyshow.com/trading/Options_Idea.asp?aid=optionsidea-20487&iid=OptionsIdea&page=2#
    and found it of great interest.
    l have just subscribed to the newsletter , options trading signals. yes you guessed it, l trade (some call it gambling!) options. l also profit from theta decay, since l mainly do credit spreads, l feel the main greek l look at, delta , has a much more significant role in an option's value.
    l am currently in the bull put credit spread in SPY, sold the 103put 102put, entered yesterday ,23rd Monday for a measly 0.05cent. well l could get around double that now, SPY is currently 105.78, in the article a contingent order is entered immediately after setting up the credit spread in SPX, l rarely set up a contingent order, but if l were to set a contingent order to buy back, from yesterday's close, looking at it now130pm ET, l would probably set it at 105.45 just below the 61.8% fib retracement line on both the daily and weekly, where would an experienced trader set it and why? with SPY at 105.78 the cost of buying back my 103put 102put spread would cost me 0.15, thats a 100%loss before commissions! the cost would be even greater if it was at 105.45. in the example in the article, the risk to profit ratio is quite favourable in comparison, $1000 loss : $750 gain, do the index options give a more favourable risk to reward ratio? or is it a case of setting up a contingent order closer to the current price?
    l could also set up a ratio put back spread by buying another 102put, incase, it does collapse. l would get out of this position, before expiration, this Fri 27th
    thanks in advance, looking forward to your reply

  2. If you believe that selling a credit spread for one slim nickel is benefiting from theta decay, you are not yet ready to trade options.

    That newsletter you bought is not going to help either.

    Good luck to you

  3. MTE


    Here's a suggestion on risk management. When a vertical gets to .05 you should be buying it to close out a position not selling it to open a new one.
  4. nixodian


    Mark, your website is definitely of interest too. I was wrong in suggesting I'd benefit from theta decay since that is around as cheap as an option can be. The reason I'd sold the credit vertical put spread (August27 expiration) at the market price, 0.05, was the low risk. at the time, the 103put had a delta around -0.06, so ~only a 6% chance of going ITM, SPY was >107. as you can see now, from yesterdays close the delta over 3x what it was last monday!. Also the commission at IB made this trade still profitable.

    so if you were to do a credit vertical put spread from last monday 23rd August, which expiraiton and strikes would you of chosen?

    thanks for enlightening the trading community. btw I never paid to subscribe to the newslettert.


    ps. the option chain for SPY AUG23RD should be attached.