Risk Managing a Credit Spread?

Discussion in 'Options' started by fakie99, Mar 19, 2008.

  1. fakie99


    i have recently begun trading option credit spreads. on one occasion recently, i unloaded both short and long options becuase the underlying's price was approaching my short strike. (it backed off and is fine now, of course - i panicked).

    aside from just liquidating the spread, what are some other management alternatives when price begins to move against a short strike? (note i cannot buy or hold naked options in my trading account).

    are there any good books that are dedicated to this facet of credit spread trading?


  3. fakie99


    thanks. i see what you are saying about closing early to take advantage of time premium, but that same time premium in the long leg would also work against me in the short leg, right? (causing me to buy back the short leg at a higher price)

    how far away from the short strike are you comfortable letting the underlying price get?

  4. doesn't matter--your loss is limited no matter how deep itm you go. It is the OTM situation that causes a problem. Should you just let the short expire and close out the long leg? I feel that this is a gamble. It is best to just close out your spread the Friday before expiration. Do not even consider accepting assignment or being assigned, for you just increase the commissions.
  5. If the market moves "against" your bear-call-spread, initiate a bull-put-spread as a means of gaining additional premium.
  6. fakie99


    would that bull put spread be intiated with the same months' expiration?

    and would that technically be an iron condor then?
  7. ?......same expiration month, yes. The short-put can be at the same strike price as the short-call or lower.
  8. fakie99


    OK...so how close to that short strike are you willing to let it get before finding the need to do something.

    (i ask becuase i ALWAYS feel the need to act, thereby absolutely guaranteeing that i lose money. i need to develop a reasonable threshold)