What is your strategy when it hits your short strike or goes ITM ? If you don't have a stop loss strategy you are going to get smoked. If vol has moved against you, smoked even more. again, much has been written on ET on this.
If really necessary then of course the usual step: hedging either with the underlying or another option... In that case one tries to let the PnL not get into the negative territory, ie. PnL=0 :-( But the p for these events are usually very small, and the good thing is it is easier foreseeable...
No, with your "probability" strategy you will be ITM more than you are prepared for. Horse is out the barn door as far as hedging at that point.
FYI: I'm trading mainly weeklys, ie. timeframe is a week or max. 2 weeks. Do you think the spot will reach the strike in such a short timeframe if the initial absolute distance is say 50%?... The p for this to occur is IMO minuscule...
If you are using delta to approximate probability of a position going ITM, then 50% is huge. 1 chance in 2 your position is in trouble. Also have you factored in the gamma risk that you are taking as this position approaches expiry near your short strike ??
I think it really doesn't matter as an early-close isn't desired at all. In case the strike gets hit, then hedging will be activated, usually buying/selling the underlying, or maybe much earlier a spread could have been built to lock in the profit... I try to follow the KISS principle. Just curious: which delta and gamma do you use in such cases: that of the used strike, or maybe that of the ATM strike?
It doesn't matter what is desired. Once the position goes ITM (and some will, probability notwithstanding) you either have to close out the position at a loss quickly or face huge losses or get assigned the underlying and most likely take a loss that way. Your example in the other thread of selling .15 in credit in an option with 0 liquidity , huge B/A spread and a IV through the roof is courting disaster. You need an exit plan, be careful, especially if you are doing this naked.
Come on, you are still thinking of an early-close. Just forget it completely, and you will have less headaches! Because then liquidity, volatility, and Bid/Ask-spread do play NO ROLE anymore! That I can assure you, because I studied the crap long enough and very deeply. Here's a useful link for you to try out what I said: http://optioncreator.com/
Sure pal, you have it all together. Here are 3 phrases you should get used to :...assignment, margin call, blow up. And no, holding to expiry doesn't prevent any of them. I'm out !