When to exit credit spread?

Discussion in 'Options' started by wpepper, Aug 12, 2007.

  1. wpepper

    wpepper

    I currently have a

    RUT Aug 830/840 credit spread

    The RUT is currently at 788.88 and I think there is a good chance for my trade to be in the money next week especially with the volatility we've been having lately.

    There have been several times when I've gotten out of a credit spread in the nick of time (with a small loss) other times if I had held tight the trade would of expired worthless.

    Does anyone have any guidelines as to when they exit a credit spread?

    Thanks,

    wpepper
     
  2. you should know the answer to this beforehand.

    one general rule of thumb is to close out credit spreads when they move against you by an amount equal to the credit received.

    so, if you sold it for 2 and it moves to 4 on the ask, close it for a loss of 2, etc. if you sold it for 5 or more, consider taking profit. don't squeeze out the last few pennies.
     
  3. If you have a decent profit, consider closing the position or running a tight stop on it.

    If you do not have a loss and current volatility troubles you, shut it down and sleep well. The market will still be ther when you have a better comfort zone.

    If you have a small loss, grab a bounce and get outtta Dodge :)


    Oldest cliche' in the book:

    "Let your profits run and cut your losses.
     


  4. If RUT closes above 805 that it manages to break up its 200 day moving average resistance above , I would consider looking for a higher strikes roll or September contracts. Till than stay put and enjoy the volatililty fireworks. It can't hurt you.


    Here is what happened to me:

    I had a 30 contract August RUT 800/810 bear spread and RUT hit me hard last week. However due to volatility I removed 7 shorts at 11.00 and 8 shorts at 14.40 and when it went down to 783 I bought back balance of 15 shorts at 7.50 and let the 810 longs stay there overnight.

    That was a dangerous gamble.

    Next day it hit 798 again, instead of selling the longs I sold the shorts now at 14.00 x 30 and on Friday when RUT came down to 770 I bought those shorts backs for 5.00x 30. Than this monster started going up with my 30 longs and I sold them out all for $7.80x 30 and got out of it this roller coaster ride!

    Another mistake I made when RUT was at 798 I sold a 30 contract 770/760 August put spread for a 1.00 credit. But that also got hit in the morning on Friday, I didn't take it out and right near the close on Friday RUT around 788 I took it off for a $1.20 x 30 loss that is $3600 loss compared to all those profits.

    Not saying you should trade like this, very dangerous you can lose 20,000 -30,000 in a quick jiffy.
     
  5. wpepper

    wpepper

    Closed my positions with a small gain. Probably should of waited it out.

    Thanks for the feed back.

    wpepper