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Strategies & Market Trends : Option Spreads, Credit my Debit
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To: Tim O. who wrote (1420)5/5/2000 11:22:00 AM
From: KFE  Read Replies (1) of 2317
 
Tim,

I used to do mostly vertical bull spreads, but because of the volatility, I often saw profits evaporate. My hesistancy in taking profits was because the net gain is only maximized upon expiration, so I usually would ride it to expiration. Also, the net gain comes from the difference in deltas on the long/short sides, so the gain grows slowly.

Do you experience the same problem? I'd appreciate your strategy on profit taking on spreads.

Before I do a vertical spread (bull or bear) I will always look at the mirror spread in the puts/calls. The vast majority of times you will better off doing a credit spread rather than a debit spread. For a bullish spread that would mean doing a put credit spread. This also has the added advantage of earning interest on the credit received and if your right about the direction of the underlying there will be no transaction costs getting out because the options will expire worthless.

You are right that the maximum gain is only realized upon expiration and it is also mostly true that the maximum loss is only realized upon expiration. Since I mostly use credit vertical spreads that are very short term the decision as to when to take profits is a lot easier. If I can buy the short side back for 1/8 on a spread that I did for a $1 credit with more than one week left I will usually do it. If I received a larger credit when entering I would be willing to buy back the short side for a proportionally greater amount.

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