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Strategies & Market Trends : Option Spreads, Credit my Debit
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To: Dan Duchardt who wrote (1804)11/27/2000 10:32:51 PM
From: KFE  Read Replies (1) of 2317
 
Dan,

it seems like a relatively high risk for relatively little reward.

I haven't been posting my exit strategies because the few people who frequent this board are mostly aware of them and I didn't want to seem like I was preaching. There have been new posters recently so I will discuss them FWIW.

I believe that your risk is what you let it be. On almost all of my OTM credit spreads my stop (cover) point will be contingent on the price of the underlying. It will either be the expiration breakeven point or when the the underlying reaches the short option strike price. In the EBAY trade I listed my cover point will be the short option strike price ($30). This strategy will usually limit my loses to the potential reward. In this case I am risking 1 1/4 point to gain a potential 1 1/4 point but the underlying would have to go against me by more than 20% before I would be in a losing position.

The key to these OTM and preferably deep OTM credit spreads is to have strict stop points. I call these "bookie spreads" because I feel that with strict discipline you are starting with the odds in your favor. No guarantee but you have the "vig" working for you. My favorite vehicle for this type of trade is the OEX because you can usually get a decent credit with deep OTM options having less than three weeks to expiration.

I think that it is worth repeating that I almost always enter these spreads as a spread order with a limit. I can almost guarantee you that over the long run you will get better executions than trying to leg in. If you ever run into an options market maker just ask him/her.

Regards,

Ken
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