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Strategies & Market Trends : Option Spreads, Credit my Debit -- Ignore unavailable to you. Want to Upgrade?

To: smchan who wrote (1815)	12/1/2000 12:35:18 AM
From: KFE	Read Replies (1) \| Respond to of 2317

Sam, You have been doing a lot of reading. Always willing to help anyone that puts in the effort. Look for OTM plays approximately 2 weeks before expiration. This statement was written mainly for OEX spreads where a credit of at least $1 on strikes more than one strike OTM is available. Equity options usually require a little more time remaining to expiration to get a similar credit or strikes that are not as far OTM. Implied volatility will play an important role in how far OTM you can go and still get a decent credit. At least 1 or 2 points on a 5 point spread and 4 points on a 10 point spread. The minimum that I will accept for a 5 point spread is $1 credit. Dave and some others do them for less than $1 but I don't like the risk/reward ratio. If I were going to do them for less than $1 I would move my cover point so that I would be risking an amount equivalent to what I stood to gain. This would mean that I would cover at some point prior to the short option becoming ITM. Always exit if a short option comes into the money by either closing the whole spread or the short 1/2 (depending on the underlying). My exit point is either the short strike price or the expiration breakeven point(usually only one or two points difference). If the underlying reaches this point I will either close out the entire spread or leg out only if I feel very confident in the direction of the underlying. This usually means covering the short side first because the momentum of the underlying is going in the direction of making the long more valuable. In those instances where I do decide to leg out I will always cover the other side by the end of the day. No overnight holding. The market of last couple of days has reinforced the importance of having strict stop points. Use expiration breakeven as a stop on 5 points spreads. (Not sure what this means other than you risk no more then the original credit once the position is open; that is your maximum loss will be commissions.) As stated above my stop point on OTM spreads will be the short strike or the expiration breakeven point. When using these stop points I will generally be risking a loss equivalent to the potential gain I could receive. If I received a $1 credit then my stop point will probably require me to cover at a $2 debit for a net $1 loss. do you watch options for a basket of particular underlyings? Or do you scan for spread plays w/o regard to the underlying (at least with respect to your first pass)? I have a basket of stocks that I have been trading for many years and know the stocks and their options very well and usually can eyeball the option chain and notice pricing discrepancies and trading opportunities. I do scan for other opportunities and the recent EBAY trade I posted was one. I have never traded the stock or the options before. I do keep detailed trading records and invariably the stock and options that I have have been trading the longest and most frequently are the ones that have the highest percentage of winning trades. Remember that these rules only apply OTM credit spreads where the stop point should be hit on only a small percentage of trades. If this exit strategy was applied to spreads that were not significantly OTM your stop point would be hit too often to be successful. Regards, Ken