To: Richard Gibbons who wrote (88710 ) 1/21/2001 12:45:33 PM From: Knighty Tin Read Replies (2) | Respond to Richard, these do indeed look bad and, most of the time, most credit spreads look crummy on the close. I would avoid them. However, here are a few points about credit spreads I use to help, and you've already hit on some: 1. Always compare the same position to the debit spread of the same direction. In this case, there isn't much in either. 2. As I've mentioned here many times, my entire max income portfolio is well-covered and low risk, but I do leg into most spreads, debit and credit. 3. What happens if the stock runs against you? The long option picks up pure premium. In other words, the maximum standstill loss is rarely the maximum real world loss. 4. I would probably be setting up the entire position much further out of the money given the fatness of all the premiums. That way, you not only have the spread premium, but stock market price working in your favor. 5. The spread is going to be backed by a base collateral position. In this case, about $4000 per contract. So, saying I got 5.5 on the spread, over two years, if my base collateral earned 5% a year, I would have another 4 points from interest not counting the interest on the premium, making even the risk and the reward more of a push. 6. You do have to be confident of the fundamentals on the stock and sometimes you will be wrong. However, this is not like 90/10 where you can make 3 mistakes and 1 big winner bails you out. You have to be right on these more often than wrong to make them pay. 7. If you are right, the sooner you are right the better, as you mentioned.
