Comments on: Watch Lists Advantage http://theoptionguru.com/blog/2009/12/watch-lists-advantage/ Option Spread Trading for Income Fri, 03 Feb 2012 02:18:00 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: Jeff http://theoptionguru.com/blog/2009/12/watch-lists-advantage/comment-page-1/#comment-708 Jeff Fri, 15 Jan 2010 12:25:55 +0000 http://theoptionguru.com/blog/?p=1295#comment-708 Mike, Some of it has to do with the increased volatility, but mostly it's due to the price of the stock when you entered the spread versus the price now. For instance, when I entered mine, the stock was at 135.49. The idea behind a Bull Put Spread is to have the stock rise, but if the stock stays above your short strike you will still make max profit at expiration. I exited my trade on 1/12 when I saw the price move below the 20 ma and my trade entered negative territory; I lost .43 per. The price of the stock was below the price when I entered by almost $1. My previous statement is still true - if the price would have remained above 125 at close today I would have made max profit. To see how this works (if you have TOS) enter this simulation on your "Analyze/Add Simulated Trade": DIA FEB 103 Sell Vertical (FEB -103/+102 Put). Then go to the analyze tab and under "Positions and Simulated Trades", change the date of the graph to 2/18/10 (the day before expiration). You can see that if DIA is at 103.84 or less your position will show a loss. But, if at the close on Friday it is above 103, you will make max profit. When I ran this scenario today, the price of the underlying is 107.03. If the price remained there or rose, then I would exit around 2/12 since I would have been at 80% profit or more. On 2/12 if the price of DIA is below 105.02 the trade would be losing. So the key is the price of the underlying versus the current price and how close to expiration. That is why you always want to enter after a flag/pennant for a better chance that the price will only move in your direction after that - but not guaranteed. In the case of FSLR - well who knows? Germany is reducing their state incentives for solar. Did that do it? How about some press on growth issues? Nobody really knows, but it sure moved unexpectedly down and looks like today it will be well below 125. There are times that buying back your short option and hanging on to the long will work out, but in this case it's just too close to expiration for that. Unless your short goes ITM very quickly, you will just lose more money. I like to close all my trades before expiration - especially if they are making me nervous. Thanks for asking this question, Mike, since it made me think about some things that I hadn't before. <em>- Jeff</em> Mike,

Some of it has to do with the increased volatility, but mostly it’s due to the price of the stock when you entered the spread versus the price now. For instance, when I entered mine, the stock was at 135.49. The idea behind a Bull Put Spread is to have the stock rise, but if the stock stays above your short strike you will still make max profit at expiration. I exited my trade on 1/12 when I saw the price move below the 20 ma and my trade entered negative territory; I lost .43 per. The price of the stock was below the price when I entered by almost $1. My previous statement is still true – if the price would have remained above 125 at close today I would have made max profit.

To see how this works (if you have TOS) enter this simulation on your “Analyze/Add Simulated Trade”: DIA FEB 103 Sell Vertical (FEB -103/+102 Put). Then go to the analyze tab and under “Positions and Simulated Trades”, change the date of the graph to 2/18/10 (the day before expiration). You can see that if DIA is at 103.84 or less your position will show a loss. But, if at the close on Friday it is above 103, you will make max profit.

When I ran this scenario today, the price of the underlying is 107.03. If the price remained there or rose, then I would exit around 2/12 since I would have been at 80% profit or more. On 2/12 if the price of DIA is below 105.02 the trade would be losing. So the key is the price of the underlying versus the current price and how close to expiration.

That is why you always want to enter after a flag/pennant for a better chance that the price will only move in your direction after that – but not guaranteed. In the case of FSLR – well who knows? Germany is reducing their state incentives for solar. Did that do it? How about some press on growth issues? Nobody really knows, but it sure moved unexpectedly down and looks like today it will be well below 125.

There are times that buying back your short option and hanging on to the long will work out, but in this case it’s just too close to expiration for that. Unless your short goes ITM very quickly, you will just lose more money. I like to close all my trades before expiration – especially if they are making me nervous.

Thanks for asking this question, Mike, since it made me think about some things that I hadn’t before.

- Jeff

]]> By: Mike http://theoptionguru.com/blog/2009/12/watch-lists-advantage/comment-page-1/#comment-707 Mike Fri, 15 Jan 2010 01:32:16 +0000 http://theoptionguru.com/blog/?p=1295#comment-707 Ok, so I guess I need a little better understanding of the last minute plays on credit spreads... I saw FSLR going down over the last couple of days, so I put a contigent order to close my spread (the same as yours) if the underlying went to 125.10 or less. It did so today, the day before expiration and I lost about .80 per spread (I got in for .63). Was this strictly due to the increased volatility from such a big move? I thought by today, I was pretty safe and/or max gain above 125.00. Would a potentially better idea have been to only close my sold side today and wait for the other tomorrow? Ok, so I guess I need a little better understanding of the last minute plays on credit spreads… I saw FSLR going down over the last couple of days, so I put a contigent order to close my spread (the same as yours) if the underlying went to 125.10 or less. It did so today, the day before expiration and I lost about .80 per spread (I got in for .63). Was this strictly due to the increased volatility from such a big move? I thought by today, I was pretty safe and/or max gain above 125.00.

Would a potentially better idea have been to only close my sold side today and wait for the other tomorrow?

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