Monday, August 31, 2009

[TheOptionClub.com] Re: what happens when a debit spread expires out of the money?

 

--- In OptionClub@yahoogroups.com, "paul7313" <paul7313@...> wrote:
>
> credit spreads that expire out of the money give me the money in the spread at expiration, what happens with a debit spread?
>

Paul7313 - I find it best to view credit spreads and debit spreads as very different trades:

Credit spread; since you want both sides to expire worthless, you typically put it on at approx. 4 weeks or less until expiration. This is because time decay starts to really kick in at 4 weeks, and accelerates the closer you get. You would probably sell it out of the money, and you are not really looking for movement of the underlying. Position gamma is negative and theta is positive.

Debit spread; just the opposite. You need to allow plenty of time for your trade to work, usually 60-90 days or more (I prefer LEAPs), and if it's out of the money, you need some movement. Position gamma is positive and theta is negative. The risk/reward for debit spreads is usually far superior to that of credit spreads. However, a good discipline with debit spreads is that you usually exit approx. 3-4 weeks prior to expiration, just the opposite of the credit spread.

Give yourself time to learn the greeks like delta, gamma and theta and it will make more sense,

Theta King

__._,_.___
The goal of TheOptionClub is to provide a forum for members to work together for the purpose of furthering our individual understanding option trading.  All messages and postings, and any materials circulated are provided for discussion and educational purposes only.  No statement contained in any materials from TheOptionClub should be considered a recommendation to buy or sell a security or to provide investment, legal or tax advice.  All investors are encouraged to consult a qualified professional before trading in any security.  Stock and option trading involves risk and is not suitable for most people.  There is no guarantee that any information provided is accurate and, may in fact, be wrong.  It is understood that the participants in TheOptionClub have varying backgrounds and degrees of experience in option trading, and that regardless of experience each member is considered a student.  As such, any information distributed through TheOptionClub should be considered with a critical mind and not relied upon as an authoritative source.

To unsubscribe from TheOptionClub, send an email to:
OptionClub-unsubscribe@yahoogroups.com
Recent Activity
Visit Your Group
Yahoo! Finance

It's Now Personal

Guides, news,

advice & more.

Search Ads

Get new customers.

List your web site

in Yahoo! Search.

Check out the

Y! Groups blog

Stay up to speed

on all things Groups!

.

__,_._,___
Posted by at

No comments:

Post a Comment

Subscribe to: Post Comments (Atom)