Wednesday, December 16, 2009

[TheOptionClub.com] Re: Debit spread now in the money....

 

John,

The best advice I can give is to pick up the phone and call your broker.
These guys are more than just order takes, or at least they should be.
They are licensed financial professionals who are supposed to be
available to their clients. It's also one of the reasons we prefer
brokerages like ThinkOrSwim, because they have really good people
staffing their trade desk who know options and who know the house rules.

Now, I realize that there is an attraction to squeezing every last drop
out of a spread trade. Over the long-term it's a loser's game, though.
You will pick up those extra pennies most of the time, but every now and
then you will give back all or most of your profits with an unexpected
price move in the underlying. That's when you feel like a jerk because
you had 80% to 90% of the maximum profit just sitting there and instead
of closing the trade to lock those profits in you sat there like a
greedy miser holding out for the last nickle or dime.

My advice is to grab your profits when they are there. Every trade I
put on has a profit exit. It's an exit strategy that is meant to take
profits out of a trade when I the position has accumulated most of the
potential profit available in the position. On your $1.00 spread the
most you can ever make is $1.00 minus the debit your originally paid for
the position. Let's say you paid .25, so you could make a maximum of
.75. Let's say you're now ITM and the spread is worth .80. The spread
is now worth 80% of its maximum value and you have an unrealized profit
of .55 out of .75. Do you want to risk that .55 profit to make an extra
.20?

What I am suggesting is that you might want to look beyond this one
trade and start thinking like a risk manager. It does not make sense to
risk losses when only slight gains are available. Doing so denies you
of a long-term positive expectancy. You will get away with it most of
the time, but eventually you will get burned.

Just something to think about as you develop a long-term trading plan.

Christopher Smith
TheOptionClub.com

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