After your write-up on credit spreads, I asked my broker about them. He said that I should examine the risk/reward of the purchase and then to hold them until expiration. When you buy spreads, do you always hold them until expiration? (January 24, 2001)
With $5 to $10 spreads, you get your best return when you hold them until expiration unless the stock really races higher and the cost to repurchase the put you sold is small. It does not take much to hurt the percentage return. The reason you have to go into the spread thinking you will hold it until expiration is that even if a stock races higher, there will be time value in the put that you have to pay for when you buy the put back. It may be way out of the money, but there is still some time value in the option that increases its price. If you are just selling a put, no problem as you did not have to buy a put on the other end to limit your exposure and margin requirements.
Now there is another put spread strategy that we are getting ready to roll out for subscribers that helps eliminate this need to ride to expiration. Also, if the stock moves against you, you can still take home a gain. We have been field testing it this year as the market improved and we are going to give you the details shortly. This will also be covered in the Options, Spreads, and Other Strategies seminar we will be giving in the spring.
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