When I first began trading weekly options, and the various option income trading strategies like the Iron Condor, Credit Spread, Calendar Spread, and others – my overall plan was to just not touch the trade and just leave them on all the way to the very end.
For example, after I put the trading position on, I’d just leave it alone until expiration day rolled around and let the options simply expire without any value and vanish into ‘options trading heaven’.
My thought on this was that this was that it was really the wisest choice – and the best way to go – because it would allow me to keep the entire credit received – and I wouldn’t have to pay any dealer commissions to close out the position.
But things have changed – and I certainly don’t think this way anymore.
After spending far too many sleepless nights, experiencing a lot of ‘close calls’, and even getting close to acquiring an ulcer or hernia or two, I’ve transformed the way I run my options trading business.
Now – immediately after I place the trade, I place a contingent order with my dealer to repurchase the call spread – and the put credit spread – as soon as I’ve generated the majority of the revenue in each of the individual spread trades.
For example, if I placed an Iron condor trade on SPX for a total credit intake premium of 1 dollar – or fifty cents each spread – I would immediately configure a contingent order to buy back the call spread for five cents or .10 – or perhaps even twenty cents. Then I would go over and do the same thing on the put side.
Think this is crazy?
I don’t think so.
Sure I may make less than if I tried to milk the option trade all the way through to the very end of expiration.
But that’s not necessarily true.
And even if it were – it’s not really THAT much less.
What I think is far more important – is that by re-purchasing those spread trades, I have ‘locked in’ the majority of the gains.
In addition, my overall risk in the trade has been reduced.
Furthermore – I’ve set up a situation where it’s now possible to generate ADDITIONAL profits in this trade – more than what I had even hoped to gain when I first placed the trade. And I’ve done this with out adding to the initial trade risk.
Here is a situation using a monthly option income trading strategy to better explain what I mean:
As you’ve probably experienced yourself while trading options, a lot of times while a trade is on, the value in the options can lose value quickly. It’s very possible for a spread trade to lose the bulk of it’s value in just a few days.
So let’s say I place an iron condor trade on the SPX at around 40 days or so until expiration day. And I bring in a premium from the trade of around a dollar and ten cents – or fifty five cents for each credit spread side.
Then lets say that right after I got into the position, the SPX started to make a quick move upwards.
Just a couple of days after getting into the trade, it is possible for me to close my put credit spread for around .11 cents.
Now here’s the thing – if I decide to do absolutely nothing and just let the trade ride – I am deciding to accept that put credit spread risk margin – for the 37 days – for that little pathetic eleven dollars of potential profit left in that side of the trade.
Or – I could instead repurchase that put spread – close it down for just .11 cents – and LOCK IN that profit I have already made in that side of the trade in just a few short days.
Furthermore – if after I do close down and get out of that put spread – if the SPX were to suddenly fall back down – I could care less as I have no more risk whatsoever on the downside.
And actually – if the SPX were to drop back down far enough – I could actually place the EXACT same put credit spread I placed at the very start of the trade – very likely for close to, if not the same more, credit premium I received at the start of the trade. This would allow me to increase my total return on investment for the trade WITHOUT adding to or increasing any of my initial risk I had on the trade.
OR – even if I didn’t place any addition trades – let’s say I just decided to buy back the original credit spreads for eleven cents. I think that this by itself is a much better choice than allowing the trade to run until the end. It brings down my overall risk in the trade – it gives me back my trading capital much more quickly – it boosts my return on investment in regards to the number of days spent in the trade – and it frees me from the market a lot sooner that if I decided to hold out to the expiration day end.
This way of trading option income strategies makes much more sense to me.
And I’ve found it to be way less stressful. And much more enjoyable too.
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