Saturday, March 7th, 2015

vertical spread questions?

Say buy to open a leg and then sell to open other leg, I have now put in spread w / a debit card. . . . minutes later to close the spread doing the exact opposite for credit. . . . My questions are: 1) to confirm that the strategy is right do I receive credit once I close out? 2) there are margin requirements to receive a credit on closing a contagion? 3) Am I now a long time the option that I originally sold to open i then bought to close? 4) and if I am a long time that position I can sell that particular option to get my hands? 5) is also provided within the trades, this would be considered a speculator trade move? really help me much if someone could answer these questions run through my lonely mabstar mente.graciaslobo

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2 Responses to “vertical spread questions?”
  1. Radar Man says:

    1) Since you opened the trade with a debit, closing the trade is done for a credit.

    2) There is no margin requirement needed to close a trade that was done initially for a debt. If the trade was done initially as a credit then there is a margin requirement.

    3) In vertical spreads you are long one strike and short another strike so I’m not sure of your question

    4) If you just a long a position (ie $50 call) you can sell it anytime to remove that position off your hands. However, if this is part of a vertical spread you will still be short a call option and most brokerages will not let you do that due to the high margin requirement and risk. Being short a call option is called Naked Call Selling. A high risk trade.

    5) Vertical spreads are not generally used for scalping. If you were to scalp you might just want to go long the option.

    Feel free to contact me if you have question or want to learn more.

  2. zman492 says:

    < <<1) to confirm that the strategy is correct do i receive the credit once i close out?>>>

    I am not sure what you mean by a “correct” strategy. If you mean profitable, you not only have to receive a credit, you have to receive a credit larger than the debit you paid to open the spread.

    The spread can never be worth less than zero, but the value can drop to zero in which case you would not be able to close it for a credit.

    < <<2) are there any margin requirements to receive a credit on closing out a spread?>>>

    It depends upon how you close it. If you use a spread order to close both legs simultaneously there will never be a margin requirement.

    If you close the legs separately you will have a margin requirement. If you use a “buy to close” transaction to close the short leg first you need to have the cash available to pay for transaction or you will incur margin debt. If you use a “sell to close” transaction to close the long leg first you will briefly have a naked short option outstanding which has a margin requirement.

    < << 3) Am i now long the option that i initially sold to open which i then bought to close?>>>

    No. A “to close” transaction eliminates the option position instead of creating a new position.

    < <<4) and if i am long that position can i sell that particular option to get it off my hands?>>>

    You are not long that position.

    < <<5) also granted the time frame of these trades would this be considered a scalper trade move?>>>

    I will not speak for anyone else, but I would not call is a scalper trade.

    —————-

    I think that if you want to trade vertical spreads it is critical to learn to use spread orders to open and close your positions. Spread orders allow you to specify two transactions and a net price. For example, for a bearish put vertical spread as in your example I might open it with an order that specified

    Buy to open 10 September $50 XYZ puts and
    Sell to open 10 September $45 XYZ puts for
    a net debit of $2.00 or less.

    This order would probably cost me $2,000 ($2.00 per share time 100 shares per contract times 10 contracts) plus two commissions to fill.

    Similarly I might close it with an order that specified

    Sell to close 10 September $50 XYZ puts and
    Buy to close 10 September $45 XYZ puts for
    a net credit of $2.75 or more.

    ——————————————-

    I will also point out that compared to stocks that bid-ask spread for options is usually huge. That makes day-trading options much more difficult to do profitably compared to day-trading stocks. If you are good enough (or very lucky) the returns can be spectacular, but that is a very big “if”.

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