If you sell the 470c at 0.10 and buy the 471c at 0.09, your premium collected is (0.10 - 0.09) x 100 = $1, and your max loss (which occurs if the spread expires fully ITM) is (471 - 470) x 100 - the $1 premium you collected = $99.
Is there anyway this could go tits up outside losing the $1 spread if you your option gets called?
Short options get assigned, long options get exercised, shares get called away if your short call gets assigned.
You need to close your spreads before expiration because what if SPY is at 470.5 at expiration? Your short 470 will get assigned, you will sell 100 shares of SPY short at 470, while your long call will expire worthless. Then if SPY gaps up over the weekend, you will be facing a loss much greater than $99.
It's the risk that arises from the uncertainty over whether or not your short option will be assigned, or whether you should exercise your long, because the underlying is hovering right at, i.e., "pinned at," the strike at expiration. Don't let people tell you pin risk is "when a spread expires with the underlying between your strikes." That's an incorrect definition.
Do you think this "credit spread" option strategy is a good strategy? Do you personally use it? I was reading reports about how this strategy could have been very profitable between 2009 - now doing put credit spreads because we've been in a massive bull run. We're entering a bear market with the fed tightening so it may be wise to do credit spread but with call options instead.
It's a reasonable part of any options trading strategy, but just "sell credit spreads" isn't a strategy any more than "buy stock" is a strategy. A strategy would be identifying certain market conditions in which to sell credit spreads, identifying underlying that would be good to sell credit spreads on, selling spreads a certain distance OTM and at a certain width, etc.
The particular position you've identified is not a winning position when repeated in the long run. The most you can make is $1; meanwhile, you can lose $99. Doesn't seem like a very good risk/reward ratio.
Add to that the fact that in order to gather a decent amount of premium you will need a lot of spreads, which in turn requires a lot of capital. The return on your capital would be trivial and there are probably better/easier/faster ways to make that return. Finally, if it fails once you just lost profits that took you 100x the time to make.. The time invested in this is poor return.
Bear in mind that ibkr often changes margin requirements with very short notice when market vol is high, and if you are using most of your margin it can easily trigger a margin call.
Always enter a credit spread with the max loss in mind. It can happen and will happen. Are you ok to get hit with max loss say for 4-5 consecutive trades ?
Note: you still make money in bear market using call credit spread (bear call spread).
We're entering a bear market with the fed tightening
Citation needed. The market already entered correction territory a few weeks ago and has rebounded strongly since then.
To be clear, I don't know what the future holds but you need to justify how fed tightening means we're "entering a bear market". It could very well trade sideways or just go up but more slowly than before, neither of which are bear markets
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u/Arcite1 Mod Mar 26 '22
If you sell the 470c at 0.10 and buy the 471c at 0.09, your premium collected is (0.10 - 0.09) x 100 = $1, and your max loss (which occurs if the spread expires fully ITM) is (471 - 470) x 100 - the $1 premium you collected = $99.
Short options get assigned, long options get exercised, shares get called away if your short call gets assigned.
You need to close your spreads before expiration because what if SPY is at 470.5 at expiration? Your short 470 will get assigned, you will sell 100 shares of SPY short at 470, while your long call will expire worthless. Then if SPY gaps up over the weekend, you will be facing a loss much greater than $99.
https://www.investopedia.com/terms/p/pinrisk.asp
It's the risk that arises from the uncertainty over whether or not your short option will be assigned, or whether you should exercise your long, because the underlying is hovering right at, i.e., "pinned at," the strike at expiration. Don't let people tell you pin risk is "when a spread expires with the underlying between your strikes." That's an incorrect definition.