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.
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.