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Investing Strategies / Options - You Make the Call


Subject:  Re: usually selling credit spreads question Date:  11/29/2007  12:21 AM
Author:  rwandamassacre Number:  8492 of 11360

Spreads, with their lower margin requirement, create greater leverage and higher percentage profit potential. However, the theta, delta, and vega of the spread are actually quite small since the long option greeks partially cancel out the short option greeks. Furthermore, spreads involve two option commissions and double the bid/ask slippage, making it difficult to get good pricing, so it is often preferable to hold until expiration rather than trading in and out of them.

Bottom line: naked short options are preferable if:

1. you plan to make quick, short-term trades that need liquid pricing to take advantage of quick favorable moves in the underlying (delta is higher with naked options); or

2. You want to take quick advantage of the underlying's lack of movement (positive theta is higher with naked options); or

3. you want to take quick advantage of a reduction in implied volatility (vega is higher with naked options).

If you are willing to wait until very near expiration, then the lower risk and leverage benefits of spreads are preferable.

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