Isn't it better to put on a wide credit spread as it increases profit? Say you: Sell a call@65 with a premium of 2 You buy a call@70 with a premium of 1. Why not buy a call@85 - isn't it going to be cheaper and therefore increase your profit margin?
Your example is $500 wide for $100 credit and potential loss of $400, so it's a 20/80 split. Going $2000 wide might get you, say, $150 credit but with a $1,850 potential loss, a 7.5/92.5 split, but odds are lower you'll reach max loss. You gotta know the stats and your own risk tolerance. A more interesting question is, e.g., would you sell 4 5-wide spreads or 1 20-wide spread?
So, depending on how close the stock price is a wider spread has more risk but may be less likely to hit the higher strike since it's further away?
65/70 Credit Spread: 65 @ 2 70 @ 1 Credit = 1 (Max. Profit) Max Loss = 4 65/85 Credit Spread: 65 @ 2 85 @ .2 Credit = 1.8 (Max. Profit) Max Loss = 18.2
Thanks! And say in a 65/70 spread, stock price reaches 67 and the option is exercised. That leaves me with shares short at 65. At that point I can close the 70 call or what? I have to balance out the short risk?
1-Close or adjust the trade prior to expiration. 2-If short the stock, best to close both positions at the same time or the stock position first. Hold the call until you want to buy back the stock or your margin requirement will increase. ***The 65 call most likely wouldn't get exercised until expiration day or day prior if stock is at 67.
Well, before it hit 65, and depending on time to expiration, you could always buy the spread back to close it out to minimize the risk of exercise. But if it happens, and you've got the margin to keep it open, and you're still bearish, then your 70 call is still protection. But really you need to look with fresh eyes, it's a new trade.
Roll the trade up and out. Up in price, out in time. If trade is going to expire with stock price above 65, close the 65/70 spread and open a 70/75 spread that expires farther out in time (next week/month).