First few days off the board of a spread trade

Those first few days in a spread trade are the worst as it is hard to see through the initial loss to the far side, particularly in a full iron condor.

A regular spread has a built in immediate paper loss. Selling one option at the bid and buying the other at the ask puts both the bid/ask and ask/bid spread in the road on top of the commission costs.

ie, selling a close call at 50 cents and buying a long call at 20 cents looks like a 30 cent credit, but that is not correct. The close call might be quoted at 50 bid and 55 ask and the long call might be at 15 bid and 20 ask. if I turned around and closed the trade immediately after opening it I would be buying back may short call for 55 cents, 5 cent loss and selling the long for 15 cents. A total of 10 cents lost. over a 6 contract trade that is $60, plus commissions.

Then is the initial move. If it moves towards the spread strike both options appreciate, the close call faster than the long call creating an imbalanced loss just like having it move away would create an imbalanced gain...the whole idea of a spread.

Taking the initial bid/ask spread loss and commissions out of mind for a moment it is easy to realise that none of this matters one little bit as long as the stock or ETF price does not hit the inside short call. The commissions will always be a loss but the initial difference in the sale and purchase prices are all that matters if the options all expire outside of the spread.

Jeff.