Spreads revisited

I decided to close out my Optioneer account, as I think I mentioned before, and I am in the middle of getting it all transferred back...chunk one is back now. I have two trades in play so I will wait until they are at least in the green as they are still fairly new iron condors which are prone to showing a loss for a while until they get going.

The decision had as much to do with the Optioneer losses as it does with the current gains, I might as well have my money working where it is performing the best... and the most fun.

I have missed out on a few spread trades through two of the three services I am using right now, the daytrading sold a put for a good return on the trade and the momentum option service has placed a few nice spread trades. One returned a nice tidy profit after only two days in play...but not to me.

The spread trades that seem to be popular with short term trading are the long call and short put of the same strike price, basically a type of straddle that takes advantage of a bull move in the underlying.

The long call appreciates in value as the stock rises and the put decreases in value. The put tends to decrease faster than the call rises, which is why it is traded in the first place as this lets more premium be kept. The trouble may be that if the stock price drops the put will get more expensive to buy back and the call will be cheaper to sell back. That seems to me to be an extra leveraged position so it would be prudent to figure on using half the position sizing for this sort of trade. Sort of figure that the call is one half and the put is the other. Seeing as the trade is not long term, a few days, a large loss is not likely to accrue quickly.

More to the point, I need a $25,000 account value to be able to sell to open options and the working capital calculation needs to be applied to each trade to determine how much free cash, not margin, that I need to cover the trade. This also changes as the stock price moves and the options change in value and this is one place where a margin call could develop if not enough spare cash is sitting idle in the account.

I will be transferring enough to cover this $25,000 requirement next month, I fell short in my first transfer this month by about $2,000...that and converting my US dollars back to Canadian right now would be almost silly due to the near par values. Having said that I am better off to have the money working for me over holding for a possible bump in USD value against CDN. I can make more in a few days than the extra cost of converting.

Jeff.