Report #23 Figuring Vertical Spread margin.

The learning experience continues!

I was puzzling out what the margin requirements are for credit spreads. I got really confused over it. Pete Stolcer a famous option guru with several websites on option trading, I occasionally check for reference and teaching, one of his sites. 1option.com
Anyway he responded to my query and with my subconcious over a couple of nights of calculating the thing, finally realized that my margin formula was:
$500 for a spaced one strike spread of five points x number of contracts I wish to trade. You can get a little picky here and subtract the CREDIT you receive from selling the TIME DECAY, which does not reduce it much. So for a 5 contract spread you need $2500 margin, less any miniscule credit you received, to be paid for by the TIME DECAY as the Spread runs out daily to EXPIRATION.
The way I'm trading is going out for SAFETY, which means I'm gambling $2500 margin against a profit credit of 2.5 % of that, should I do right. Huge potential loss, versus the profit. However, it is offset by the safety factor, if you figure it right. The only real threat I can see, is if the market makes a sudden BEAR PLUNGE very rapidly in one day and I cannot close out my spread quick enough, to catch it running through my bet. Haven't learned how to close out yet. That experience will come eventually I suppose? Which is why we do virtual paper trading first.

That's the new lesson for this week so far!
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If you leg in with another Vertical Spread forming a price channel, above and below, currently called an IRON CONDOR, the margin stays the same, as you only have to put margin on one side of the channel. Because only one side can get hit, if price action is volatile enough, or you put it in too close to the movement. I'm told that this usually wipes out both sides of the channel profit. The goal is to swallow an extra set of commissions and close out BEFORE you get hit, should the price go against you. That way if you had collected enough TIME DECAY already, you might even break even, or perhaps take a little cash home with you. It is very little, if you are lucky about +$15. Which is better than losing $300 by letting your threatened STRIKE PRICE get hit. Or even worse, by the price action going through your spread and consuming your margin at $500 a point. ( $2500 loss potential ) At least in a 5 contract spread, which I'm currently trading. The losses get bigger if you are hit, multiplied by the number of contracts you hold.
Some recommend closing out when you have 80% of the TIME DECAY, if you are close to the last day before EXPIRATION. Others say, you can do a ROLL OVER which means implementing ANOTHER Vertical Spread, another strike further away. Not faced those decisions or problems YET!
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