Whoa, a whole lot to unpack there. First of all, do
NOT start out selling 150x of anything. Full stop. Second, spreads (and an IC is just two spreads, bull put and bear call) are absolutely
real dollar losses, more so than selling cash-secured puts and covered calls. CSPs and CCs are fully covered (having the SP go ITM just means exchanging shares into cash or vice versa at the agreed strike price). When spreads go ITM at expiration the entire cash backing is lost. Your homework is to read upthread (Fall 2021-December 31, 2022) about the real financial and
mortal danger of trading spreads when the SP goes against the position.
Ok, with those warnings, let’s discuss my rationale: Unfortunately, not much, but I like $10 wide spreads for simple, in my head calculations. 1x $10 wide spread is $1000 at risk of being lost if ITM. 100x is thus $100k at risk. Wider spreads have lower %premiums and require more cash backing at risk, while narrower spreads conversely lower dollars at risk but increase %premiums and chance of rapid losses. Narrower spreads can go from bad to worse to complete loss in the blink of a trading day. Spreads can be difficult to roll, or require dumping good money into a bad rolling position, for a worse loss in the future (read the numerous explanations by
@adiggs upthread). My minimum spread width is $10, but I’m now trying $15, $20, and $30 just to experience the impacts on risk, premiums and rolling.
Why those strikes? Mostly just guessing that the inner strikes won’t be violated based on open/traded options on MaxPain and my newbie understanding of charting technical analysis. Obviously, the farther away from the SP, the lower the premiums and the less risk. Near ATM, inside of SP+/-10%, is pretty risky. Outside of SP+/-20%, much safer, but lower premiums. The choice is yours.
I’m not completely satisfied with my position, so don’t think it’s “perfect.” Ideally, I would only open on Wednesday (2 DTE) or preferably Thursday (1 DTE) for the highest theta decay, but unfortunately some of these are rolled from a previous losing position.
Finally, a few more points: Read my previous posts up thread for more details, but I’m gravitating toward wider spreads, 1-2 DTE, because the decay and cost of the protective +c and +p are lower. In the 5+ DTE range, the protective (long) options actually decay faster than the money-making (short) options because they are farther OTM. That’s difficult to watch. Furthermore, like adiggs just said, selling call spreads is nerve-racking because the SP can rocket at any time. I probably should not be selling ICs, but instead just stay with BPSs. When the SP goes up, the BPSs are hedging my CCs, while the BCS side of the IC will amplify the loses on the CCs.
Summary: If wanting to trade spreads, be very careful, start with single contracts 1-2 DTE, >10% OTM, and always be prepared for total loss of the spread value. Hope this helps.
Edit: Great explanation by
@Chenkers above. Thanks.
