Exiting A Short Spread Trade on the QQQQ | Options Portfolio Management

Follow us:

Twitter

RSS

Facebook

Exiting A Short Spread Trade on the QQQQ

Exiting a trade is often glanced over in most trader education. That is largely because exits are the stickiest part of the trading process and they are usually the most emotionally disruptive part of the trade. That may sound dramatic but investors have an irrational instinct to hold onto things they own. Being willing to exit a trade at the right time is often the difference between good traders and those that will not succeed in the market. The good news is that exiting a trade is as easy as getting in once you know how. Planning for those potential exits in advance can also head off a lot of trader anxiety.

In this section of the vertical spreads lessons, I will start walking through the options available for exiting a spread. We are concerned about exits in both profitable and unprofitable trades and typically you have two choices in each case; you can exit sometime before expiration, or you can get out after expiration. In this section we will look at exiting a profitable short vertical spread.

Exiting Early:
In the example of a short put spread on the QQQQ I was anticipating a bump up in prices. That has now happened and I may want to consider an early exit before expiration. If you need to review that example you can find it here. There are no restrictions for exiting a spread early and in the case of a short vertical spread, if the market has moved the direction I expected, I should be able to buy it back for a much lower price than I sold it for. In the video I will show you how that works with a current chain sheet.

Exiting at Expiration:
Alternatively to exiting early, if the index closes at expiration above the short strike price (in this trade that was $45) there is no required action. Both puts will expire worthless and since I was the spread seller I will walk away with the entire premium I was paid originally.

What are your questions about exiting a spread trade? Let us know in the forums.