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Originally Posted by dixonge
I'll leave it to the market makers to arbitrage those things, I just put in a limit order for a price that meets my minimal demands and let the order fill as the prices move toward my position. I've gone 2-3 days working on that price before,...
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I also do that often - but it is separate from what determines that price, which is the market's measure of the risk/reward of the position.
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Let me propose a theoretical trade scenario. For me to sell a July 780/790 bull put credit spread someone somewhere else has to be willing to *buy* a 780/790 put debit spread. (I think I have that right).
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I'm not exactly certain of the mechanics of how it gets filled on the floor, but I always assumed they just fill your sale of the 790 put and your buy of the 780 put. So they just need to match each leg up with a buyer and a seller - not specifically another person looking for that complimentary spread (which I think would be a Bear Put Debit Spread, but I'd have to check).
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However, long before expiration day the other side could sell for a profit. Say they bought when the S&P was at 920 and it falls to 850. They sell, take their profit. In the meantime the S&P levels out and my spread expires worthless with the S&P at 840. I keep my credit, the other side keeps their profit. The market makers and brokers keep their money. I don't see where this requires a winner vs. a loser or a pro trader vs. a sucker.
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You are mixing things up here. If the other side closed their complimentary spread position at a profit before expiration, then you need to compare them to a credit spread position that was opened/closed at the same time, and that would be closed at a loss - netting zero (disregarding spread/comm/fees). The position you hold to expiration can only be compared to it's complimentary spread held to expiration. If you had a gain, they had a loss.
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This reminds me of when I first started exploring options. Most of the textbook explanations seem to assume that one will always hold an option to expiration....
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Sure, the books usually deal with expiration to make it clear how these things work. You can close earlier to lock in a profit or limit a loss, but.... at that point you are guessing on the future moves of the market. Locking in a gain means giving up some of the total gain you might have if held to expiry (but relieving you of further risk of loss). Limiting a loss means you give up on the chance that the position returns to profitability at expiration, which it might do.
It becomes market timing - good luck!
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FYI, I'm quite enjoying this discussion btw. If I can't somewhat defend my strategy in the public forum I'd have no business doing it, right?
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That's the same reason I'm engaging in it from my end. It's been a while since I talked myself through these - good to challenge my thinking and make sure I don't get stale!
-ERD50
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