Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we're going to answer the question, “How to manage options spreads?” The root of this question in managing options spreads comes from the assumption that in order to be profitable trading, we need to be very active or super active in managing options spreads, either managing potential profitable positions or on the other hand, managing potential losing positions. I take maybe an alternative approach to managing spreads in that if you are trading a spread option strategy which would include credit spreads, iron butterflies, iron condors, etcetera, you are defining your risk on that trade by the width of the spreads that you’re trading. When you enter a credit spread or an iron condor trade, you can define how wide that options spread trade is going to be and therefore, you are defining whether you know it or not, the amount of risk that you are willing to take on that position.
Now, since we know from our research and back-testing data that using stop-loss orders is never the best strategy overall, we are definitely fans of letting options spreads go all the way to expiration unless they hit our profit targets first. If a potential spread trade hits our profit target, say at 25% or 50% of the credit received, then we will take off the trade, but if it does not hit that profit target, we are fans of letting the trade go all the way to expiration. Yes, that means no stop-loss for the trading that we’re doing because we know research wise and back-testing wise, this ends up generating higher expected returns than using a stop-loss order. While many people want to manage option spreads by using stops and by using orders that would potentially limit risk or so-called risk in the position, we have found that managing spreads actually is much more of a game of patience and letting the position run all the way to expiration unless it hits its profit target first. Hopefully this helps out. As always, if you have any questions, let me know and until next time. happy trading.