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Hi folks, This is somewhat related to my previous post. My bear call spread is ITM now (RUT 855/865). I adjusted it by rolling it to the next strike (closed 855/865, opened 875/890). But I was wondering if this could be approached differently. This seems too good to be true, so I'm wondering if I'm missing something. I could have done nothing for now, and if on October 18 (when my spread expires) RUT is still above $865, I could just roll to the SAME strike prices for the NEXT MONTH, for even more credit. And keep doing it forever, until RUT is below my short leg and it can be closed for profit or expires worthless. This seems too good to be true, but here's my logic: Since today's price (or any price higher) is way above EMA(20), EMA(50) and EMA(200), it is expected for the price to come down eventually, as it always touch these 3 points from time to time. Of course these indicators would move up, but a lot slower than the price itself. So I could roll the same strike price (855/865) forever, to a point (worse case scenario) that I would get $1,000+ credit (some more for time value) and pay $1,000 to cover it again (if it becomes well ITM). But since the market never goes up straight forever, and it must touch EMA(50) and EMA(200) eventually, then this RUT spread would eventually come down to less than $855 in this case, and in long term, since we're approaching new highs, eventually expire worthless for full profit. I mean, as long as EMA(50) and EMA(200) are below my short leg, there are good chances that the RUT price will come back to it (to close for profit), or simply expire worthless, to digest the recent climbing. So in theory, there would be no loss adjusting the legs (use same strike price for following month), and eventually they could always be closed for less than the original credit received. This would apply specifically to indexes like RUT, which is low volatile and can never be assigned before expiration. Thoughts on what I'm missing here? Seems to be almost no risk of loss provided we keep rolling it this way? Thanks! Rod

I commonly buy DITM, long dated calls on stocks that I think will be rising for some reason. I don't think they are less risky at all, since (as you say) you have theta to contend with, they are time limited (so you have to be right, at the right time), and their are affectively leveraged (their % gain or loss is greater than the underlying). I guess the reason some think they are less risky is that they are cheaper than buying the stock, but I think that is a dangerous misunderstanding of options. But if you address the risk by using appropriately smaller position sizes, then buying DITM calls allows you to diversify more by having positions in more stocks. And you can still sell covered calls against them, as I typicaly do. BTW, my typical DITM call is 6-12 months out, with a delta of about .90 and I plan to sell them with at least 2 months until expiration.

First of all, I don't accept the concept of "rolling". What you do is closing one position (for a loss) and opening a new one. A loss is a loss, no matter how you call it. The question is: do you want to own the new position or you roll just to salvage the losing trade? Now for your question. As tradervic mentioned, the ITM spread cannot be rolled for a credit. The reason is simple. If RUT is at 855, the 850/855 spread will be worth a full $5 at expiration. As you go further from expiration, if will be worth less and less. If you think about it, it makes sense: further you go out in time, more time value those spreads have. So October spread will be always worth less than September. So you roll for a debit, and what if the index continues higher? You will have to roll again for a debit, this time probably larger debit since you are deep ITM. Sure at some point it will reverse, but meanwhile you might already have a very significant loss.

There was a great table in some Investools training (I shouldn't put it up, since it's copyrighted) but the first table at http://www.optionmon...ions_basics.php is similar to it, discussing right and obligations, depending on your position (buyer/seller) and put vs. call. If you sell a naked put, your max loss is capped at the (strike price * 100) - premium received. So, if you sold a put at a 100 strike, and received $500 premium, and the stock fell to $0, if you hold it until expiration and it expires ITM, you're going to be assigned 100 shares at $100/share, so you're going to pay $10,000 for stock that's worth $0. But, you did receive the $500 premium, so you lost $9,500. If you sell a naked call, your max loss is potentially infinite. Let's say you sell a naked call on a stock at $100 strike. Since it's naked call, you don't have any to cover it. If the stock hits $1000 and you're assigned, well, you've got to buy shares on the open market at $1000/share to give to the other guy but only be paid $100/share. If you use Thinkorswim, in the options buy/sell confirmation dialog, it'll tell you your max loss and max profit for most options trades. There are some types where it won't but for selling or buying calls or puts, it will. I'm an options amateur too, and I'm not scared of selling way OTM naked puts on stocks that I wouldn't mind owning that are no more than ~50 days way from expiration. I've made a decent amount of $ (but use up a LOT of buying power) and have almost never lost $. One MUST be careful about earnings though. I almost never ever sell naked puts that expire after earnings. I just don't enter the trade and wait for earnings to pass. I have never sold any naked calls yet. I'm scared by that. Back to assignment, another consideration for some (depending on brokerage and position size) is the assignment/exercise fee, if any. For TD AM/TOS, on small positions, being assigned can suck. See http://steadyoptions...ade/#entry6183. It's best to contact your brokerage to understand what will happen when assigned, esp. if multiple legs expire ITM.