The Credit Spread - Closed Out

[tamo42]

So I was able to close out my credit spread trade that I opened on Monday today.  What happened was that the market fell away from the 1125 point and two days went by.

Options always have an portion of the price that is called time premium.  This means you are paying extra for amount of time you have before the option expires.

When the option gets close to expiration, the time premium decays rather quickly.  If you bought an option, its value decreases, and you are upset.  If you sold an option, its value decreases, and you are happy.  In a credit spread, I sold an option.  (I also bought an option, but it was much cheaper, so its decay is more than made up for by the more expensive option).

So, S&P declined to 1090, and two days out of five days total were used up.  I sold this position for $1.45 and was able to buy it back for $0.20.  That's a $1.25 profit.  The amount of money I needed to put the position on was equal to the maximum loss, which was $23.55.  So all in all, I ended up with a 5.3% profit in 2 days or 3.9% after including commissions - option commissions are relatively very expensive when you do low numbers of contracts.

So why not let it go to expiration and get that last 20 cents and not pay the second commission?  Easy, there's a Fed meeting going on, and whatever announcement they make can have a large impact on the market.  Given that I already had the vast majority of my profit, I decided not to risk an adverse non-market events.