On January 17 I closed the January 31 SPX 4800/4700 put spread for $4.20 per spread. I had opened it on December 19 for $7.00 when the market sold off sharply after the FOMC meeting. The position returned $2.80 per spread, or 60% of the maximum potential profit of $4.70.
Why exit at 60% and not hold to expiration for the full $4.70? Two reasons. First, this is a personal rule I apply to all defined-risk spreads: once I have 60% of maximum profit with more than 10 days to expiration, I close. The remaining $0.50 per spread is not worth the gamma risk as we approach expiry — a sudden gap down can turn a winning trade into a loss in hours. Second, the options market was pricing in roughly 1% daily moves going into earnings season. I did not want that exposure.
The position was sized at 10 spreads, so the net gain was $2,800 before commissions. Not life-changing, but it represents a consistent application of the strategy I use to generate income during periods when I expect the market to trade sideways or higher. Next entry: I am looking at a February 5100/5000 put spread if SPX rallies another 1–1.5% and implied volatility drops into the 14–15 range.