As almost every trader knows, the key to success in the options market is position management. Regardless of how well you forecast the trend or character of a specific issue, you can still lose money if you don't learn to take profits and limit losses in a timely manner. Unfortunately, this ability is one of the most difficult skills to master especially when dealing with limited-risk strategies such as options spreads because there is relatively little margin for error.
Theres no doubt that position selection and entry are necessary components of the trading process, yet learning how to initiate a closing (or adjustment) transaction is often the most critical requirement for achieving consistent profits. In addition, this essential skill is often the focal point of many of the questions received from new spread traders, thus it seems appropriate to review some of the common techniques for effectively managing combination positions. In today's narrative, well examine the call-credit (bear-call) spread and a unique strategy that can occasionally be used to prevent losses when unfavorable market activity occurs. Our discussion begins with an analysis of the risk-reward outlook in a call-credit spread using common strikes and option prices in a hypothetical position.