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There’s a risk in credit spreads that most traders never think about until it happens to them, and I call it “no parking on the dance floor.”
What that means is simple — you don’t want the stock to settle between your two strike prices at expiration, because that’s the worst possible outcome for a credit spread.
You take a loss on the short option without being able to use your long option for protection, and it gets ugly fast. The good news is it’s completely avoidable if you structure and manage the trade correctly from the start.
This is exactly why I prefer $2.50 strike differences over $10-wide spreads, even though wider spreads let you capture more premium. The appeal is obvious — bigger spread, fatter credit — but with a $10 spread, the parking zone is much larger and the capital at risk jumps significantly from $250 to $1,000.
My ideal would actually be $1 strike differences, because there’s virtually no room between them, which almost eliminates the parking risk entirely and keeps the trade far more controlled.
How the Math Actually Works
Let’s say hypothetically that you sell the $335 call on a stock and buy the $337.50 call. If the stock blows through both strikes, you’ll get called out at $335 — but here’s the key: You also have the right to call someone else out at $337.50, so the most you can lose is the difference of $2.50.
That defined risk is what gives you flexibility. If the stock starts ripping and looks like it’s going to push well above $337.50, you can buy back the $335 call, take a manageable loss, and let the $337.50 continue working as the stock climbs.
Now compare that to a naked call. If you sold at $335 and the stock runs to $360, you may have to buy it back at $360 — and that’s the kind of move that can turn into a blowup scenario quickly.
With the spread, your maximum loss is always capped, and you maintain control over how and when to unwind.
When I Start Thinking About the Exit
Here’s my rule: If the stock gets up to around $331 or $332 when I’m short the $335, I start looking to unwind — maybe half the position first. The only way you get stuck in the parking zone is if you let it happen by not managing the trade.
Maybe you collected $0.25 on the spread, and by the time the stock reaches $333, you unwind and give back $0.20. You still made money, but more importantly, you avoided the scenario that can cause real damage.
Market conditions also play a role in how aggressively I manage positions. Some days offer unusually large credits early, while other days the move is strong enough that getting out sooner makes more sense, and adapting to that flow is part of what makes this approach work consistently.
At the end of the day, this isn’t theory — it’s what I do every week. When people ask which trade is best, the answer is almost always the same: manage your risk first, and the profits take care of themselves.
That’s the trade-off — premium versus protection. Tighter spreads give you better control even if they generate less per contract, and I’ll take that trade every time, because staying in the game matters more than squeezing every last $0.05 out of a position.
Trade well,
Jack Carter
Jack Carter Trading
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*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk.
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