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falconview
Registered: Jun 2010
Posts: 1465 |
07-26-12 12:52 AM
The debit spread premiums stay the same, no matter how many months out you go.
I was pricing the premiums on debit spreads, which I'm experimenting with and learning in TOS paper money. I found something interesting. The premium you debit is the same, whether you use 1st, 2nd, or 3rd month out options. Giving you more time. One guy was telling me he trades using 9 month out options. The premiums to buy and sell increase in price, but the spread stays the same. No matter the month. Just something I learned accidentally here.
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falconview
Registered: Jun 2010
Posts: 1465 |
08-16-12 01:13 AM
Agreed!
But a straight buy is subject to time decay losses. So people spread, so they can sit it out, if their guess is wrong. Removing some of the profit but also some of the risk.
I can't remember now, but vaguely recollect that in a method of letting profits run, and cutting losses short, it takes about 7 profitable trades to make up for one losing trading.
Many trading strategies are best suited to special kinds of markets. Like directionless, or congestion. Or trending.
Congestion, or low VIX markets are probably best with spreads, as otherwise, the time decay is faster than any subsequent trend profit.
Overall I'm a loser, so don't take my ideas as gospel. I'm still not steadily profitable. Been unable to do so, except in credit spread trading. Unfortunately a BLACK SWAN event eventually wipes out your account with that accumulative method. And to trade it smaller scale is not very profitable versus the risk.
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Trader13
Registered: Jul 2004
Posts: 179 |
08-16-12 02:36 AM
Some sage traders on ET have made the point that to be successful you have to be able to predict direction or volatility. Once you can do that, then step 2 is choosing an options strategy with a risk/reward profile that suits you.
So step 1 is getting a handle on direction or volatility. While I don't have any advice to offer on how to do this, I do believe this is the logical progression for how to become a successful trader. This means that jumping to step 2 with discussion of various options strategies is not going to get you anywhere until you solve step 1.
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falconview
Registered: Jun 2010
Posts: 1465 |
08-18-12 03:44 PM
Well I lost on my CALENDAR experiment. So, don't trade calendars ( grin )
Having spent the last few months dancing around stocks, earnings reports, indexes and such. I think I'm going to revert back to indexes.
I'm not sure of the relationship between the QQQ and IWM, but they trade roughly the same in lockstep fashion. What I'm noticing IWM trades bigger swings, which would make a debit spread pay, when in the equivalent QQQ, it would not necessarily be so.
Further experimenting with debit spreads reveals the following, when doing them in the IWM index. ( ETF ) The debit spread makes a $100. Of that you have your debit you incur, when you set it up. Plus factoring in the commissions it comes out like a possible .30 cent profit if you clear the complete spread. I'm thinking of not entering a debit spread that costs no more than .50 cents. With .20 cent commissions in TOS, that means .70 cents of your possible $1.00 is used up. So you are left with .30 cents.
Just finished going over my past week experimental trades. In the IWM it would cost you $500 debit at .50 cents, plus $200 commissions using ten contracts, using TOS. Of this if your direction is right you will make a net profit of $300. If your debit spread fails to work, you will lose your debit plus commissions. Which is $700. So your possible maximum profit is 42% on a trade, or $300 using ten contracts. In other words it is going to take 2.34 profitable trades to cover each losing trade. Remember your debit spread limits your loss as well as the profit. It's all based on getting the direction right. I thought I was pretty good at direction, but apparently not, if the last two months of experimenting are any indication. I found that the market had a tendency to not cover the spread strikes when you put it on, after getting a directional signal. You need a win loss ratio of 4 profits to one loss, to come out ahead.
That said; I'm giving up on playing around with various spreads and different strategies. At least for now. I'm going to concentrate on PATTERN TRADING. This is the only thing that has really worked consistantly for me. Unfortunately my account ( what is left ) is too small to allow me to day trade. I guess will give it a try and see if I can get enough strike movement, in an overnight trade. You only get two trades if you day trade, per week. Back to pattern trading, which I've previously done in the OEX and the QQQ. I'm going to try the IWM because it swings a bit wider in movement. Perhaps it will cover the debit spread strike width?
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