Put_Master
Registered: May 2009
Posts: 1029 |
08-06-12 06:11 AM
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Quote from cdcaveman:
what do you mean? what are you talking about.... are you saying that a 5 wide striked spread on a 15 dollar stock has different risk then on a 50 dollar stock?
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Yes.
Assume two $100,000 accounts. All the cash in both accounts is invested in bullish put spreads.
One is all $15 5 point spreads, and the other is all $50 5 point spreads.
Thus, they both contain 200 contracts.
Assume they are both 5 week contracts, and they are both equally 15% OTM on initiation.
There is a bad market. Two weeks later they are both just barely 1% below their upper strike.
The $50 account will cost you one million dollars to buy the stocks, if it closes between the 2 strikes.
The $15 account will cost you $300,000 to buy the stocks if it closes between the strikes.
Both $100,000 accounts which used only cash to secure the spreads, put vastly different amounts of cash at risk, if you wanted the CHOICE of buying some of the stocks if put to you, in the hope of a temporary market drop and eventual recovery.
Don't you agree it's nice to have CHOICES vs panic selling (closing) for a massive loss, when the market gets a bit volatile?
In the $15 account you could consider waiting to see if the stock might recover by the time the contract expired. As buying most of the shares is not out of the question. There is no need to panic sell.
In the $50 (million dollar) account, you risk a devastating "wipe out" of your account, if you don't close your spreads for a loss immediately.
There is no potential plan "B" for the $50 spread account.
Both accounts started out "the same" in terms of $100,000 cash, spread gap, % OTM, # of contracts, ect.....
But your ability to manage them "the same" during diifficult times, could not be more different.
That is my point.
Option trading is not just about option strategies. It's also about "money management", risk management, stress management, and planning ahead for difficult times BEFORE they arrive.
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