One final tidbit of info before I drop off for the night. There are 4 basic spreads. Bull Call Spread (debit), Bear Call Spread (credit), Bull Put Spread (credit), and Bear Put Spread (debit). If you compare a Bull Call Spread and a Bull Put Spread on a risk analysis graph they will look basically identical. Both make money if the underlying goes up and both lose money if the underlying goes down. Both have caps on both the max profit and the max loss. However what is not apparent is that the Bull Put Spread improves if Volatility DROPS and the Bull Call Spread improves if Volatility RISES. So if you think the market is going to go up and Volatility is already high which spread makes more sense to you? I hope you said "the Bull Put Spread". There are a lot more scenarios and plays to master so do NOT consider this a complete list, but here is a simplified example to demonstrate how to use market direction AND volatility to choose the best option play: Bull Call Spread (debit) - Use when you think market is going up and volatility is already very low and probably going up. Bull Put Spread (credit) - Use when you think market is going up and volatility is already very high and probably going down. Ratio Call Spread - Use when you think market is going up and volatility is close to the average or expected to remain near the same levels. Bear Put Spread (debit) - Use when you think market is going down and volatility is already very low and probably going up. Bear Call Spread (credit) - Use when you think market is going down and volatility is already very high and probably going down. Ratio Put Spread - Use when you think market is going down and volatility is close to the average or expected to remain near the same levels.
Thanks Maverickz! Appreciate your taking time to explain that. As for delta question I was under assumption when picking hedging calls or puts in a spread they should offset the short deltas . So if I was -50 opposing side should equal + 50. if so as delta changes as underlying does should I always be trying to keep the spread equal by buying more calls or puts to adjust delta.
Hey Purpleone, I understand how you must be feeling as I have been down that road with credit spreads and ICs. PM me and I will provide some information you should find useful
@PurpleOne; The only way to set your stop losses and take profit targets, is to backtest your system; tweaking the parameters and judging by yourself if you can stomach X drawdown or not. Backtesting gives you the vital confidence in your system so you don't exit too late/early or enter too late/early. Concerning the size of the trades here a very good paper: http://www.turtletrader.com/position_sizing.pdf
Thanks Teycir! I am going to read that now. Thanks for being down to earth and not beating up on me , I appreciate it.
The only time you want delta to be neutral is when making non-directional plays. Straddles, Strangles, etc. If you want to keep delta neutral then it is usually easier to buy/sell the underlying to modify your Delta, since you can buy/sell that in units of 1 instead of 100. Do a quick search on "Gamma Scalping" it sounds like that may be what you are trying to do. In any directional play I generally try to make sure I have a minimum Delta of +25 or more if I think the market is going up, or -25 if I think the market is going down. If you are wanting to profit from a directional market move then you need some amount of Delta.
This is just another Niederhoffer-like story of selling premium. It's GREAT till it bites you. That being said, at least you weren't naked, and that would explain why you still have an account. Funny as it seems, getting a menial job at this point just might be your best remedy. After 6 weeks of the "grind", you'll really want to come back to trading....and that over-confidence will then be gone. The over-confidence of early wins is what did you in. Almost happened to me as well. It's all part of the trading "experience". Good luck no matter what you decide to do.
All of this delta adjustment comes at a hefty price of commissions. And don't forget, you could really get whipsawed with this approach and have to adjust almost daily in a volatile market. This safety of course will penalize your profitability....and confirms the capital market theory of the tradeoff of risk vs. reward.
Oh I agree, the commissions can start adding up fast and you do really need to know what you are doing to work this in a volatile, whipsaw market. I am not really a scalper though. I tend to make the directional trades as I have mentioned in the other posts of this thread.