Is there any strategy with the following characteristics if I want to bet that the underlying will not hit the strike before expiration? -Capped risk -Decent risk/reward -Margin for error Thanks!
stay away from expiration... you should read more before doing anything probably though.. and don't sell to far otm.. this works better in a falling volatility environment.. closer to option expiration you get the more gamma risk you take on...
I want to trade the weekly options by opening the trade at the beginning of the week and close it on Friday. The strike will be on the unrealistic side say 5-10% above the underlying with 3-4 days until expiration. I want to bet that the underlying won't go up fast enough to hit the strike given the very short time frame. Is short put spread the correct strategy for this?
You need to read a lot more... if its actually unrealistic for the underlying to go through the short strike then you won't get much of anything for selling it
Caveman is correct - your risk/reward ratio won't be favorable. I highly suggest paper trading this strategy before you commit real capital. Also, you mentioned upward movement of the underlying which implies that you may be selling OTM call spreads. The premiums for these weekly calls will likely be much lower than you expect, making it difficult to bring in enough credit to justify the risk. You might want to look at risk reversal with hedge for your short put. You would buy an ATM call, finance it with the sale of an OTM put and hedge the sold put by buying a further OTM put. Essentially you will sell a put spread and be long a call. These structures can be profitable even if the underlying doesn't move at all (due to the decay in the put spread you sold).
Can I ask why you are interested in doing weekly trades vs monthly? Is it because you think you can earn a higher % return at year end,... or because you think you have a higher probability of your trades being successful, or......???
Turkeyneck hasnt answered, But i am interested in the same topic. I am interested in weekly as well. I think i would have a higher probability on weekly, but as stated above there is almost not enough credit for it to be worth the trade. Do you have any insight? I am not an advanced options trader, obviously,lol EF
In theory, I like weeklies. The problem I have with weeklies is, "reality" interfears with the theory. In theory, just keep bouncing from trade to trade each week. In reality, it's not that easy finding trades that meet my criteria for financial health, price value, tech support, dollar and % return, and so on..... Thus most of my trades last 4 - 8 weeks. Speaking for myself, when I find a really good deal, I assume it will NOT remain at this fantastic price, offering this good credit, for too much longer. Thus, I want to take advantage of the opportunity while I can. And that means getting a nice dollar amount out of the deal. Not just % return. The % returns are always fantastic on those weekly trades, but they are 100% meaningless. Thus, i don't see the value of investing in a trade that took me a long time to find, for a puny dollar amount, and a meaningless % return. I do a lot of screening and analysis prior to actually selecting a stock to invest in. It's a lot of work finding "high probability trades". Thus, I'm not interested in earning a puny credit after all that work. Hence the reason my contract lengths are generally 4 - 8 weeks. In addition, if you do a weekly for a puny credit, and the stock drops on you, now you may be holding the stock for a while, without getting "paid to wait". HOWEVER, if you are not very picky about the stocks and prices you invest in, and can successfully bounce from trade to trade each week,.... then weeklies can be a very good deal. But if you find there are often lag periods between those trades, you will end the year earning a substancially LOWER % return at year end, then you assumed you were earning as the year progressed. And of course, all those extra commissions speak for themselves. Obviously my response is from the perspective of a put seller. Someone buying calls, may have a different outlook.
Thanks PutMaster.. i understood most everything you said and it makes sense. It doesnt make sense as you say to earn cents on a trade where there could be large money to be made elsewhere. I am going to sound like a complete ignaramous/caveman, but regarding options. I will admit i dont know much. You say bouncing from trade to trade. I am thinking this means closing out a position and opening new position within same strategy to extend the "life" of your trade, to let the market go your way. Could you please expand on what you mean by bouncing from "trade to trade"? thanks, EF