Bear Call spreads

Discussion in 'Options' started by ecasene, Jan 28, 2010.

  1. ecasene


    Can you do option spreads in FX or is it just an equities strategy?
  2. MTE


    You can do it with options on any underlying, not just equity options.
  3. Options in Forex are a terrible deal.

    The spreads that will make you anything have strikes way too close to the money for it to be worth the risk presented by the volatility associated with forex...

    Not sure if you've traded forex before but you can trade a .10 lot size at the lowest which is $1 per point. Forex easily moves 50 - 400 points a day. (a light day is usually 40 - 50 points)

    My experience with forex options is that they offer you a poor premium for a strike in the range of 125 - 175 points away from the current value. Anything beyond 175 points away and you will make no money at all.

    Seeing as all currencies are correlated in one way or another, you have many major news announcements for all the major currencies that occur each month, all effecting each other. Top 10 - 20 major market moving news events ontop of you forex option spread 150 points away from the current market value and your asking for disaster.

    Luckily I never ventured into this with real money. I don't see how anyone can make more with forex option spreads than option spreads in the stock market.

    Forex is great for long term investments or commodity hedging but options, let alone spreads are an absolute joke with forex.
  4. Neutral


    Does it mean you can then simply buy the spreads instead of selling them, and be profitable on average in the long run? Or is it more a case of market-makers eating up any of the potential profits either way (i.e. wide bid-ask spreads)? For an options novice like me, it seems that if one side of the trade is a terrible deal, the other side must be a fantastic deal, unless the "house" (i.e. the market maker) takes so much that everyone but the house loses. This is more a question than a comment. I am trying to build up my intuition about the subject. Thanks.

  5. TATA


    The bear call spread option trading strategy is employed when the options trader thinks that the price of the underlying asset will go down moderately in the near term. The bear call spread option strategy is also known as the bear call credit spread as a credit is received upon entering the trade. It is entered by buying call options of a certain strike price and selling the same number of call options of lower strike price (in the money) on the same underlying security with the same expiration month. The maximum profit to be gained using this strategy is equal to the difference between the price paid for the long option and the amount collected on the short option.

    For example, let's assume that a stock is trading at $50. An option investor has purchased one call option with a strike price of $55 for a premium of $1.00 and sold one call option with a strike price of $50 for a premium of $3. If the price of the underlying asset closes below $50 upon expiration, then the investor collects $200 (($3 - $1) * 100 shares/contract). :)
  6. Neutral


    Thanks for the explanation. I wasn't concerned about the definition of bear call spread though. I was just wondering if it is necessarily true that, if a strategy is terrible over the long run, then does it follow that taking the other side of such a strategy is a good idea? It seems to me, as a novice, it must be unless the middle-man is taking all the meat. I would like to know if this line of thinking is naive. I am curious both about the specific spread mentioned in the thread, as well as a general idea.
  7. I’m not sure what you mean by the other side. Market maker filling your order? Or selling versus buying the spread?
    Anyway, if you will trade spreads on highly liquid options on equities then the bid-ask spread shouldn’t be that much of a concern at this stage of your learning curve. The spreads are fairly tight.

    Now, if you’re referring to doing credit spreads versus debit spreads, that is selling the spread vs buying it, then they are synthetically equal. Once you get more advanced then you can do calculations to determine which spread is better spread. For example instead of buying deep ITM debit spread with wide bid-ask you can sell OTM credit spread with tight bid-ask, and you’ll end up with the same risk profile. There are some nuances, but at this stage just remember that they’re synthetically equivalent. One way to speed up your learning curve is to learn synthetics because once you do, then you can view your strategy from number of different perspectives, and you can then play different scenarios in your head and you’ll be able to adjust/roll or get in/out positions for less money.

    Don’t worry about the middle man right now, the spread of the middle man can be reduced by using OTM options, but at this stage don’t lose your sleep over it, stick to the very liquid option and focus on understanding how to best use options as multidimensional instruments rather than on focusing on how to execute trade with minimal slippage.
  8. Neutral


    Thanks for taking the time. I appreciate it. By "taking the other side" , I mean doing the opposite of the credit spread. For example, instead of placing a bear call spread, placing a bull call spread. I think that involves switching what's sold and what's bought, right? Or whatever the "proper" opposite of the strategy is. I am assuming that an "opposite" strategy exists. If it doesn't, that's also interesting to know. What I would like to know is the following: if an experienced trader says something like "bear call spreads in the XYZ market is a terrible idea, the risk is not worth it", does it mean the reverse of that is a good idea? And if not, why not, given that options are supposed to be a zero-sum game (I think)? I hope my question(s) are clear enough. I have a thing for parentheses. :p
  9. Neutral


    Let me elaborate why I posted on this thread after all. When Insurinator wrote "My experience with forex options is that they offer you a poor premium for a strike in the range of 125 - 175 points away from the current value. Anything beyond 175 points away and you will make no money at all.", I thought, "well, if options premiums are too low for the typical moves in practice, then buying those same options should be a great deal". Again, my question is, assuming Insurinator is correct, is my line of thinking flawed? And if so, why? Knowing those answers will help me (and presumably other novices) build some intuition about the general principles. I know options can be tricky, so I am hoping the experienced hands can shed some light.

    Thinking a bit more, perhaps Insurinator meant that no money can be made AND lost. In other words maybe FX options market is too efficient to reliably make (or lose) money with sensible strategies that work elsewhere. I assume that in a perfectly efficient options market nobody but the market maker and the broker can earn money from options.
    #10     Feb 12, 2010