As far as I know it works something like this: If I don't close the AAPL 600/595 Spread before the bell on Expiration Friday and AAPL closes at 599, the AAPL 600 Put I sold has closed ITM and my account is assigned 100 shares of AAPL at the strike price of $600. I don't need to have $60,000 in my account to buy the stock. It is immediately sold by my broker in the After Hours Market for 599 (or close to it) and the $100 loss (+ commissions) is deducted from my account. The broker also has the prerogative to Buy To Close my Spread before the bell, if they can't contact me. I'm assuming they do this if the stock isn't available to be sold in the After Hours Market. The 595 AAPL Put I bought as part of the Spread expires worthless if the closing price is 595 or higher. If the closing price is 594 my Long Put is automatically exercised and I'm then short 100 shares of AAPL, sold at 595, IF I have enough money in the account for the margin involved. If there isn't enough money to margin 100 short shares of AAPL, the broker liquidates the position instead, and gives me the profits for the 595 Put trade ($100). I assume the Options Clearing Corporation (OCC) gives the broker the $100 to give to me. Not totally clear on that last bit. Will ask thinkorswim about all this on Monday and let you know what they say. But there's no way an account could get wiped out because of the value of the underlying stock in a credit spread. No one would trade them if that were true. :eek:
I like the last line of your post. All stocks are correlated when it matters most. Unfortunately the reality is that trading is about capital. The less you have the harder it is to make more of it. If you want to take 20k to 200k then either get long some kind of convexity or make 15percent a year every year for 20 years.
I disagree. You can easily make 50%-80% on 200k if you have the right tools and the right knowledge. It's relatively easy to make very nice returns on small amount of capital, capacity constrained opportunities abound in the market. Of course, you also have to spend the required time to find these opportunities.
But not by being a consistent seller of vol. I agree with you about capacity constrained opportunities.
Sle, this is something you have repeated numerous times in your posts and you've even hinted to a few of these opportunities. IIRC you talked for example about dispersion on less liquid ETFs. Is this something you still like? Or any other ideas or hints you feel like sharing? Thanks. I am actually looking (i.e. not trading) at biotech ETFs/components mainly because it is an industry I have some deeper knowledge of, I am a novice in options trading.
While I agree it is possible to potentially earn those kinds of % returns via option strategies, shouldn't you also be discussing the "probability" of actually earning it as well? As well as the "probability" of ruining your account value in the process? There's a difference between earning 50 - 80% on the occasional trade you take a higher risk on than usual, or when you just happen to catch something at the exact best time.... vs attempting to earn that kind of % return on a regular basis, as an annual goal.
I have not looked at smaller ETF dispersion for a while, might still be there; Overall, the idea is to find small, illiquid stocks or ETFs that have options and try to see if there is any sort statistical opportunities there, I will send you a PM with a few examples. Smart thinking. Options on biotech stocks in general present good risk/reward to people who have good understanding of the business with some basic understanding of the risks and pricing. The two skill-sets rarely coexist in the same person and you might be able to find good ways to making money.
There is no "probability" to talk about here, I am not suggesting taking more market risk and competing for alpha with the big boys. Instead, I actually mean steadily producing these kinds of returns (with Sharpe of over 2) by locating statistical and mis-pricing opportunities. It does take a lot of work and some smart information processing, but for someone who only needs to deploy 200k it's a fairly reasonable task. PS. Remember, you asked me why am I running over 20 different strategies? Well, this way I am producing 30% returns on much bigger capital with Shrape of about 2.