The reason he is arguing so vehemently is because we've ALL been there! The notion of gimmick trades that bring in free money - until you get destroyed and realize wait a sec, perhaps getting into trades where I risk 20 to make 1 is a phenomenally bad trade regardless of how likely it is to happen. It could happen 20 times in a row and its still a horrible trade. Stop doing "x always happens" or "there's no way y will happen" trades that when x doesn't bappen or y does you're screwed. ALLOW YOURSELF TO BE WRONG AND WALK AWAY! Too many naive option sellers believe they don't have to be right on anything and the magic theta fairy will take care of everything. They eventually get carried out because they put on these ungodly large "juice from a stone" positions that they have no ability to hedge when a strong adverse move is made or vega shits on their face.
ok, so from what i take your saying is that OTM credit trades arent good because the risk rewars isnt worth it. or are you saying that credit trades should be used doing spreads, to limit loss.
Just out of boredom I ventured over to one of the other trading sites a few weeks back, the week of the 8/24 collapse...there was one guy who was consistently doing the aforementioned trades and in big size...he had attracted a few followers who followed accordingly...some big money involved too (I believed it, since the positions were large and they truly believed that a big down move was not possible)...anyway, we all know what those options values looked like the morning of 8/24..I was on here relaying some of what I saw in the futs options that Sunday night...now add in the fact that they were likely selling these spreads at least 4-5 days prior to that plunge and it was a catastrophe... Like yourself and everyone else I did those credit spread trades maybe 17-18 years ago, back when it was a bit slower of a market and the order entry systems were archaic...I did luck out in a big way once in Oct 98 when I closed out the short portion of a large call spread and kept the long calls open (probably didn't get filled at my price the day before), anyway Greenspan cut rates the day prior to an OpEx when LTCM was going tits up...those calls (OEX) went from maybe 0.50 to 12-15 bucks or something...just dumb luck that kept me going with such an asinine strategy...
The only issue I have with the OP's SPY position is that you only have till 4:00pm to exit (maybe 4:15pm with some brokers), but the holder of the option can decided to exercise if the underlying moves in his favor during AH. As it did in the OP's case. To make matters worse the SPY moved only enough to put the short leg ITM while the long leg remained OTM, rendering the insurance useless. So now instead of having an expired position on Friday you are now short 100 SPY shares going into Monday. Long story short - You don't want a credit spread expiring in between the strikes. Give yourself some time to exit if it's close to ITM.
lol to your expected value calc. As though the pricing will be different if you enter the inputs in some website options calculator. I'd love to see the math. No, ignore the valuation -- assume, rightfully, that the implied vol is accurate for the strikes you are trading. I have yet to bring them up (greeks) in this thread. You're ignoring everything that I've stated and are explicit in arguing terms not presented. You stated, "not much can happen on Friday from entry to the close!" I stated, "that's not the risk!" OK, so continue to ignore the actual RISK out of the persistent cognitive dissonance that you alone can make this turd-stupid penny-strategy work. It works for you because you're comfortable with it. The mkt says no f*cks given to what you're comfortable trading. No, the buffer is similarly retarded. Make the buffer out 10-strikes. You'll be shorting at cab, but wtf do you care, you're comfortable. I'd rather be short premium because sometimes you can win even if you're wrong. Thanks, that sums it up beautifully. It's number three in the 8-step program. You want the opportunity to trade OTM (worthless!1) options at an edge? Buy the ATM bear fly. Buy an upside call against the bear fly. Wash, rinse, repeat. I will post a r/t example to this thread and we can revisit it along the way to LTD.
Here is something for the end of month Sep SPY series (Sep5). It goes off next Wednesday. Long the 121 put fly neutral to 192. Long the Sep5 195C. The trade drifts to what is essentially a long 195/202 guts strangle as we approach expiration *and* 195 on price. *So* the gamma risk is reduced as we approach the 195 strike, and beyond. Downside is clear from the stress. White-line is this coming Monday; BE at 19% vol at 190 SPY. Red-line is expiration; BE at 189 at null-vol. I had some SPY so I blocked-out my existing position in my IRA. You can buy (now) a Sep5 187P for $0.49 offered to fix the asymmetry of the PNL. Sum the vol to arrive at your vol-edge. The edge is in the fact that you're paying 0.12 for the 182P, so the vol-line is meaningless. You're isolating a bit of edge on the 192P that you're short at 19-line vs. the 202P that you're long from the 12-line (see Derman/sticky delta for an explanation of the vol-gains as SPY rallies). Sum the vols and express as premium. You'll be happy to read that I am done here; save for one follow-up comment that is relevant to the trade mentioned in this post.
no... we agreed that the risk is being assigned and that over the weekend a large move can happen, resulting in a loss.