Would an example be like this? XYZ @ 100 short 9 at 110 call strike long 10 at 120 call strike or short 9 at 90 put strike long 10 at 80 put strike I'm fairly new to trading credit spreads (1 year) and stumbled along this idea somewhere and it appears to really reduce your maximum risk vs. the standard credit spread. In TOS, the p/l graph really shows it visually. If this is not what you're talking about then could you elaborate? Thanks for the help. BTW, Angeles City is the city of angeles. Was there once in my 20s....probably never again though.
You didn't mention selling naked puts. I assume it's because you feel it's too risky, or you have not received approval from your broker. As a "potentially safer" alternative to selling naked puts, may i suggest you consider adding a "buy/write" strategy to those you've listed above. A buy/write has the same advantages and benefits as selling naked puts, in that you get to select the strike, the otm safety cushion, the credit (debit), the annualized % return, the risk/reward, the probability of success, your break even price, and so on..... all before you initiate the trade. Just like selling a naked put. The reason I say it's a "potentially safer" alternative to selling a naked put, is because you can sell far more contracts via naked puts, than you actually have cash for, and you are not charged any margin interest. Thus, there is a HUGE "temptation" to over leverage when selling naked puts. With a buy/write strategy, you will be charged margin interest daily, on any borrowed cash you use for additional contracts. That tends to keep investors from over leveraging their accounts, as readily as they might selling naked puts. Thus, if you are not planning to go on margin, or if you do not have level 3 approval of your account to sell naked puts,.... then doing a buy/write has all the same benefits and advantages of selling naked puts, without the risky temptation to over leverage your account. If you are not familar with how to set it up, have your broker walk you through it the first few times, as there is a slight learning curve involved. And of course, ask you questions here as well.
Gotta love the weather there.. unless your in the Valley.. i'm always out in LA.. best friend lives there.. I actually trade his account..
this is what i've learned from reading all the market making books i could put my hands on.. which isn't all of them.. but i do have a conceptual idea of what market makers are always trying to do with their book... MM (market makers) provide a liquidity function to the market.. this entire thread is about the "choice" to a particular set of options or not.... some of the market makers are "REQUIRED" to post what they will sell an options for.. so they have stratgies to eliminate the risk associated with selling options. because in a credit spread. condor etc.. your actually net short options..... i've learned to forget the idea of Delta neutrality all together.. its a lie.. its an idea spawned in the world of Academia.... You'll never stay delta neutral..... The whole idea came about considering Constant volatility.. the volatility of volatility isn't constant or even mean reverting for that matter.. Yes there are some relative assumptions you "can" make but the mean to vol is truely flux.. yesterdays mean isn't todays mean.. just like homeboy said.. if you stay net short options and don't constantly manage your gamma delta and vega.. and thereof second order derivatives .. your gonna blow! and to answer the question about what are some stratiges.. Butterflys and wrangles ... Which is just a double sided ratio backspread.. The way otm options are to be bought NOT SOLD.. never ever sell pennies.. buy them.. ratio backspreads hedge your gamma... limit your risk provide small returns on small moves over time.. and BIG returns on market crashes.. Market makers try to configure a book such that they are at some point net long vol.. i don't know that much but i know that.. with a ratio backspreads... you are net long options.. and in a position to bank on tail events. its not that sexy to people cause you don't get a big check every week from being a net seller.. my understanding is if you can't make it through a market crash.. you'll never make it.. no matter how mcuh money you make.. it will be taken.. all these net short premium stratigies are good.. UNTILL THERE NOT.. emulate the probability distro of your stock.. Butterfly and wrangle it.. your short the vol for the small moves in a limited risk way.. with a great risk to reward ratio.. and long vol for the standard devation moves that we know literally almost NOTHING about..
putty man i love how you have made such a big stink out of this... your totally right on.. haha you determined to take it to no end.. gotta love your persistance.. you can ratio back spread on stocks you own.. and if you end up between the strikes at opex you can just take more stock if you so desire.. and if their is a blow up in the stock.. you get your money back.. and you can put these ratio back spread hedges on for barely any debit and sometimes get a credit on them.. just saying
OK, as I mentioned I trade RUT exclusively. Here's what I'm looking at for OCT. Looks like there are the strikes are slightly skewed against me so the credit is showing 4.62 after hours but could be better maybe closer to 4.80. Calls, -30 880, +50 900 Puts, -40 680, +50 660. This would be an easy fill. Then add a couple more 660 longs. Or, works good with a 10 point spread on the calls, just adjust the contract size.
what determines your ratio? you got a 3 to 5 on one.. and a 4 to 5 on the other with the intent to add more.. legging in i guess? just curious...
For the covered call sellers. I know its another popular strategy, buy/write but as you know this has the same risk as selling puts naked. This is another strategy that can wipe you out in a bear market. Think about what your risk is on the trade. If I traded this way and wanted stocks, I'd be buying deep in the money, far out, say 6 months to a year+ puts for protection and thereby limiting risk, THEN selling the out of the money front month calls. You could potentially be in a riskless trade if your timing is good and you dont' fall asleep. Thats another good way to stay in the game and prudent way to protect your stock portfolio and sleep soundly at night knowing that you are covered. Trading covered calls is for suckers anyway. Thats just reality.
Just an easy fill. Try to put it on your trade platform now to see what it looks like but this is a typical entry for me. Yes, I would add a couple more longs as mentioned on the puts. Add volitility and time to this trade. As also mentioned a 10 point spread can work better on the calls. Just the way the greeks work. Adjust contract size, but you get the picture.
yeah.. thats kind scalping front month against back month.. short put same as covered call ... married put same as long call.. etc.. etc.. i've thought about doing some back month long from month overwrites and delta hedge when needed with buy stops.. never heard anyone talk about that.. of course that short vol isn't a good strategy to have as a huge portion of your portfolio..