hi guys, wanna talk credit spreads.. call me a dunce for not using them yet, but I always just found the naked put or call to work.. minus my learning experience of over leveraging when I first started.. some of my questions using credit spreads are: 1. can you get an advantage to using cost basis ( from what I know no 1256 contract can use wash sale, so I assume talking ES going in and out all year.. ) as one side is a buy, and if all just dwindles, obviously you lost that whole chunk of money.. am I thinking correct that that "lost" money get applied to cost basis your next buy again, or am I thinking that all wrong? can you capture any of that lost money for the buy side next trade or tax time? 2. is the general consensus to hold it till close, since the commissions increase dramatically if closing it out? 3. what tips and tricks do you use when entering a credit spread? 4. what is the "standard" strike difference you look for, is it based on strikes distance or risk or premium you collect when deciding how short or long you set the strike width? 5. one of the biggest ones I have is, how does increase of volatility affect the play? does the buy side mitigate the sell side if vol increases dramatically? wondering if you can get into a situation of margin trouble if volatility spikes like say a couple months ago. 6. is there strategy to selling off the buy side if say you feel confident the "play is over" and say you are running a put credit spread, to me looking at credit spreads is all that money lost to the buy side ( and yes its for risk control ) but is there methods for trying to capture some of it back at all? my problem viewing this is if selling off the buy side it would jump the margin up like what 25x over.. ??? 7. do you run credit spreads often or do you choose another play? I found I wouldn't like iron condors as I don't like call sides, their premium to me is too low without out adequate far out strike zones. 8. I don't understand if it goes against you how to exit the trade. I get it's strike zones minus premium collected, but what do you actually do in a bad play? do you buy back the sell side and then what with the buy side, can you explain the procedure of getting out of the bad trade. 9. wondering about tax implications of commissions. I asked about this in the tax section, but I know stocks get treated with cost basis, is there any way to reduce commissions load as I find it seems to be coming in around 13% of what Im just estimating which seems very high.. for example a 56,000 play would incur 7,000 in commissions. 10. Last, what's the best advice to tell someone going into a credit trade obviously going to run some of these on Monday. but I have so many open plays that I wouldn't be able to tell how it's affecting margin or anything with my portfolio, so appreciate all links, advice, facts, stories, opinions, better plays.. anything to help, as I guess to me this is WAY better then running naked options, bearing you can get fill rates on the strikes you want
Liquidate all positions. Spend some time with Russell Rhoads, Dan Sheridan, et. al. Ask later whether you should/shouldn't resume trading.
My reply to your post is inline below in blue. "IndyJonerJr, post: 4658771, member: 501711" hi guys, wanna talk credit spreads.. call me a dunce for not using them yet, but I always just found the naked put or call to work.. minus my learning experience of over leveraging when I first started.. Remember this lesson well and you will have become a better trader. Do not over leverage or fail to use proper money management at any time. By definition, your trading idea is not working if the market penetrates a support or resistance zone as appropiate for your trading horizon or some other defined criteria against your trade. some of my questions using credit spreads are: 1. can you get an advantage to using cost basis ( from what I know no 1256 contract can use wash sale, so I assume talking ES going in and out all year.. ) as one side is a buy, and if all just dwindles, obviously you lost that whole chunk of money.. am I thinking correct that that "lost" money get applied to cost basis your next buy again, or am I thinking that all wrong? can you capture any of that lost money for the buy side next trade or tax time? If I understand your question correctly, I believe the IRS has a "marked to market" rule to prevent someone from inappropriately deferring their income tax liability. Try IRS.gov or a investment tax professional for more information. 2. is the general consensus to hold it till close, since the commissions increase dramatically if closing it out? I will base my opinion on short term options with less than one week to two weeks until expiration: Due to the rapid theta decay in short term options, it is harder for an option price to breach resistance, a declining moving average, or exceed a set amount off it's recent low. Should whatever technical measure you use be "violated", close your position. When the technicals are favorable again, you can always reenter the position. 3. what tips and tricks do you use when entering a credit spread? As implied by previous statements. 4. what is the "standard" strike difference you look for, is it based on strikes distance or risk or premium you collect when deciding how short or long you set the strike width? For me, since I will be using technicals and money management, if I sell a simple naked option, it will be at the money. On a ratio spread, I will look for a debit amount of about 25% of my cost for the long option. On an overwrite situation, I will look for a credit spread that gives me a net delta of .10 to .50. On a short straddle, I will actually favor one side of the market using technical analysis and will quickly close the position out if the market starts to go against my "vulnerable" side. For example, let's say that XYZ is at $100 and the technicals are bullish. I might sell very short term option such as (1) $100 put and sell (2) $102 calls. My total premium recieved might be $2.00 and my stop might be $2.25 in this hypothetical example. 5. one of the biggest ones I have is, how does increase of volatility affect the play? does the buy side mitigate the sell side if vol increases dramatically? wondering if you can get into a situation of margin trouble if volatility spikes like say a couple months ago. Although the rapid theta decay in short term options may provide some protection against volatility spikes, one of the decisions that goes into position selection is your volatility outlook. If you get surprised by a volatility spike, you still need to use money management. Know what events on your calendar are likely to be significant and trade accordingly. 6. is there strategy to selling off the buy side if say you feel confident the "play is over" and say you are running a put credit spread, to me looking at credit spreads is all that money lost to the buy side ( and yes its for risk control ) but is there methods for trying to capture some of it back at all? my problem viewing this is if selling off the buy side it would jump the margin up like what 25x over.. ??? Ultimately, you will make more money with good trading and technical skills. For me, options trading is used for reducing my overall risk, reducing performance volatility, and maybe adding a small statistical edge to my profitability through theta decay. 7. do you run credit spreads often or do you choose another play? I found I wouldn't like iron condors as I don't like call sides, their premium to me is too low without out adequate far out strike zones. I only use options on VXX, SPY, and ES due to personal liquidity desires. 8. I don't understand if it goes against you how to exit the trade. I get it's strike zones minus premium collected, but what do you actually do in a bad play? do you buy back the sell side and then what with the buy side, can you explain the procedure of getting out of the bad trade. The beauty of some of the various option plays is the potential overall risk to reward. Again, after your trade has been violated technically, take your small loss before it becomes a big one. Yes it may re-reverse. You shouldn't really care about getting whipsawed. These small, irritating losses are a cost of doing business and keep you from getting "married" to a position that blows up your account. Right? 9. wondering about tax implications of commissions. I asked about this in the tax section, but I know stocks get treated with cost basis, is there any way to reduce commissions load as I find it seems to be coming in around 13% of what Im just estimating which seems very high.. for example a 56,000 play would incur 7,000 in commissions. Look at comparing brokerage fees, such as the ones on this site, as well as considering restructuring your trade. For example, get closer to being at the money and trading less options. 10. Last, what's the best advice to tell someone going into a credit trade Practice trading on a trading simulator until you have proven your trade selection, risk management, and profitability. Several of your questions were hard to understand because you did not seem to know some the critical option terminology, concepts, and appropiate trading strategies. obviously going to run some of these on Monday. but I have so many open plays that I wouldn't be able to tell how it's affecting margin or anything with my portfolio, so appreciate all links, advice, facts, stories, opinions, better plays.. anything to help, as I guess to me this is WAY better then running naked options, bearing you can get fill rates on the strikes you want Do not trade real money on Monday or after. You are not yet ready. Sooner of later you will lose your money with your current level of knowledge. Tommcginnis is an experienced and sucessful options trader. Heed his good advise in the post above and learn before you lose again. Best wishes in your development as a options trader.
Credit spreads work until they don't...and when they don't they blow up like a hurricane. Never commit more than 40% of your capital to the maximum spread loss and at least you will never blow up. It is more art than science.
thank you guys, watching that video already a question.. so he says max loss is really just margin requirement or ( width of spread minus credit ) looking at this ( pic included ), this does not match max loss unless I'm doing it wrong? should be : 20 ( spread width ) - 1.60 ( credit ) = 18.4 X 50 ( contract size ) = 920 margin maintenance or max loss? that correct?
18.4 or 1,840 per contract, X 50 = 92,000 max loss.... For a 20 wide spread you need to collect more than 1.60.
that can't be right muff?? a 92,000 risk... for $80 in premium ?????? credit spread is width of spread minus premium right ( 20 - 1.6 = 18.4 per contract, times 50 since it's ES = $920 risk. what am I missing here??? that sounds balanced to risk $920 to make $80 on a 20 wide doesn't it ??? by this calculation a person trading $1,000,000, could only do max 5 contracts????? so $480 to risk $500,000? who would ever do a credit spread if you risked tens of thousands per contract?? I am so confused
The reason the max loss is so high, but the credit received is so little is because you are selling the 2600 put for tomorrow’s expiry. The probability that these puts will be out of the money is greater than 99%. It is 20 dollars x 100 shares per contracts for a max risk of 2000 per contract. If you sell puts that are not as far out you will collect more premium. 50 contracts is a massive amount of leverage. If u want to collect that little premium, move closer in the money and close the width of the spread. It’ll reduce your prob of success but also minimize your risk and increase the credit received.
Because the probability of success is extremely high. Try this. Setup a put spread selling the 2750 and buying the 2740. You will see your credit received will be greater, with a max loss of only 5 dollars or 500 per contract. BUT your probability of success is less. Probably around 80 something %.