Debit Spreads and Vega

Discussion in 'Options' started by bigchair, Jul 17, 2012.

  1. bigchair


    I'm still learning options trading and have been doing Double Calendars for about a year now. I'm curious if there are debit spread stradegies that are negative vega positions?

    My reason is that I can't afford the margin requirements to place most credit spreads.



    P.S. - I'm new to the forum.
  2. <<< My reason is that I can't afford the margin requirements to place most credit spreads. >>>

    The cash requirement for a credit spread is the gap of the spread.
    If you have $5,000 you wish to risk on a credit spread of $15/$14, you can initiate 50 contracts.
    If your gap is $15/$12 you can initiate 16 contracts. ( Divide $5,000 by 3).

    Makes no difference if you are using a 3 point 10/7 gap or a 3 point 75/72 gap.
    You can initate 16 contracts on either one using your $5,000 in cash.

    HOWEVER, since your 16 contracts with a $75 strike will cost you $120,000 to buy, if it gets put to you between your strikes, chose your strikes carefully.... as well as how many contracts you use.
    Since you can't buy the stock with your $5,000, you will instead have to close the trade for a partial, or a huge, or a total loss of your $5,000... depending on whether you close it high, medium or low, between the strikes or below it.

    Credit spread may sound safer than selling naked puts (which have their own risks), but they can more easily wipe you out if you don't trade with the understanding that a sudden and severe drop can force you into a maximum loss situation.
    So keep that in mind when selecting strike prices.
    Not all 1 or 2 or 3 point strike gaps are equal, even if they require the same margin.
    Remember, if you don't have the cash to buy your stock if put to you, or if it drops below your 2 strikes, your loss will be a total wipe out. Even though your potential losses may be predictable and limited with a spread, the limit may be your entire bankroll.

    It takes very little cash to initiate a spread. But it could potentially costs hundreds of thousands or milions to manage,.... if they go bad.
    Since most investors don't have that kind of cash to manage a trade going bad, the result may be the loss of your entire bankroll put at risk for those trades.
  3. In the money debit spreads are short vega.

  4. i have found in many cases putting on credit spreads instead of just outright cash secured puts has reduced my credit related to my cash secured amount but enabled me to have the desicion later if the stock gets cut in have to not have to take the stock at such a loss
  5. Investors who are pure technical traders, who do not really know much about a companies fundamentals (cash flow statement, balance sheet, income statements, ratio comparisions for debt levels, margins,ect...) should absolutely do credit spreads instead of naked or cash secured puts.
    The reason being, if you don't know how solid a company is, you have no idea of its ability to "recover" after a drop.
    And all companies are potentially at risk of a drop at any time, and for any of many reasons.

    The only problem i have with credit spreads is, too many investors treat all 1 points spreads as equals. Same with all 2, 3, 4, and 5 point spreads.
    Since the margin requirement is the same for a $85/$80 spread, as it is for a 25/20 spread, someone with $12,000 to invest in that 5 point spread, must come up with $204,000 if he wishes to consider buying that $85 quality stock brought down temporarily by a bad market.
    Since he obviously can't, he has no choice, but to close the trade for a loss.... partial or total.

    I don't like the idea of not being able to ride out "temporary" down turns in a volatile market, if I feel I have a reasonably priced, good quality stock, whose contract expiration date just happens to line up poorly with a a bad week in the market.
    HOWEVER, the only thing worse than that, is going naked on a stock you really know nothing about fundamentally, and bought solely as a trend or technical trade.
    Those type traders should absolutely be investing with protection.
  6. i actually totally agree with you... if your going to sell a put cash secured .. you keep the cash ready.. if i don't potientially want the obligation to take the stock then i buy a lower striked option.. All within the premise of really wanting the stock, but not wanting to expose myself to Tail risk! less of a return if you consider the entire capital that you have kept on the side to take the stock.. playing with fire and instead using all the cash secured money to for margin on a 5 point spread near the money to make a quick 20 to 30 percent is a recipe for a blow out.. I sold some puts recently on the Vixy , now i'm wishing i would have bought protection! i could have totally been in a better position right now! hindsight is 20 20! so i'm gonna end up with the vixy at 27 or so at the end of the week with my basis being 32... not good!
  7. All great data... I have tried Covered Calls and Naked Puts.... as I do not have lots of time to do the detailed analysis to provide myself with an educated estimate of where a specific equity is going, I have settled on OTM Credit Spreads.... My trigger is a low delta on a basket (IWM, RUT or IDX). Trying to get a fundamental understanding of where the market is headed and play Credit Spreads going the opposite way.

    Been doing fine so far (knock on wood), but watch closely and ready to protect my position if the market moves against me.

    Never play more then 45 days in the future... in today's market things can reverse very quickly.

  8. the STocks and Commidites had an interesting article writen about credit spreads.. it was all about Iron Condors.. which is at least some what similiar to what yoru doing.. it talked in detail about how and when to roll positions down.. which i've put on alot of credit spreads.. never rolled them down though.. The Queen of Condors was rolling down the spread when it became a certain delta and putting up 1.5 times the amount to gain 80 percent of the original spread allowing for up to three rolls.. and it was done on the RUT