Debit Spreads (NO margin required)

Discussion in 'Options' started by increasenow, Dec 19, 2009.

  1. been reading that debit spreads do NOT require there any really money to be made with these trades?

    Example of debit spread:

    buy 10 QQQQ calls @ 50 strike

    sell 10 QQQQ calls @ 55 strike

    anyone do this NO margin required options trading?
  2. That is true in this example but it is far from true in general. There are many debit strategies that require margin. Its in regard to the maximum potential loss.

    Example of potential debit strategies that requires margin:

    risk/reversal or synthetic short
  3. Tom1am


    You can make 5 bucks from that trade. Your risk is the net premium

    If you get direction and time right you can make money.

    IMHO there is a better risk reward than a credit spread, based on max risk/reward fo ATM or OTm spreads. If volatility and time decay are high, credit spreads may me the waay to go. If volatility and time decay are low, debit spreads may be the way to go. If the underlying is flat, credit spreads may me the way to go

    Impact of theta and vega are different than credit spreads (opposite), the spreador has to account for these in addition to direction.
  4. donnap


    Generally, every vertical debit spread has an equivalent vertical credit spread. There are some exceptions where the equivalency may get skewed a bit, such as in hard to borrow stocks.

    The credit spread for the example would be long QQQQ 50P short QQQQ 55P

    OP, vertical debit and credit spreads are commonly traded and I will trade whichever one that seems most suitable to my needs, regardless of margin considerations.
  5. Debit spreads can sometimes present a confusing situation where the UL moves the way you want it to go, but the spread movement lags, and again you have another reason to curse the greeks.
  6. A more precise statement would be debit verticals do not require margin. The are some other kinds of debit spreads that do require margin.
  7. is there anyway to make real cash weekly or monthly trading spreads with small $5k account or under?
  8. I'm sure you know that you can make 5 less the debit cost but given it's a newb question, thought Id clarify.

    Exceppting mispricings due to hard to borrow stocks (as donna mentioned), volatility and underlying flatness make mean nothing. Interest rates too. IV will change the premiums but it will not make the eith spread any more or less attractive. What one gains, the other gains. or vice versa
  9. Yeh, trade stocks that move in your direction :)
  10. drcha


    Yes, that pretty well sums it up. In options lingo, these are "directional" trades, which require you to guess direction and be right about it within the time frame prior to expiration.

    I highly recommend Options as a Strategic Investment by Larry McMillan and Options for Rookies by Mark Wolfinger. Options are complex and besides lots of reading, they also require some experience to trade well. It is good to get some real experience, in tiny doses at first. Fear and greed are great teachers. You do not really notice everything that is happening to your positions when you are paper trading. So trade one real position, as well as several paper ones.

    You can make debit spreads as conservative or as aggressive as you like. As with everything else, risk and reward are two sides of the same coin. The more aggressive (and therefore dangerous) positions are also potentially most lucrative. Needless to say, you can lose every dime you invest into one of these. Here are some ways to trade them a bit more conservatively:

    1) Choose positions with both options or at least the long option in the money
    2) Choose longer-dated positions (two to six months out, instead of near-month)
    3) Choose diagonal positions (long option is longer-dated than short option)
    4) Stay with the direction of the trend. For stocks, this means not only the direction of the stock itself, but also the direction of the market.
    5) Spread them across multiple underlying instruments, some of which do not correlate with the stock market. So in addition to trading a few stock options, you can also trade options on ETFs/ETNs like GLD, TLT, FXY, FXE, DBA, etc., which do not have strong correlations (at least historically) with the stock market. At the moment, though, nearly everything is somewhat correlated--everything is about the dollar--dictating a bit more caution than usual.
    6) Start with a single contract position in one or two of these spreads. Observe how they behave with respect to time to expiration, changes in volatility, etc. There are many factors that affect an option's price besides the price of the underlying instrument, and you should develop a feel for these without risking too much money at first
    7) When you are ready to get bigger, diversify over entry prices. For example, suppose you were thinking of buying five bull call spreads on AMZN today using the 110/130 strikes. There is no reason to do this all at once. Buy one today, then let AMZN move around a bit. Next week maybe the stock will be up, and you'll want to buy a 120/140 instead....and so forth
    8) Get out before expiration week
    9) Set a stop, at least mentally
    #10     Dec 19, 2009