T man you are right in that usually call credit spreads are more easily managed however the R/R is even worse for them than put spreads. The IV skew really works against you on the call side.
Thanks for the input RichardRimes, but I don't understand. Could someone give me an example? Torontoman
Tman here's an example on the SPX. Say tonight I'm looking to sell an IC or strangle out of the money on the SPX. I want to be about 45 to 50 pts out on both sides to have a high probability of success. The April 1355 put I could sell for 7.20/8.60 with an IV of about 15.5% and a probability of success of about 80%. Going up 50 pts(from today's close) to 1460 the IV is only 8.31% which makes the delta (or probability of success) sub .10 or 90% and the price of the option much less..$2.20-3.0. The reality is that in April the odds are that the "true" volatility will be higher than 8.3% and the possibility of expiring thus is higher than just 10%...so you are getting less bang for the buck so to speak. Now selling the spread reduces this effect to some extent...however you actually have to go farther out on the call side for the same "true" probability of success as you might have on the put side. not sure if this explanation helps
Yes. This helps. However, if I understand correctly, your explanation does not involve adjustments when the the SPX approaches a certain point. If adjustments are planned, doesn't the probability of profit increase. By adjustments, I mean closing the spread & getting a further OTM spread with more quantity. Thanks for your insight, Torontoman
Sure...you can always do adjustments but believe me they don't always go as planned sometimes they work and sometimes you still get run over by the train. There is no exact formula or trading plan you can execute every time under all circumstances, that is why trading (options) is both an art as well as science. BTW I do agree with jj90...
Thanks for the input, RichardRimes. I have learned a lot from you on this and other posts. Again, thanks Torontoman
BTW I also agree totally with jj90....lots of ways to skin this cat....just make sure YOU don't become the cat:eek:
I don't know if your asking me...I actually don't buy extra wings but do a smaller debit spread closer to the money. At least thats what I'm doing now so I end up with unbalanced condors on both the put and call side. Each month is different...sometimes I have butterfly's near the money...thats what I mean by "art". I'm sure everyone works out different ways to "protect" or hedge their spreads and its something you really need to work out for yourself. Again no specific ratio will always work as prices, IV etc change monthly.