Maverick: If I were going to try this strategy, I would want to put on as many as possible. I include reducing costs as part of my edge, so I would want to minimize commission costs by trading at least a 5 lot for each underlying. So the way the way I would approach this is to pick 20 stocks trading 5 lots each, 10 Bullspread, 10 Bears. Naturally this is all contingent on your account size, but this would be my starting point. One more thing, with IV like it is, the idea of not trading around the position is smart, delta neutral approaches and low IV don't seem to go together well (at least not for the retail trader). As always, I am interested in hearing your opinion. Best Regards, Steve46
Maverick, I appreciate your threads and posts. I am not very familiar with the nuances of options, why do you prefer the credit spread instead of the debit spread. Thanks for the help.
Ok, that's a pretty easy question. Let's say stock xyz is at 100 and you believed that to be a very strong support level. You could either put on a credit spread there or a debit spread. By paying for a debit spread if the stock holds that 100 support level like you thought but doesn't go higher, you will lose 100% of your trade. The credit spread will profit if the stock goes higher or if it just sits there at support and holds. hence, a much more lucrative strategy.
This has the potential to be a really good thread. People may even be able to make real money from it.
Thanks for the reply, but I could use a little more clarification if you don't mind. Let's use your example of xyz trading at 100. If you believe this will hold, it seems to me that you could either buy the100 puts and sell the 105 puts for a 2-3 dollar credit; or you could sell the 100 calls and buy the 95 calls for a 2-3 dollar debit. Either way, wouldn't you have a 2-3 dollar profit at expiration if the stock is at 100. Or, the strikes could be adjusted depending upon your outlook and the profit range you want. If that is the case, does the credit still have an advantage over the debit?
Well, first of all the put spread you would do for a credit and the call spread you could do with a debit. You could move the strikes to 100 to 105 if you want to create a debit or credit. You can also move the strikes down to create a credit on the call spread and nice versa on the put spread. The idea for the credit is that you are short premium, with a debit spread you are long premium. When you are short premium, if the stock expires at the support or resistance level then you could 100% of your profit vs losing all of it with a debit spread. They both have the same risk to reward ratios however if you ignore TA. Again, another advantage of being short premium in this case is that you don't have to unwind the trade if it expires worthless. This will save you both the commission and the spread on the way out. If you are long a debit spread, you are going to have to get out of it and give up the spread on the way out. I hope this answered your question.
Why would you do a 105/100 bull put spread with the stock at 100 if you thought 100 was the relevant support level? You'd lose money if the stock was at 100 at expiration.
Mav and HD, Thanks for the help. I think I understand a little better now. Maverick, Do you think this will be more profitable than your "perfect option position", or do the compliment each other?
No, I think the perfect option position has much more firepower then this strategy. However, this strategy will work well in it's ownright and simply provide a way to make more money in a market environment that is choppy and going sideways. When the market breaks out the perfect option position has unlimited upside where as this strategy will eke out small gains. However, on the flip side when the market is not moving, the perfect option position will eke out small gains will this strategy could bring in a lot of profit. So yes, I think they complement each other but if I had to choose one or the other I would go with the perfect option position which I will nickname the Flying Wrangle. Don't you just love options!
Maverick, It's nice to see someone posting something educational and positive....thanks for this second great thread! Daryn