Maverick, Is it even possible to put on verticals for a 2-3 point credit these days? I am guessing that you are looking to do the short side ATM or as close as possible and most of the potential stocks I have looked at might give a credit $1 or a little more at best. Is that really worth it when your risk is $3.50-4? should the stock break support/resistance?
Daryn, The feb bull put spread in DNA is 1.85 and that is without legging in to it. I could probably put that on for 2 pts. You can do these for 2 pts. If they you do them a little more in the money you can do them for 3 pts. The idea behind these is to do as many as you can. I would try at least a minimum of 10 but preferably 20 to 40 of them.
I wouldn't open 40 (5 pt wide) put bull spreads for 2 under this high P/E POS unless the absolute max risk, 3pts x 40 x 100 = $12,000, were no more than 2% of my account, meaning you need to be trading a 600K account to even consider such a trade at that size. Wee
Wee, DNA was just an example. I wouldn't touch that POS either. And yes I agree with you about the 2%. In fact most of my options trades never exceed 2% of my equity. On the rare exception it could go as high as 5% but rarely does that happen. In fact most of my trades don't exceed 1%. I think I have made that clear on all of these threads. You should always keep your exposure to 1% to 2% of your account. In fact if you can do less that is even better. I think I have already said all this but I guess it doesn't hurt to repeat myself.
I think you'd be extremely hard-pressed to find 5, let alone 20-40, OTM or ATM vertical credit spreads with a 1:1 or 3:2 risk-reward profile in this low vol environment. If you can point to some, however, I'd be interested to hear it. Otherwise, it's just another fanciful idea with no practical application.
HD, I could find 100 not 20 to 40. All you have to do to increase the credit is increase the time or go deeper in the money. The amount on the credit has NOTHING to do with low vol. Remember it is a spread so if the vol is low that your selling you are also buying a low vol option as well. If you are selling a high vol option ATM then you are also buying a high vol option OTM. I think you are forgetting the first post I made on this thread. Please go back and re-read it. This strategy is not a pure option play but rather a directional play on the underlying. The reason I started this thread is because there are a lot of guys on this forum that only trade direction. Probably like 98% of the people that post here. People are PMing me asking me to post more directional stuff so I start a thread about a very simple strategy that allows traders to use their feel for support and resistance levels to put on bull put spreads and bear call spreads. THATS IT! HD, you are over analyzing this too much. All this spread is making a bet that stock XYZ is going to hold the $50 support level or not go through the $100 resistance. Hell I would tell them to just buy long calls at support and just buy long puts at resistance but you know that I'm much more risk averse then that. So I'm giving them a strategy to play the levels with limited risk. This play has nothing to do with vol or skew or anything else except direction. If you have a better play for them to play solely direction then why don't you start a thread and do it. I don't know why you have been so negative lately. You use to come on these threads with an open mind and try to learn as much as you can but now you are just going around and shooting down strategies. Look to each their own. I hope you continue to expand your wings and incorporate new strategies. I have said this before and I will say this again to all the know it all option traders out there. There are no GOOD option strategies and there are no BAD option strategies, only GOOD and BAD traders. So let me throw down the gauntlet here and ask you if you have a better way for traders to play direction let me know. These people that read these threads are trying to learn something. When you come on here and make a simple post that says that doesn't work or that won't work, you are adding nothing to the thread. Why don't you make a post that says, well, that won't work to well why don't you try this. Or here is a better idea try this. Or say, in my experience I have found this to work better. But don't make posts that say simply that won't work. That is a negative attitude that is going to keep you from being successful at trading. ET is full of traders with negative altitudes. Everyone is pissed that they are not making money or not making enough money so they come on these threads and just scream at everyone. The option threads have been quality threads and I intend to keep that junk off these boards. Let's keep the talk here positive here. If you have a question then fine ask a question. If you have a better idea then fine, post it. I'm not trying to call you out personally here HD, I'm just trying to keep the clutter of this board. If you don't personally like a particular strategy then fine, go to another thread. I don't like to buy calls and puts outright but I don't condemn it. I know people that make money doing that. More power to them.
Mav, My comments weren't personal; thus, I'm surprised that you seem to have taken them so personally. Nevertheless, I have two additional comments in response that I hope will be received in the spirit of commity in which they are intended. First, of course you could increase the credit of a vertical spread by going ITM. However, that will reduce the trade's probability of profit, would it not? And isn't a high PP one of the primary rationales behind this strategy? Also, didn't you say that a related rationale for this strategy was to "earn premium in a choppy sideways market" and to "save a lot of money b[y] not having to buy back the spreads that expire worthless"? That's significantly less likely to happen with ITM credits, wouldn't you agree? Further, by selling an ITM credit spread, you will now be theta negative and gamma positive. I thought this was a theta play. But even so, aren't there better ways to play gamme? (More on that below.) Moreover, by going farther out in time, you will greatly increase your vega risk. Does that really make sense with volatility at multi-year lows? Also, as a general matter, I'm not sure it's ever advisable to sell options with more than, say, 45 days till expiry when theta decay really begins to accelerate. Plus, the standard deviation range of the underlying will be appreciably larger the farther out you go, thereby decreasing the probability of the stock remaining within a prescribed range. And, after all, to repeat my first point, isn't the idea behind using credit spreads to make a high probability non-directional bet on the underlying while generating profits from the decay of options on a range bound stock or index? Which brings me to your last question as to whether I could suggest better ways to bet directionally on a stock or index using options. Well, since you asked so nicely, the answer is most definitely yes. Even if you're not a good enough trader to be able to leg these things the way you suggest, straight long calls or puts would still be a superior way to bet on direction. You'd get leverage and much higher gamma. Plus, with IV so low on a relative basis, options are relatively cheap. Thus, premiums are lower, break-evens closer, and expected returns (which ultimately are the name of the game) higher. Bottom-line, in this market environment, while there may be the occassional exception to prove the rule, long options are a much better way to play direction than vertical credit spreads. And, by the way, I've been putting my money where my mouth is in an attempt to prove the validity of that assertion. I trust that adequately answers your question. Regards, HD
First, of course you could increase the credit of a vertical spread by going ITM. However, that will reduce the trade's probability of profit, would it not? No it wouldn't. Remember these are directional plays. You are betting on a stock holding a certain support level or resistance level. You are not betting on a normal random distribution which then would take probability of profit into play. And isn't a high PP one of the primary rationales behind this strategy? No, it's not. The high PP never enters the equation. Again, these spreads are for traders that have some kind of feel for support and resistance levels. So there is no high or low PP however one could say that if he does have a good feel for the underlying then he could say that by doing many of these that he does have a higher probability of profit then doing fewer. Also, didn't you say that a related rationale for this strategy was to "earn premium in a choppy sideways market" and to "save a lot of money b[y] not having to buy back the spreads that expire worthless"? That's significantly less likely to happen with ITM credits, wouldn't you agree? No, I think you misunderstood this. I didn't mean that in the way that you are trying to earn theta, I meant that in a way in that if the mkt overall is choppy then there is a better chance that your support and resistance levels on all your plays will hold thereby earning the premium from your credits, but they are not, I repeat are not meant to be purely positive theta plays. And yes if the stocks close outside the spreads then you won't have to buy them back thereby saving on commission cost and not paying the spread to the MM. Further, by selling an ITM credit spread, you will now be theta negative and gamma positive. I thought this was a theta play. Again, this is not a theta play. And whether a trader wants to go deeper in the money is up to him. Some people would rather go deeper in the money because they have a better feel for the stock then others. So they feel more confident that the stock will bounce back off those levels. Again, I emphasize these spreads are for good underlying traders. But even so, aren't there better ways to play gamme? No, this is not a gamma play either. Besides the gamma is so small its neglible. (More on that below.) Moreover, by going farther out in time, you will greatly increase your vega risk. Does that really make sense with volatility at multi-year lows? I don't recommend going further out then 30 days. I only used the Feb options because jan expiration is too close. These are definitely front month plays. I thought I made that clear. Again, there is no vega risk on these plays. There is no vega on options on the front month or even 2nd month options. Also, as a general matter, I'm not sure it's ever advisable to sell options with more than, say, 45 days till expiry when theta decay really begins to accelerate. Agree, I never told anyone to go further out then 45 days. these are front month plays. Plus, the standard deviation range of the underlying will be appreciably larger the farther out you go, thereby decreasing the probability of the stock remaining within a prescribed range. True, again these are front month plays. LOL. Sorry I keep repeating myself but I am just trying to answer each of these points. And, after all, to repeat my first point, isn't the idea behind using credit spreads to make a high probability non-directional bet on the underlying while generating profits from the decay of options on a range bound stock or index? No it isn't. I think this is where you are misreading this strategy. Yes, in theory one can say they are earning premium because they sold more premium then they bought so technically that is true but the idea behind this is not solely to collect premium. It's a directional play. And no, this is a directional bet, not a non directional bet. Maybe I should re-post the first post I made on this thread because I feel I am repeating everything I said in that first post. Which brings me to your last question as to whether I could suggest better ways to bet directionally on a stock or index using options. Well, since you asked so nicely, the answer is most definitely yes. Even if you're not a good enough trader to be able to leg these things the way you suggest, straight long calls or puts would still be a superior way to bet on direction. You'd get leverage and much higher gamma. Plus, with IV so low on a relative basis, options are relatively cheap. Thus, premiums are lower, break-evens closer, and expected returns (which ultimately are the name of the game) higher. I disagree with this. I'm not saying buying long calls or long puts is bad, I am simply saying if you want to bet on the underlying straight up you are probably better off buying the stock. You have theta and vega going against you. So if you buy a jan 55 call in XYZ for 3 pts with XYZ trading at 55, you will lose the whole 3 pts if XYZ is at 55 at jan expiration. See the directional trader does not want to concern himself with theta bleeding out of his position or a decrease in vega. He simply wants to make a directional bet. That's it. You can buy all the long options you want but the problem in this market environment is that stocks are not moving and there is a very good chance that your options will all expire worthless on you if you buy ATM or slightly OTM options. The directional trader does not want to be faced with this burden. So why not just buy the underlying? Because he may not have the capital to buy enough shares in enough stocks to do that. Credit spreads have very little margin. He also doesn't have gap risk. Now what do I mean by that. Well say you buy stock XYZ at $50 and put a stop at $45 right? Say that stock warns the next day and the stock opens at $25 right? Now you are going to get filled at $25 not $45. But with a credit spread, your loss is capped at 5 pts minus the credit, so in most cases 3 pts. The guy that buys the underlying does not have that protection. So there are numerous advantages for him to do the credit spreads. Again, I would strongly caution guys against buying just call or puts if they want to bet on the underlying direction because you are not making one bet, you are making 3 bets. I don't know if you ever have bet on sports but one of the biggest sucker bets out there are the parley bets. The odds are really nice but you have to win all your bets to collect. So guys would put a 3 team parlay on but they would lose the whole bet if all 3 teams didn't cover. This is a sucker bet. If you want to bet on 3 teams, beat on each of them individually. Same is true with the directional trader. If you want to bet on direction, then don't bet on time and volatility as well unless you are prepared to do that. Bottom-line, in this market environment, while there may be the occasional exception to prove the rule, long options are a much better way to play direction than vertical credit spreads. And, by the way, I've been putting my money where my mouth is in an attempt to prove the validity of that assertion. I guess I just answered this. I respect your opinion but I just gave you my reasons for disagreeing with you. Again, to each his own. If you are making money buying calls and puts outright then keep it up. I just do not believe the directional trader will come out ahead plays calls and puts straight up. I think you could do a poll here on ET and find that close to 99% of traders have lost all their money doing just that. As they say in the casino business, that trade has the largest vig. It's a very low probability play I trust that adequately answers your question. Well, I hope I answered all your questions. I think you just misunderstood the whole purpose behind this thread. And btw, I didn't think you were attacking me although I did take objection to your phrase that this strategy is just "a fanciful idea with no practical application". I obviously disagree with that statement completely and I think you can see why now. If you have any further questions, don't be bashful. I don't mind people question the strategies of mine or others on this board. Just don't dismiss others ideas until you either completely understand what it is or until you have completely thought out what that person is trying to convey here. I thought my first post on this thread was detailed enough but perhaps in the future I should go into even more detail. Anyway, I hope you have a better understanding of what I'm trying to do here.
Okay, my response won't be nearly as comprehensive as your's. I'll just make a couple quick points since you said you welcome the exchange of ideas (as do I). Beyond the fact that we apparently disagree over the best use of vertical credit spreads, I think we would both agree that the selection of any option position should be based on where one would derive the greatest edge and which would provide the greatest expected return given a specific market environment, security, and directional and volatility outlook. Frankly, it seems to me that, in general, there's just no edge here in selling ITM vertical credits. OTM I can understand, but even there, as you acknowledge, the credits to be received at the moment are miniscule and hardly worth the risk. So the edge, I gather from your comments, is in the directional bet and has nothing to do with trivial stuff like probabilities, relative volatility levels or the Greeks. Fine. Then I will return to my suggestion of going long options. First, I need to correct a misimpression you have about what I suggested. I never proposed buying front month options. Indeed, for the same reasons I would only sell options with less than 45 days of life, I would never buy such short-dated options. You're right about that being way too risky and generally ill-advised. Rather, I was talking about 3-6 month options, or even leaps if one is less confident about timing and had a longer time horizon. The idea is to evaluate each strike and series in terms of all the trivial stuff like IV, break-evens, the Greeks, probabilities, etc., and determine which would give you the highest expected return in light of a directional and volatility outlook. And yes, straight stock is certainly an "option" to play direction. I never said it wasn't. But I thought the point of your question was to suggest alternative ways to bet on direction using options. Plus, for the reasons you yourself mentioned as to why credit spreads might be a better way to play direction as compared to straight stock, namely limited risk, the same reasoning applies to going long options. But I would agree with you that buying long options is a low probability exercise (though I thought you said probabilities were irrelevant to the discussion). I would never suggest one do that as their sole trading strategy. Indeed, as I think you know, I use other strategies, such as iron condors on the indices for non-directional bets, while I go directional and long gamma in individual names in an overall "quasi-dispersion" approach. In any event, it seems to me that at this particular moment in time, with vol so low on a relative basis, long options (or perhaps vertical debit spreads to reduce risk) are a much more viable way to play direction. (By the way, another alternative, which is the subject of another thread as you know, is to buy OTM time spreads as a way to play direction, be theta positive and take advantage of low vol levels.) Finally, for educational purposes, I would challenge you to provide some support for your assertion that you could right now come up with 100 vertical credit spreads that fit the specific criteria you've described in this thread. Actually, just 10 would do.
Beyond the fact that we apparently disagree over the best use of vertical credit spreads, I think we would both agree that the selection of any options position should be based on where one would derive the greatest edge and which would provide the greatest expected return given a specific market environment, security, and directional and volatility outlook. See I disagree with this, but only on this strategy. Normally, I would always look at vol and skew and examine all my risk, but the edge in this trade is with the stock picking ability of the trader an not in the analytics of the options. In other words if you did this strategy and another guy did this strategy on this board only he is a great underlying trader and you are not, I would bet hands down this guy would do better then you regardless of which options he chose. Therefore the edge here is in picking the right stocks and not the right options. Of course this is the only strategy where I will say this. Frankly, it seems to me that, in general, there's just no edge at the moment in selling ITM vertical credits. OTM I can understand, but even there, as you acknowledge, the credits to be received at the moment are miniscule and hardly worth the risk. So the edge, I gather from your comments, is in the directional bet and has nothing to do with trivial stuff like probabilities, relative volatility levels or the Greeks. Fine. Then I will return to my suggestion of going long options. I think you are still missing the point. It's not about options edge, its about stock edge if there is such a thing. This is a stock picker's strategy pure and simple. And I will say this again, the fact that vol is so low does not play a role in this at all. Remember you have to buy the outside strike so in a high vol environment you will be paying more that outside strike and possibly paying a much higher skew. First, I need to correct a misimpression you have about what I suggested. I never proposed buying front month options. Indeed, for the same reasons I would only sell options with less than 45 days of life, I would never buy such short-dated options. You're right about that being way too risky and generally ill-advised. Yeah i know you want to buy long dated options but the problem you have here is vega. The guy that simply wants to bet on direction, thats it, does not want to also be making a vega bet. You are exposing him to a enormous vega risk and if the stock he is long calls does just that, go up, then the vol will surely go down and thereby hurt his position. I have nothing against long options as you know, I love long straddles, but for a vega play, not a delta play. Rather, I was talking about 3-6 month options, or even leaps if one is less confident about timing and had a longer time horizon. The idea is to evaluate each strike and series in terms of all the trivial stuff like IV, break-evens, the Greeks, probabilities, etc., and determine which would give you the highest expected return in light of a directional and volatility outlook. Again, we want to make only a directional bet here, not a volatility bet. I'm sorry I keep repeating this but I think you are ignoring this important fact. And yes, straight stock is certainly an "option" to play direction. I never said it wasn't. But I thought the point of your question was to suggest alternative ways to bet on direction using options. Plus, for the reasons you yourself mentioned as to why credit spreads might be a better way to play direction as compared to straight stock, namely limited risk, the same reasoning applies to going long options. Yes, we are leaving straight stock out of this, I just wanted to point out the advantages the credit spread had over the long stock play. But I would agree with you that buying long options is a low probability exercise (though I thought you said probabilities were irrelevant to the discussion). I would never suggest one do that as their sole trading strategy. Indeed, as I think you know, I use other strategies, such as iron condors on the indices for non-directional bets, while I go directional and long gamma in individual names in an overall "quasi-dispersion" approach. Yes, probability is irrelevant. I was simply stating that most directional traders I know if not all have never made a dime just making directional delta bets. I stated why this was the case in the last post. It's because you are essentially making a parlay bet where you are betting on not only direction but volatility and time. Most guys on this board can't even make money just trading direction, how do you expect them to make money if they have to add two more variables to the equation? However, it seems to me that at this particular moment in time, with vol so low on a relative basis, long options (or perhaps vertical debit spreads to reduce risk) are a much more viable way to play direction. (By the way, another alternative, which is the subject of another thread as you know, is to buy OTM time spreads as a way to play direction, be theta positive and take advantage of the low vol levels.) Just so you know, the vertical debit spread has the same profit/loss graph as the credit spread. They are the same thing as I'm sure you know. The reason I don't like the OTM cal spread is because what happens if the stock doesn't move. See with the vertical credit spreads you can make money if the stock rallies or if it just sits in the support range. Finally, for educational purposes, I would challenge you to provide some support for your assertion that you could right now come up with 100 vertical credit spreads that fit the specific criteria you've described in this thread. Actually, just 10 would do. Sure tell me what criteria you are looking for. Almost every credit spread I see can be done for about 2 pts give or take .10. Obviously if go more ITM you raise the credit and if you go further out you raise the credit some. Take a look at AMZN. Stock is at $45 right. You could put on the feb credit spread for about 1.70 just hitting the bids and offers. I could leg into that for at least 1.90 if not 2 pts. That is selling the feb 45 put and buying the feb 40 put. And that is right at 45 so thats not even ITM. Every stock I look at is the same. So I am very confused as to what you are looking at. I could post the entire CBOE quote screen here, they are all the same. Again, the only reason I am choosing feb right now is because jan expiration is too close. Normally I would wait a few weeks then put on the feb spread. Are we on the same page here?