It's not that I don't like options - they are kind of a fascinating mathematical construct - it's just that there can be, IMHO, a "seductive" allure to using them and working these spread strategies, when a much simpler method would be more efficient. For the spread pricing one month out with a stock drop, I just kept IV the same, at about 38, and dropped the price of the stock to $45. Then, on Mar 5, the same 3 July spreads would cost a little more than approx $1000. So the original spread dropped ~$200 - $150. For a "better" way, well that's very subjective. But something to look at is, say you were expecting the stock to move up 5% in the next 2 weeks (based on whatever T/A or fundies). Just buy the next strike, next month, ITM call. You must try like hell to get that call at at least a little discount, tho (limit order a bit under the market). Simple shorter term ITM calls are a decent (and under appreciated IMHO) high leverage stock substitute. If you don't get the move you expected, sell it back. And if the stock moves up only 2 - 4%, for example, that ITM call is going jump 10-20% (approx) in value (yeah you could lose too, but gamma/delta, at least, is on your side). And you don't have the hassle of dumping or waiting for theta to catch up on the short leg. Of course you MUST have a positive expectation system/method for determining the probability of the stock move. But that goes for any initial spread, or adjustment, or whatever. How do you get that edge? Good question! The big overriding factor, is if you make money and are comfortable with whatever strategy you are using, then just keep doing it. No matter what, keep the total account leverage low. But do keep your mind open to newer methods and ideas. Build an Excel spread sheet and log the details of every single trade. Try out new ideas, in a very small size, and see how you do. Good luck all!
MTE, what a nice metaphore, really! This is exactly what happens so often here, someone exemplifying a quite complicated strategy that is equivalent to something far simpler and clearer. I think 1 in every 10 threads is, at the heart, about these equivalences. To yucca_mtn, I fail to see how you, admittedly being bad at picking directions (as many are here in the options forum, it's good being able to admit that) would be able to trade around a vertical. Because that is all about directions. How do you feel about rolling up one of the strikes to see the stock going down right after that? Ursa..
MTE - I going to try to give you a real response when I have time to prepare it. For now: I thought we were on the same side with DITM vertical spreads, but you keep beating me over the head with puts. Basic American capitalism: buy something cheap sell it higher. Hot dog vendors know this. Country boys know this. I understand this. Who sells something they don't own, and hopes they never have to pay for it? Consignment sellers, con men, insurance salesmen, fancy fast-talkin' options traders, etc Who's driving backwards? ************************* Response to URSA: I said I am bad at picking short-term directions. But I am more a believer in fundamental analysis (as long as someone smarter than me is doing it), and a non-believer of TA (but I still listen to them too). So I have more faith in long term guesses than short term guesses by the experts. And that is the presise reason I love DITM Verticals with a relatively far out strike, because I don't trust anybody so I pick the best guess direction of the stock, then hedge it with a DITM position. What can be better than that? About your question on rolling up one of the strikes. If I understand your question correctly, I don't do that. I tried it a couple of times and got burned. All the rolling around I do is to make my position less risky. So I only do rolling down, but I do that one leg at a time as the position heads south on me. And I only do that if I'm very confident the stock will recover. When I don't have that confidence, I cut my losses just like everybody else.
You came to the wrong crowd then . Would you rather be selling insurances of be the dumb sheep buying them. Besides, the position is exactly analogous. You are currently trading put bull (credit) spreads already. No difference at all. Welcome to the crowd. You get 250, maybe you can keep it, maybe you pay 1000 later on. Same thing. Ok, if your take on the market is like that, a best estimate of what direction it will take, I agree that you strategy is not that bad. However, I think the profit/loss ratio and also the max-loss is very bad and certainly too risky to put everything in. If you have fundamental outlooks on certain stock you might be better of doing backspreads, or timespreads. Ursa..
I have sort-of been following this DITM possibility (vertical debit call spread), with a good many comments about the ABC corporation. So I decided to find some real cases. I looked at RTP and GS. From what I could find, the bid-ask spread always ensures a loss. Does anyone have a current, real-stock example to share that illustrates this strategy?
Real life stuff ABX APR07 22.5/25 @ 2.05 now 2.4 AMGN JUL07 60/65 @ 3.85 NOW SAME APA APR07 55/60 @ 3.8 NOW 4.65 BTU JUN07 30/35 @ 4.0 NOW 4.2 CNX APR 25/30 @ 3.95 NOW 4.65 Please don't anybody copy these. All we need is dozens of people trying to buy the same spreads on the same day.
for PHG You are misled about the bid ask spread. We don't leg into a spread. We bid the whole spread, generally I split the bid-ask in half and usually have to kick in 5 cents extra. also about GS GS July 195/200 @ 3.8 now has dropped to 3.55
only volume in ABX today is at the 30 and 32.5 (for March)...for April there is 1 contract at 25...so do you buy 1 contract at a time? There is no way any of us could actually do any size in these....