OK, so you want to sell 64 calls and buy 65 calls for a few cents. What happens if QQQ goes to 66 or 63? What happens if it stays between 64 and 65? Simple way to analyze this, right. You have 5 minutes, and no calculators allowed, LOL. Don
Don Bright WOW! Interesting question Don. I must show my work. That comes under the heading of proprietory secrets. ( grin ) But I will go along, based on the premise, I´ll show you mine and you show me yours, to figure the odds on the unpredictable. In a same month of trading credit spreads, I like to be out 6 strikes at the beginning of the month OTM. The odds of not getting hit, are I forget now, but very good. Often in the OEX you would not get hit if you were even 5 strikes out in a same month. As the month progresses, you can start narrowing the distance. For this weekly, same weekly, you can do a credit spread from Wednesday to Thursday based on RULE OF THUMB 2 % distance for a market move. Since I´m trading the QQQ now, that is 2% of 64 = 1.28 + 64 = or 65.28. Using that rule of thumb, I can trade a weekly if I am two strikes OTM. Should there be premiums available. This is 1.30 a.m. There were no premiums available at strike 66 for safety yesterday afternoon, a Wednesday afternoon. So skip the trade, until Thursday afternoon, when the percentage of market swing narrows some more, on average in probabilities. Rule of thumb quick and dirty, I would trade a credit spread on a Thursday afternoon, if I could get premium at two strikes OTM. For expiration at noon the next day on Friday. The second weekly starting this Friday, I would look for a three strike out OTM credit spread to do on the Friday. And of course if I could get 4 strikes out, I would build in an extra margin of safety. But would accept 3 strikes OTM. I would be looking for .35 cents to .25 cents, no less than .25 cents per contract. In the case of this market, we are in a complex situation. I show we are in an intermediate downtrend, while we are in a longer uptrend. So I figure the market is going sideways, for my two day time period. I would want 2 strikes OTM this Thursday in the morning for .25 cents or more. The premiums were not there yesterday at these strikes. So no trade.
In the meantime, I am holding two contracts 2 May QQQ -68- PUTS @ $4.76 Using my own method. Unfortunately I got in a little early on this and didn´t wait for certain qualifiers. So now I have a bet going down, but the market is going sideways. Which means the odds are not too strong on my bet. In this I´m a pattern trader. Plan B is to wait for my qualifier if it occurs and double up the bet. Plan C is to close and reverse, if the market goes UP. Take a bet the other way. Betting philospy: The reason for the bet, ( that terrible buying ) is that the rewards when right, are much better than any other spread strategy. Also I have no problem with closing and reversing the trade if I´m wrong. Taking a quick loss. I´m rather disappointed with myself for jumping the gun on this bet though.
This is why I asked. I worried that you were being too complicated. Just say "at $64 I make/lose xx, at 63, same, at 65 same, way up, way down" - just an exercise in visualization of expiration to show yourself how gammas and deltas work, and overall P&L. Don't start thinking about market direction, just be aware of where you would stand with movement. Don
Ryan The shotgun killer of earnings options. Whats the equity balance you have now Ryan? I got a daughter interested in using your method. Behavioral trading.