Yeah, this is a long post, but there was no way to provide the pertinent details without writing at length. About nine months (or so) ago, I became interested in learning about options. Along the way, a number of you have taken the time to offer insights into the mechanics of trading options, for which I am extremely grateful for your time and your assistance. One of many things I've recently learned is that assignment is really nothing to fear, and, if you want, can be virtually eliminated as long as you understand when assignments happen, and monitor your trade. Thank goodness for that! lol I *think* (hope) I finally have enough understanding to make my first paper trade and attempt to apply what I've learned so far. I don't have an options account just yet, and have no way to screen stocks, so I just manually dug around and came up with NFLX. Chart looks good, no dividend to worry about, and next earnings report isn't until October. So NFLX is what I used for my paper trade, which I made earlier this past week, on 8/9, EOD. Based on the chart, NFLX has had a pretty bad year. However, it looks like it bottomed out in May, June, and July, and price is working its way back up. The overall market is bullish, and I'm thinking a put credit spread would be an appropriate trade. This trade probably should have been made back in June/July, but I wasn't ready at that time. On 8/9, NFLX closed very near $230. The overall IV was 50% and the HV was 68%, so not really a great candidate for selling puts. However, the IV30 rank was 60%, which seemed marginally acceptable, even though 70% would have been better (and probably would have been a month earlier). Not sure whether IV30 rank trumps overall IV/HV, but I made that assumption. I decided on the 9/16 expiry, only because I've read that 45-60 days out is best (I need to dig into this a bit more). Keeping in mind the market, over the long haul, tends to maintain normal distribution and 1SD would equal +/- 34% from the NFLX closing price, I looked for a delta in the vicinity of 34% for my short strike. Note: I will be using the midpoint between bid/ask for all prices. And I'm still not certain how to determine whether a bid/ask spread is acceptable. The spreads in the following were 15, 20, and 25 cents. That seems like a lot to me, but I'm used to trading MES futures contracts. The first strike that was <= to a 34d was the 215, at 30d, so I used that strike (going for 7.53) as my anchor, which put me a little outside 1SD, with slightly better probabilities. In determining the spread width, I looked at the 210 and 205 strikes, but the 205 entailed more risk than I really wanted to take on. The 210 strike was going for 6.15, which would generate a premium of 1.38. The 205 strike was going for 4.98, which would generate a premium of 2.55, significantly more. However, even though the 205 strike represented an 85% increase in premium over the 210 strike, the increase in risk (factoring in premium) was 106%. That didn't seem worth it to me. Plus, the volume on the 210 strikes was pretty good (288), but on the 205, it was minimal (53). This is where it got tough. The risk:reward on the 215/210 was 2.62:1, and on the 215/205, it was 2.92:1. To further complicate matters, it seems you are supposed to look for a premium that is >= 1/3 the spread width, which would eliminate the 215/210. So what to do? I really wasn't certain, but being new, and had this been a real trade with real money, I'd probably have played it safe and gone with the 215/210, so that's what I did. On 8/9 EOD, I sold a NFLX Sept 16 215/210 put credit spread as a paper trade (did I write that out correctly?). And in the past few days, I *think * I also understand margin requirements, so let me give that a shot while I'm at this. Margin account requires a minimum of $2k (or whatever your broker requires). Based on TradeStation's website (because it was easy to locate and easy to understand), the initial margin for this trade would be $500 + premium, so $638 + C&F (buying power would be reduced by that same amount). Maintenance margin would be $500. So the absolute minimum account balance to make this trade would be $2,638 + C&F, but a few thousand more on top of that is highly recommended. At present, that trade is doing well. More than likely beginner's luck and/or because it's only a paper trade. Of course, all that is the easy part. How to deal with the trade if/when the short strike is threatened, whether to hold to expiry or take profits somewhere along the way, maybe around 50%, and what to do when/if the risk of assignment becomes greater than my tolerance, etc., etc. All that is still TBD. As of Friday's close, it looks like I could have bought the spread back for $62, which would have left me $76, so already past the 50% mark. Still a lot of reading and studying to do on this. I'm hoping my logic for this trade makes at least some sense, and my calculations check out. If not, back to the drawing board. And at this point in my learning curve, I don't mind telling you -- my brain hurts. lol Still in grade school but trying to work my way up to middle school. Any feedback would be appreciated -- good or bad. Thanks for taking the time to read.
Assuming you are trading American-style options, does your paper-trade account for exercising? The most detail you gave was about a NFLX put credit spread you sold. Can any of that come back to bite you in the ass? When peeps start talking about minimum margin amounts required for trades, it is worrying. People way more experienced than I will chime in here, but if it raised my eyebrow, you can be sure you need to use caution.
I think this is the best general analysis on options trading and especially picking a trade I've seen for a long time. It looks like you considered everything important in and for such an option trade. I'm sure you will master the game in record time, for which others, like me , need at least 3 years. I made the observation that there are, as usual in everything, two extreme poles: safe trade picks with less risk and a moderate profit, and the other extreme being risky trades with the prospect of high profit (the latter can also be called betting or gambling). Yours surely seem to belong to the safe category. I'll shortly check/analyze NFLX too... You say "30d", but DTE was 38d on 8/9 for the ExpDate 2022-09-16. If it was the following trade, then it looks not that impressive, I'm afraid to say, b/c there would be much better alternatives out there than this one: https://optioncreator.com/steviil Or did you rather mean another ExpDate?
IMO the Risk/Reward ratio of such a spread should be <= 1.0, meaning MaxWin should be >= MaxLoss. RRratio = MaxLoss / MaxWin Depending on interpretation of the margin requirement, and if it is indeed $500, then the $138 credit represents a max possible profit of 138 / (500 + 138) * 100 = 21.63% or 138 / 500 * 100 = 27.60% To the margin experts: which one of the above is the correct interpretation? And initially 2k+Margin+Credit (ie. 2000 + 500 + 138 = $2638) is required to be able to open this trade. If things were "just", then the margin requirement would only be the possible MaxLoss, ie $362. Which then would mean a max profit of 38.12%. At least with European style options this should apply. Btw. MaxLoss is calculated as follows: MaxLoss = (StrikeOfShortPut - PremiumOfShortPut) - (StrikeOfLongPut - PremiumOfLongPut) MaxLoss = (215 - 7.53) - (210 - 6.15) = 3.62 See also https://optioncreator.com/steviil
I just used minimum margin to show my calculations to see if they are correct because if you have multiple trades on, you have to watch that to keep yourself out of margin trouble. However, I would never trade options with minimum margin. IMO, if you can't fund an options trading account with at least $5k, probably not a good idea to trade options. $10k would be better. Yes, NFLX options are American style, so can be exercised at any time. However, I recently learned there is no reason for a long holder to exercise unless the option's price is near, at, or greater than parity. And if I understand that correctly, parity doesn't occur until the intrinsic value equals the premium, which doesn't occur until we get near expiration and the option is ATM or ITM... or the option goes deep enough ITM anytime during its life, to a point where intrinsic value exceeds the premium. If they exercise any earlier, the long holder loses money. So monitoring all that gives you time to take defensive action to prevent assignment. Appreciate your concern.
The 30d meant a 30 delta. I thought writing it as 30d was the correct shorthand for that. Maybe not. Sorry for the confusion. This is where I got the Trade Station info: https://www.tradestation.com/pricing/options-margin-requirements/
With credit spreads, I don't see how you can have anything but an upside-down risk:reward because premium received will always be less than your risk. Either that or I'm missing something.
Thx! Yes, 500 is then indeed correct, ie. (215 - 210) * 100. But folks, look what IMO important information (for CashAcct owners) I just have discovered at the above TradeStation MarginTable link: Take a look at the column titled "Cash Accounts" (that's my current account type), ie. the "margin requirements" (then of course named cash requirement) and see how trader-friendly TradeStation is in this respect! IMHO! B/c for example at TD Ameritrade they force you to upgrade your CashAcct to a MarginAcct if you want trade such a Bull (Credit) Put Spread (aka Vertical Put Spread with StrikeLong < StrikeShort)! I think I should switch to TS if TDA doesn't offer the same! See also this recent discussion regarding exactly this case, which I was missing at the brokers (especially at TDA): https://www.elitetrader.com/et/thre...put-spread-vehicle-also-for-cashaccts.368732/
Hmm. it seems my prog did calc it wrongly. It should be something like 42 or so, instead of my said 38 :-( I just verified it: DTE=38 on 8/9 is correct for ExpDate Sep-16! But when you say DTE=52, do you still mean Sep-16, or maybe a later ExpDate?