Recently, I noticed a thread where it was pretty clear the guys at TastyTrade are not held in high regard around here. However, in my ongoing quest to become more knowledgeable about options from the sell-side perspective, I came across the following TastyTrade video where they give their take on how to determine optimal spread widths. If any of you options gurus has 9 minutes and 30 seconds of free time, and the mere sight and sound of these guys doesn't give you heartburn, I'd appreciate your opinion on the validity of their recommendation. Thank you!
I would go for a reward:risk ratio of 1:5 or better (1:4, 1:3, 1:2). The reward:risk ratio will give you a good idea of the spreads you will be working with. And how close you are to ATM - you want to be as far OTM as you can. Earnings and inflated IV is another factor to consider.
Do you mean this for spreads consisting of 2 legs (like Bull Put Spread), or rather for spreads consisting of 3 legs (ie. the wings of a Long Butterfly, for example)?
I like the fact that in the video he talks also about ROC (Return on costs, aka Return on investment, ROI), and margin costs etc., as these are very important factors for each trade to consider before one makes the trade. ROI (aka ROC) should be expressed in percent, ie as ROI% (aka ROC%). See also https://www.elitetrader.com/et/threads/selling-puts-to-enter.368965/page-3#post-5652180
Just out of curiosity, I took a closer look at this. I got the MC they show on their chart to make sure I was calculating it right, but when I applied it to strikes with five point intervals, it doesn't seem to work. The MC just kept going up as I widened the spreads -- took it out to 40 points. Or else I'm doing something wrong in my calculations.
Do you know which type of spread they apply this to? Is it Long Butterfly (ie. consisting of 3 legs)? In their tables the header line says "ATM Call Spreads". This is also hard to understand, IMO. Does "Width" here really mean the $width of the strikes? But then why is it called "ATM ..."? Is the middle strike, ie. the Short, ATM, and the others (Long) left and right of it? Don't they (tastytrade) usually have also a lengthy web page explaining the video? Any link?
If you watch the video on YT, in the video description, it just indicates defined risk spreads, but it looks like they are talking verticals. I think ATM means their short strike was ATM, and spread width is based on points. Anyway, I couldn't get it to compute using an OTM strike and strike intervals of five points, so I'm moving on.
Thx. I think they mean LongButterfly (ie. 2 ShortCall (usually ATM), and 1 LongCall lower, and another 1 LongCall upper of it), like in this example: https://optioncreator.com/sthvs1v Make your calcs. Then change the Strikes of the wings equidistant to the middle Strike (leave the middle strike as is). Do new calcs, and compare to the first calcs... ...and do some more such calcs and put everything in a table, and later plot a curve of it... I think this is the way to go to understand their said work in the video. Btw. such a LongButterfly can also be constructed with Puts. S.a. the text at https://optioncreator.com/long-butterfly