Does anybody trade ratio spreads? Ratio call spreads or front spreads can give you a couple of advantages if you are bullish. You will get long deltas and you will get short vega to the upside. As many here know, implied volatility typically comes down when a stock moves higher. It is even possible for the otm call to decline in price even though the stock is rising. It is a function of supply and demand. When a stock declines, speculators enter the market to buy calls. After it rises, they need to sell them out plus you have people taking profits in the stock by selling a covered call. MMs are NEVER in a rush to buy otm calls. So here's a trade: From ivolatility.com and CBOE.com: Buy 10 MSQ July 50 calls at 4.40 for a debit of $4400 sell 15 MSQ Jult 55 calls at 1.75 for a credit of $2625 for a debit of 1.775 or $1775 you would have a net delta of 60, gamma of -36, theta of 4(?), can't find a vega but it would probably be something like -15 At expiration: P/L with stock at 50 = - $1775 51 = -$775 52 = $225 53 = $1225 54 = $2225 55 = $3225 56 = $2725 57 = $2225 58 = $1725 59 = $1225 60 = $725 61 = $225 62 = -$275 If I had software that shows how the position changes over time and price it would be big help. On a stock rise, short gamma increases, short vega increases which is good because IV is probably coming down. To the downside, your loss is limited because there is no naked position. The 55's will get crushed into oblivion. The 50's would probably not lose as much since IV is most likely increasing. You could buy back the 55's for .10 cents and sell more calls against the 50's. I wish I could trade like this but I don't have enough capital for naked sales. When I was a marketmaker, something similar to this is was as close to being a sure winner or least a non big loser as possible. Owning out of the money calls was always death. It is part of the reason I am no longer a MM. What do you guys think?
If a stock is at 50, why in the world would you buy the 50 call? You're paying 4.40 for pure air and you're only getting 1.75 for the time value that you're selling. In my opinion, that is exactly opposite of what you should be doing. If you want to make money selling time decay, sell a lot of time and buy little bits of time, not the opposite, which is what you're doing. If you want to know how to make money in this market contact me and I'll show you how to do it.
When the trade was inititiated, the stock was at 52. Sorry, I should have included that in the setup. If the stock didn't move one cent, the trade would be profitable as the break even point in the stock is 51.775. You could also compare it to a 50/55 bullish put spread. If you remove the 5 extra calls that are sold, your now 10 time 50/55 bullish call spread has the exact same risk and P/L characteristics as the put spread. short call/long put spreads share the same relationship as the short put/buy write one that everyone is familiar with. There are reasons you might shoose one over the other. The calls may be more liquid and easier to leg into at better prices. The prices I used were hitting bids and taking offers. If I take the closing prices from Friday for a put bull spread, the net credit comes to 2.80. This would equate to a break even of 52.20 in the stock which is higher than with the ratio. If the stock doesn't move one penny between now and expiration, you lose money. The four hundred extra dollars is not an insignificant sum when put into context of the total dollars changing hands. It is about 13% give or take of either trades profit.
Enough hypothetical spreads. Tell me about some "real" spreads that you have open now so we can discuss real strategies.
Yes, I would definitely take a look at thinkorswim's platform. I really like some of the features and layout. Good selection on the options quotes, delta, gamma, theta, open interest, implied volatility, etc. Also they allow automated order entry on more complex option trades. Good Luck
As previuosly stated on other posts, I don't trade these things. My capital limits me to stock and long options. I blew out as a MM twice. Of course, I could just make something up and make you feel happy. The position I offered for discussion is A VERY REAL TRADE. If you don't want to understand the theoreticals behind the derivatives, ignore my posts. I posted these things because of boredom and it helps me keep sharp in my limited trading activity which has been picking up lately. People, hell of a lot smarter than you or I, have blown a lot of money on these things. I have no secrets to hide. The point of this board should be to expand ones understanding of trading options. They are multi-dimensional product which includes factors going beyond long and short deltas. If you want to brag about your winning trades, that is you perogative. Wouldn't it be nice to understand why you made money and how to repeat it?
Rbane, you should listen to trajan, what he says is true. Your posts lead me to believe that you really don't have a clue about the option markets. Lose the attitude before you blow out. By the way I am a former market maker and I have blown out as well.
Trajan How do you determine the ratio. Is the +60 delta and -36 gamma the key relationship. I planned to follow the greeks on this trade but i have not found free online data. Ivolatility is still showing data from Friday. If you consider closing 3 trades today vs Friday close 1. ratio call -300 total (per 10 or 15?) 2. bull put +.30 3. bull call -.10 I'm interested to see when the other two trades will start to outperform the bull put, surprised they are not already. Back to the topic of this thread, do you know of any good analysis software. As mm's, does everyone have there own custom software? You mentioned doing a lot in your head, but do you atleast have a terminal to calculate the greeks, and tell you where you stand.
You sound like a pretty knowledgable person so give me your opinion of this spread which I opened on June 4. Bought to open NDX JUL 1425 P, and sold to open JUL 1350 P for a debit of 67. Put your greeks to work and tell me what you think.
For sake of making it easier to read, I'll assume it is a 10X spread. Your greeks with NDX at 1101 are: Delta = -57 94.7 - 89 x 10 Gamm= 0 Both options have a Gamma of 1 Vega = -269 72.5 - 46.6 x 10 Theta = 179 37.7 - 19.8 x 10 For every 1 point move down you maek 57 dollars. Your deltas do not change with a points movement because both options have a one gamma. Gamma is the derivative of delta. For every one point increase in implied volatility, you will lose 269 dollars. No worries about that because you make 179 dollars of decay every day. As expiration approaches, with NDX here, your greeks will go to 0. What is just as important as greeks is the cost of carry. I personally think this more important because without it, you could never understand the relationships between options and stock. It is simple to determine how much interest it costs to hold a position. Simply multiply the net credit or debit by the cash rate, divide by 365 and multiply it by days till expiration. (net credit or debit) x Interest rate(I'll use 2.5%) / 365 x Number of days till expiration(37) Your position is going to cost you 169(remember, this a ten times spread) dollars to hold it till expiration. These are professional rates. Although, the broker Thinkorswim.com seems to give similar. As these are European expiration options, they can not be exercised till the last day. If you don't want to hold the position till expiration because you made all the money the position will allow, there are a couple of different options to lock in your profit. This is where interest rate expense comes in. The spreads on the options is huge. There is no reason to get raped by the MMs or leave yourself exposed to market risk. By purchasing a 1350/1425 call spread, you will lock in your profit. Your position will end up being a box, which is a lock, kind of like a lock box(hehe). You would have eliminated all your risks. The market at 1101 for the call spread is 2.1 - 3.85. That is a lot tighter than twenty points for the puts. Total cost of carry of carry for such a position would be .19 cents or $190. Buying this would lock in a profit of 3.96 excluding commision costs(75-(67+3.85+19)=3.96). You can also use the call spread market to determine what the real market is for the put spread. This is because MMs always look for locks whenever pricing a trade. The above call spread market would indicate a put spread market of 71.15 - 72.90. You shouldn't sell for much below 71 as you know you could lock in a btter profit. As expiration approaches and the options lose their time value, you could simply buy a 1350 call or lower to lock in the profit. At this point the 1425 calls are not needed for risk purposes and would not have any bid. With the 1350 calls no bid - .75, your put spread should be 74.10 - 75.10. You shouldn't sell it for anything less than 74. The downside is getting into a lock also locks up capital. The MMs may try and rape you, but, don't let'em. You could watch for trades in the strikes around yours and then cut the market as MMs look for a hedge.