I spent the better part of this past weekend coming up with "bullet proof" strategies, and then I read this. Back to the drawing board I go.
Ratios are good... http://tradingthecow.blogspot.pt/2013/09/anatomy-of-position-trade.html What do u think?
The risk is 3 puts since it's a ratio + an itm put - I'd just sell three 160 puts instead. Fewer legs, lower cost basis if assigned, lower risk if SPY tanks, and unless there's a strong move up will perform better (and if expecting a strong move up, trade something else) Keep it simple, m2c.
Ratios are bad. They amount to selling naked legs. They represent a huge waste of margin and will tie up a huge fraction of your account for no real prospect of gain proportional to the margin you are tying up, even assuming that you choose to ignore the unlimited risk of a sudden market crash. Far better to use that large wasted margin (or risk allocation) to instead diversify into some other trade. One way is to buy protection further out at very little cost, but a large reduction in required margin.
So it's the same as naked puts. But you can Buy the Out of money strike to reduce Margin. If you buy 1 PUT 163 and Sell 2 PUT 160 and Buy 1 PUT 140 you reduce margin exposure. And if the stock falls to 158 at expiration, you get 100 shares at 157 average price, which leaves you still with a profit.... At 160 you are getting 300 USD for 1600 USD on margin...
question: Naked strangles are essentially unlimited risk in either direction with limited profit. That being said, any purchases on either leg is just to reduce risk with the position. So, for verticals (debit and credit spreads), my understanding is that the purchasing of legs to off set the shorts (whether credit or debit) is done to either discount your long position or to reduce risk on your short position. Is this correct? So, it would be more successful to sell credit spreads overtime that are 1.5 to 2 STD OTM on a probability standpoint, assuming the vol is high? When closing positions, is it better to exercise the options or to just close the options? For example, Lets say ABC is trading at 10.30, and its expiration day. you're short x1 10. ABC put @0.1 short x1 11 ABC call @0.1 Long x1 10.5 ABC call @0.35 current debit: $0.25 B.E 10.65 At expiration day its trading at 10.30 Do you think it would be good to take the loss or take on more risk by owning the shares and turning the position into a covered call? I'm still new, so I'm looking for your input and critiques. Just want to get better at trading.
I think you've got several strategies happening all at once. What I would do is find out exactly why you're trading what trade. For instance are you trading a vertical spread because you're making assumptions about directional price movement, statistical price movement, product skew ect. What that is in the beginning should be than in the end.
The reason for my trade is to collect credit while being bullish on the stock. I guess a better strategy would've been to use a bull put credit spread. I'm not sure if its possible to do a credit bull call spread. Because My account is small however, my goal is to just grow the account by collecting credit. My position started out as just a naked call/naked strangle.
If I am reading your example correctly....you have only paid 15, not 25 (typo?) Also if you want to collect premium - this is a poor example of doing it. If you mean that AT expiry it closes at 10.30 then according to your example, you have no positions to worry about. The loss has already occurred. All the options are OTM. Why would you exercise OTM calls? If its at a price of 10.30 pre expiry, then you have to wait - you will either have 0, a long position at 10 or 10.50 or a profit above 11. Or you could punt it. Personally - I would wait, or simply buy the 10 puts back for a cent if you could or were worried about a 3% fall in the day.