Hey all- Just starting to get beyond the basics, and one thing that is confusing the hell out of me is how certain options are being priced. For example, if I am bullish on AAPL and I want to put on a bull put spread, I am noticing that a lot of the spreads would have me paying a DEBIT. How can this be? If I check the options chain for contracts expiring 17th of July 2020, I could sell the 340 at 1.15, but to buy the 337.50 put would cost 1.49? There is no credit. I am getting an idea of how to trade from watching videos, but I can't seem to find the logical risk/reward setups these gurus are recommending. I am noticing at times I could increase the width of the strikes to get a credit, but at times it's literally crediting me 5 dollar while I risk 495 (5 point difference in strikes). The prices look like they make sense if I were to put on a debit spread, such as risking 300 to make 500, but why doesn't it work for credit spreads? My gut feeling is it has to do with Volume because the spread between the bid and ask seems huge. However, I am seeing this in Apple, Tesla, etc. Stocks that I see having thousands of contracts being sold. I understand volatility can increase the bid/ask spread, but isn't high volatility what I should looking for when selling premium?? Yikes.. much to learn. Please help!
You are skipping steps. Learn the basics of how to price a call n put first. Then your spreads are just linear combinations of them and you will understand why you are seeing those prices.
You answered your own Q, wide spreads. You can get it for a credit if you sell and buy mid, but your risk/profit profile is still going to be "shitty" in your opinion. If you really think they're shitty, then you should be a taking the other side of the trade. My advice is to read a few books and ditch the option gurus. If you lurk here for a week or two you'll notice the handful of ppl here on the options forum that actually know what they're talking about. Best info here from those dudes than anywhere else on the internet, I'll let you figure out the rest.
No, you absolutely are not. Your post contains too many errors to disentangle, but you *are* aware of risk(s) and return, and that is way good. As far as videos go, the Options Industry Council probably still sponsors webinars through Interactive Brokers -- they're free and on the web. Russell Rhoads put a bunch of block-by-block videos together; they may still be there (or elsewhere on the web)... http://www.cboe.com/blogs/author/russell-rhoads
Welcome to the world of options, get ready for a never ending supply of derivatives knowledge. Keep asking questions and keep studying. Also, play around with your strike selection. If you want a bull put and your risk/reward isn't optimal then don't choose those strikes. For example lets look at the same option chain, the 17 JUL 20... sell the 360/350 put spread and you receive 2.67 credit, which isn't too bad from a R:R perspective. Try to always collect at least a 3rd of the width of your strikes. So if its a 10 buck wide vertical you want at least 3 bucks in credit to make it "worth it". It comes down to heuristics, and your own method. Everybody trades different, and usually matches their personality. Edit: also learn as much as you can about synthetics. Most of the time, if you are making a directional bet (not volatility bet) you might as well trade the bull call spread instead of the bull put spread. Yes you want to sell premo when vol is high, but other factors are at play as well. If you are going to trade TSLA, AAPL options don't worry bout bid/asks
Just to clarify for my own knowledge. I'm looking at a SPY Iron Condor with a $26 spread (Sold call / sold put middle legs), should I then expect about $8 credit back? The credit on this proposed IC is $173 (max risk $427). Is this $26 spread supposed to credit back $8 or is it $80? $8 seems minimal when I'm getting $173. - or - is it that I should get $8.00 credit but actually only got $1.73 making this a not so good to execute trade? Thanks.
I'm thinking that I might have made the mistake of looking at the option chain after hours expecting to be able to plan trades for the week ahead. Is it possible the list I'm looking at (ToS) is priced this way because it is after market, and thus, the low volatility is making the bid/ask spread huge (dollars wide)? It just doesn't seem right that I can sell a put at a certain strike price, and then I would have to pay more to buy the strike price that's lower to make a vertical. Before everyone writes me off to still needing to learn the basics, at the bottom I'll post a trade I plan on making Monday and the thought process behind it. If I'm way off, please point me in the right direction! Also, thanks for all the replies. I appreciate the input. Did you definitely read through the numbers I wrote, or maybe just assumed that once I wrote the bull put spread was a debit, figured I must be confused? In almost all of the videos I am watching, I am understanding them fully so I'm curious which steps I am missing. I believe I do know the basics of pricing options, including their intrinsic value as well as how extrinsic value comes into play. I thought about taking the other side of the trade too, but that risk/profit sucks too. I'm thinking once the market opens monday the numbers it will make sense again? And yes, I have a few of the "bible of options" type books, but since I have a tendency towards paralysis of analysis I've been watching the tasty trade videos on youtube since they're direct and to the point, and I feel like I know enough to get going and actually practice. But I agree, I am going to read through the "must-reads". I'll definitely be lurking here and learning. Do you happen to remember any specific members that I can learn a lot from? Maybe I can search their posts. Thanks Please, almighty all-knowing, at least tell me where my errors lie! Besides maybe my last paragraph, I am pretty sure everything I said is on point. Thanks for the link though. I'll definitely check that out. When I look at the option chain I see the 360/350 put spread as a credit of 2.10? I'm selling for 5.00 and buying the 350 strike at 2.90. I made a post recently with this exact question; I was having difficulty finding credit that gives 1/3 the width of the strike. It seems risking 8.90 (10 point width, 10.00-2.10) to make the 2.10 credit wouldn't work out in my favor often enough to be profitable considering how close those strikes are to the underlying (364) already. Maybe that would be a good risk/reward if my probability of profit were high, but with the strike that close to the underlying there's no way its worth it! Why would you prefer a bull call spread over a bull put spread? I would go for that if imp vol is low in it's range, but correct me if I'm wrong, most of the professional's are sellers? ________________________ My process in finding a trade for Monday went like this- I scanned ToS to find optionable stocks that'd be liquid with high volume and also with a high IV percentile, figuring the options will be expensive and I can sell premium as the volatility (hopefully) reverts to the mean. Anyway, after I sorted the list by volume, I found CVM which I noticed had an IV percentile of 73%. I also like what the chart looks like considering the price is right at the bottom of the channel. I then looked at the options list for options expiring AUG 21 20 since it's the closest to 45 DTE, which is what I aim for. Now, from what I've been learning from tasty trade videos, strikes that are 1 standard deviation out are a good starting point. So, if I'm not mistaken, delta can also show me my probability of being in the money. So I tried to find the strike price that had as close to a .16 delta to aim for my 84% probability of success (1 SD for single options). Side note- I was going to make a thread about this. Why doesn't the delta always equal the probability OTM or ITM then? Anyway, the strike price with a .13 delta is 7.5 and I can accept a 1.85 credit. If I don't decide to write naked puts, I can buy the 5 strike for 1.10 and accept .75 credit while risking 1.75 (2.5 spread minus .75 premium). Even though the probability OTM is 50% on the 7.5 strike, which normally would make me think this trade is horrible considering the risk/reward, I am now looking at delta for my probability and I think this is a good trade. I also plan to follow the advice of those videos in managing winners and closing at 50% to increase win rate. If I am using spreads, I wouldn't manage losers, even if all the way to expiration for a loss considering I am managing my risk from the start and not trading too big for my account. I also want to give it time to become a winner. Sorry for the huge wall of text, but I felt it was necessary to spill some thoughts out to see if everyone still thinks I'm at square one haha. I feel like I am understanding it, but by all means if I don't have a grasp of the fundamentals, please point out my errors! Thank you!
As soon as you sell an option combo, the net (of [total sold: credit] - [total purchased:debit]) is deposited in your account, while your available margin is reduced by [distance between strikes * contract multiplier]. • You don't receive a credit "back". • The distance between short (middle) legs has more to do with likelihood of getting hit, and nothing to do with the arithmetic of credits+debits. • $8?? Whut? Perhaps you're conflating $6 (see below) and quote prices and account impacts? • If your max. risk is quoted at $427, and your credit quoted at $173, then your longest side (assuming a righteous symmetry in your IC) is $6. But that $427 risk number is *net* of the credit: your initial risk for evaluation purposes is back to "distance between strikes" -- $600. If you moved the short and long strikes $3, you'd still have a $6 distance and a $600 risk, but your probability(ies) on the trade would be entirely different. • BTW, when the trade is closed, you will see your available capital increased by $600 -- you get that risk capital "back".... in a way.
Thank you. Many articles speak only of 'the spread'. I wasn't sure if this meant the space between bought put and sold put on upper leg of IC and/or Sold call and bought call on lower leg of IC - or - the gap between the middle of the strikes. e.g.; Buy 9.00 Put Sell 9.50 Put Sell 12.50 Call Buy 13.00 Call So, the spread in this example is $0.50, not $3.00 and one should shoot for a credit of at least $0.16 (1/3 of $0.50) per total IC contract. In my case, the credit to be received is $150 on a 10 contracts per each leg of an IC execution. Close enough to $160 desired but then there will be about a $40 execution expense (40 contracts x .50/contract). Decisions, decisions. Thanks again.
FWIW, three problematically-broad words in finance are spread, risk, and margin. They each have multiple meanings that blend and conflate themselves, and while you can get some clarity from the immediate context, that is *not* a 100% cure. Just here on ET, that lack of clarity probably accounts for a fifth of all posts by itself. (So! There is an intermarket spread, a calendar spread, a strike spread, or a bid-ask spread. Yowser! If you're in energy, your intermarket spread might also be the "spark spread." Sheeesh.) Two other thoughts: • "...a credit of at least $0.16 (1/3 of $050) per IC..." This sort of summary is fine, except that it leaves out the probabilities involved. Can't do that. • "...the credit to be received is $150 on 10 contracts..." Don't go for totals -- go for what you trade (which is market prices) and leave the volume to be volume. Don't crowd your brain with irrelevant detail -- and your account is irrelevant detail to the market. Whether your trade is 1 or 10 or 10,000, trade the market. • While I'm at it, there is one account number that matters most/always: net liquidation value. A close second is excess liquidity. All else is (nearly) NOISE.