You mentioned Danshirley. Dan thinks the risk of investing all of ones account cash, in bull put spreads, is the same, whether they are all $10 (3 point gap spreads), $40 (3 point gap spreads), or $70 (3 point gap spreads). In theory they are. In the real world,... they are not. That is the message i want novice investors to be aware of. Dan doesn't get it and he never will. My warning is for others who have not yet lost their objectivity. I want them to think ahead for potential bad times. and think about how they might feel if they have no choice but to sell for a massive loss,... because they over concentrated their account on high priced strikes for their spread strategy,.... thinking all similarly spaced strike gaps are the same. They are not, and that is the darkside i want them to be aware of, before they find out the hard way. Spreads are a wonderful strategy, if used intelligently and strategically, and with an open mind, as to how a TEMPORARY market downturn may devastate your account value PERMANENTLY.
what do you mean? what are you talking about.... are you saying that a 5 wide striked spread on a 15 dollar stock has different risk then on a 50 dollar stock?
my opinion is as follows.. just to be explicit for the record... if your selling a options spread.. you better know your underlying and its related volatilities.. for example one would need to answer these set of questions.. or shall i say.. I WOULD. 1. does the spread pay well considering the typical devations in price movement of my underlying? (IE.. netflix has a high premium payout and you collect alot.. but not considering how many time the realized volatility ends up blowing out what the implied vol was priced at) 2. I would ask myself.. Am i looking through one pair of "strategy" glasses.. thereof am i being a perma bear or perma bull in my outlooks.. 3. Have i modeled what happens to my position when different things happen.. "what if's analysis" vol up.. vol down.. delta gamma risk changes. 4. once i've modeled what if's .. Do i have a map of what to do when those things happen? what is the worse case senario.. THEY HAPPEN.. have i considered how much money i would need to take the stock if i considered that as a part of my strategy.. or thereof have i considered the amount i would need to roll out my position.. basically the same thing.. taking the stock in a short put thats itm is similar to rolling down strikes in essence at least.. at least as far as My senerio of it being a bad trade and exiting completely hasn't been triggered.. 5. I ask myself again.. Am i jumping in front of a freight train to pick up what looks like a quarter and is really a penny and the train is closer then it appears... there are a few other things i consider when selling a spread.. macro maket stuff .. beta of stock.. foward fundimentals.. etc.. another thing is.. have I computed what my overall risk adjusted return is of a short put.. and a credit spread.. because generally speaking here we are collecting premium in these trades.. and if it pays more considering all the risks .. and there are alot of risks.. to sell a credit spread. then its a better strategy.. If i'm going to buy a stock.. i always would short a put.. cash secured.. .. and remember if your spreading widely your buying dotm options which are typically hard to price and make great protection in tail events.. which no matter which company you pick.. no matter how dilligent you can not predict.. all these trades have different margin implications... one benifit of spreading is.. you have a static margin requirment.. no matter if the stock goes to zero.. therefore you can't mess up in your mental accounting of what you need to have on margin.. and just say you were the crazy f8ck that wants to lever out and try to go for super returns in short period.. if you naked put.. you could be quckly margin called and put in a position in which you are cornered.. if you spread.. your margin is defined and there is a potiential for the underlying to cross back over the strikes you sold and become profitable.. NOT A RECOMMENDED STRATEGY.. but a consideration.. . Margin requirements and there related changes are always to be considered.. i know you keep track of your cash to secure your puts.. but i imagine some noob would mess it up and get himself a margin call.
Yes. Assume two $100,000 accounts. All the cash in both accounts is invested in bullish put spreads. One is all $15 5 point spreads, and the other is all $50 5 point spreads. Thus, they both contain 200 contracts. Assume they are both 5 week contracts, and they are both equally 15% OTM on initiation. There is a bad market. Two weeks later they are both just barely 1% below their upper strike. The $50 account will cost you one million dollars to buy the stocks, if it closes between the 2 strikes. The $15 account will cost you $300,000 to buy the stocks if it closes between the strikes. Both $100,000 accounts which used only cash to secure the spreads, put vastly different amounts of cash at risk, if you wanted the CHOICE of buying some of the stocks if put to you, in the hope of a temporary market drop and eventual recovery. Don't you agree it's nice to have CHOICES vs panic selling (closing) for a massive loss, when the market gets a bit volatile? In the $15 account you could consider waiting to see if the stock might recover by the time the contract expired. As buying most of the shares is not out of the question. There is no need to panic sell. In the $50 (million dollar) account, you risk a devastating "wipe out" of your account, if you don't close your spreads for a loss immediately. There is no potential plan "B" for the $50 spread account. Both accounts started out "the same" in terms of $100,000 cash, spread gap, % OTM, # of contracts, ect..... But your ability to manage them "the same" during diifficult times, could not be more different. That is my point. Option trading is not just about option strategies. It's also about "money management", and planning ahead for difficult times BEFORE they arrive.
you know what Putty man.. i must say we sure agree about everything and yet like to discuss everything in a slightly argumentative way.. you gotta love that ..hah... its not that i don't usually get what your saying.. sometimes i get confused and think your saying something a little different then you usually say.. and then you clarify and i realize your still saying the same thing hahah now that being said.... we should seriously battle with some examples.. to see considering money management.. risk adjusted returns.. and a particular type of underlying which strategy is a better one.. wanna do it? we should start a thread about it... wanna? a theoretical trade on a particular instrument.. and we can theorize about a concrete example.. put all our views into numbers.. extrapolate our opinions and then have a discussion considering a freaking example! wanna.. OK LETS..
no a real situation.. like a stock.. or etf or commodity.. and its related options.. as of right now.. http://www.elitetrader.com/vb/showthread.php?s=&threadid=247082