Repost: About a week ago I initiated a put credit spread on CB for July. Bought the $30 puts. Sold the $35 puts. Credit of $0.75 Overall, I like the companies fundamentals. It appears to be financially healthy. However, since this is a S-T trade, my main focus is on the stocks technicals. The 5 year chart relects that anytime the stock drops below $35 it recovers to $35 or higher within a few days to a couple of weeks. Thus the reason for my $35 upper strike. If it again tests that $35 mark, I'll then decide whether to close the trade down, or give it a chance to recover, as it has in the past. Part of that decision will be based on the number of days/weeks remaining in the contract.
<<< Bought the $30 puts. Sold the $35 puts. Credit of $0.75 >>> Other than theta, what other variables should I be considering, that are as relevant for this type trade? Or is this considered a strictly theta trade.
Synthetic vol... but I'd have better luck explaining it to my Newfoundland puppy. Yeah, it's a theta trade, WTF that means.
<<< Yeah, it's a theta trade, WTF that means. >>> I'll rephrase the question for you. Other than allowing for time decay to increase the value of my trade, (as well as the potential of the stock rising), is it worth the time to monitor and consider other greeks for vertical spread trades? Or do the long and short positions "neutralize" the other variables to such a degree, that they are not relevant enough to matter?
Of course they are relevant. You're in a path-independent, long-delta, short gamma/vega trade. A normal person would hedge SV via gamma-adjustments, but it's a waste of time as your r/r is so poor that no adjustments can be made w/o making the hedge the PRIMARY RISK. Also, you believe that stat-vol is beta, which is another moronic episode. Your trade is a fait accompli, so I wonder why you come here to irritate us. Gamma and payoff convexity are remarkably consistent. I could spend months trying to pound that into your head, but you're not worth the time. With luck, you'll get bored starring at ET's village-idiot and find another hobby. In any case, I am done with you.
<<< ...your r/r is so poor that no adjustments can be made w/o making the hedge the PRIMARY RISK. >>> I asume you are saying my $0.75 July credit is too low to warrant adding an additional long contract. In which case I agree. But the only way to raise the credit at the time the trade was initiated, would have been to either select a longer contract than July and/or select strikes ITM. That would certainly improved my R/R, but it would have also resulted in a lower probability of the stock trading above my upper strike during the contract. I suppose I could have selected a wider strike gap than $5, for a higher credit, but that comes with it's own potential risk management issues. Thus, this trade was based mostly on the trading range I anticipated the stock would fluctuate in, during the duration of the 8 week contract, while relying on time decay to gradually increase the value of the trade. Given my choices of available strikes to work with, that was the strategy that seemed to make the most sense for this particular company (CB).
Hi Put Master, Why didnt you consider calender (anticipate stock stay sideway) or ratio backspread (anticipate stock going to move) as iv can be considered low at this moment Chee Yong
Hi tancy. Thanks for your input. Really appreciate it. With respect to strategy selection, I'll tell you where I think the stock is going to trade, and what my market concerns are. Then you'll have a better idea as to what might be the more appropriate strategy for me to consider. Over the next several weeks, I think the stock will trade between $35 and $43... depending on overall market influence. But I think its unlikely to actually hit within 1 point of either end. I can make a reasonable argument for the VIX remaining in a trading range, but I can just as easily make one for it trending down. But given the world we live in, I can just as easily see it spike up over a variety of concerns. Thus, I'd rather not have to worry about how individual stock or overall market volatility might negatively affect my investments. I didn't actually look into it, but I briefly considered doing an IC, given that I think CB will remain within the range I discussed. But I'm not ready for it emotionally. I mean that in the sense that I don't want to worry about stocks getting close to either end in volatile markets. I like being able to relax knowing its trending in one direction and I'm sitting with a nice otm cushion. Not ready to deal with managing both ends, with the potential of either over reacting too soon, or not soon enough. Given my volatility concerns and where I think the range CB will trade over the next several weeks, I decided to allow it to do its range thing, and just let time decay increase the value of my trade. That's why I initiated a credit spread. Knowing that I don't want to worry about guessing the "where and whens" of volatility, potentially negatively affecting my investments, and where I see the stock trading, does that affect which alternative strategies you think I should have considered? BTW, when I say "where and whens", I'm refering to worrying about where volatility is heading and when. Rather then "guess or hope", I'd rather simply take that issue off the table. Thus the reason for the credit spread. But I'm open to and appreciate alternative suggestions.