Hi all, For those of you familiar with the platform, there are some verticle spread trades generated by the spread hacker application that has a extremely high probablity (>90%) of profiting and I can't figure out what the catch is. Most of them are deep OTM verticle put spreads. (I hope i'm getting the terminology right..) For example: Sell one Apr 08 110 puts of IYE Buy one Apr 08 105 puts of IYE Credit = 1.725 I mean the chances of me getting assigned are very low (not impossible of course), and even if it does somehow happen my risk are limited by the spread. The only downside to these trades that I can see is my capital being tied up to maintain the margin reguirements until short puts expire. Am I missing something? Also, who would be offering this spread since it's almost a sure loss for them? Just hedging purposes? I've been trading stocks for 3 years but am just getting into options so if any option pros out there can help me out that'd be much appreciated. Thanks!
There's no catch, it's a probability play. You will have many small wins and then one big loss, which will wipe out most if not all the profits. On the other side of the trade, you will take many small losses and then have one big win. On balance options are fairly priced, which means that, taken at face value, there's no edge in selling options vs. buying them.
Terminology is certainly important to understand and use correctly, especially when it comes to options. The spread you described above can appropriately be called a 'vertical put spread' but it would be more in detail to call it a <i> bull</i> put spread and since you are looking to <i>sell</i> to open the position you would be <i>short</i> one bull put spread. Welcome to the world of options. As you can see the terminology is indeed important (so is spelling, remembering to use a spell checker before posting is always a good idea).
be careful with these thinly traded etf/options. if the market moves against you it will be very hard to close your position without taking it on the chin from the mm. the probability these analysis programs come up with is based on standard deviations which is flawed t.a. std deviations are only valid in normally distributed populations. stocks are not normally distributed.