The Only Vertical Spread that I Think has an Edge

Discussion in 'Options' started by BobbyMurcerFan, Feb 22, 2003.

  1. Bull Put spread. It seems all debit verticals are no better than just buying the call or put b/c the appreciation of the option you sold eats into your return and flattens your Profit vs Underlying Price curve, even if it's still OTM. All those straight line P/L graphs w/ 45 degree angle turns at the strikes show just after expiration. But few of us exercise (in both meanings of the word, LOL).

    Now, the Bear Call spread is a credit spread, but IV works against a seller, even with the calls.

    But the Bull Put spread allows you to sell a put and not have to put up the margin (b/c you also buy a lower strike put as a hedge). Now if prices rise, the IV of the put you sold should go down, working in your favor. Now it's true that the put you bougth will also lose in value, but I think the net benefit is with decline in price with the one you bought.

    That being said, my general opinion of vertical spreads is that they are way for brokers to make money and keep their clients from losing too quickly. I tend to believe that most vertical spreads are worse than a outright long calls or puts positions.

    Anyone care to comment, am I off base here?
     
  2. Fan,
    If there are any edges no one has told me about them so I can't pass them along. Seeing as a vertical spread is a directional hedged strategy any edge would be what you do when "X" happens, like rolling up or down or out, or scalping vega, gamma etc.

    The writing of Todd Harrison and C. Cottle come to mind, and it is a well crafted plan that you implement after putting on a position that increases your percentages verses just buying and selling, you might say having options on your options.
     
  3. I've got a copy of Cottles book "Coulda, Woulda, Shoulda" with me right now. :)
     
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  5. The edge in options trading is less in the structure of a trade than in being right of the direction of profitability. There are exceptions in DN structures.
     
  6. This is a good book. You might wish to get the full-size version, though. I believe interlibrary loan is the best way.
     
  7. How ya doing guy... good post. I agree exactly with what you said in paragraph 1..... X is often the difference between a win and also ran.

    I
    :cool:
     
  8. I agree.

    Trading volatility is not easier than trading directionally. If you trade vol and variance swaps then trading vol is much easier and actually a great way to make money, because you have no pin risk or assignment risk.

    But for those who trade stock or futures options, I'm afraid that the directional challenge is always there.

    If you really want to get into spreading and have a small account or can't do naked options, then the calendar strangle is a great way to try and capture a stock within a certain range with a high degree of probability.

    I also like the bull put spread for the advantages mentioned, but your directional analysis still has to be good. Forget about the fancy morphing techniques ala Cottle. Get the basics down first. if you can't make money on calls and puts then you won't make money morphing a losing position into another one. You'll only end up lining your broker's pockets...