Theoretical options strategy challenge

Discussion in 'Options' started by cdcaveman, Aug 6, 2012.

  1. just because me and Put_master aka Putty man always seem to get into a discussion about his speculation of what the majority of "spread traders" do .. haha just messing with.. no but seriously that has spawned a relatively intellectual conversation about what is best and when.. sooo that being said.. check this.. being as ADHD as i am.. i figure we model the thread such that i can post a hypothetical trade.. discuss all my theory behind it.. and people can deconstruct its risks or just be critical as hell.. give opinions about what strategies they would use.. and then from there.. anyone is ok at any point to give counter point examples with hypothetical trades themselves.. . or for that matter just post their hypothetical trade and present their theory behind it and we will deconstruct it.. And if no one participates i will be talking to myself and thats ok .. i'm funny to myself :)
  2. I post enough real trades under the thread MY OPTION TRADES, that I'm really not into playing around with theoretical ones.
    That is what DanShirley does on his thread.
    I already made the point I wanted to make, regarding the "risk management" characteristics of spreads.
    I will re-post CD's question regarding the risk of managing a spread, and my reply below in the next post.
  3. --------------------------------------------------------------------------------
    Quote from cdcaveman:

    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?

    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", risk management, stress management, and planning ahead for difficult times BEFORE they arrive.
  4. OK how about I post a trade I take for real... or that I am about to take... tune in or not... but I'll be weighing strategies just like I described
  5. I read that post... I get it... your happy with your views on all thepeople that trade different strategies and how you trade your short puts on well researched companies
  6. Nope. What you stated above has nothing to do with what I wrote above.
    The point being, that not all similar gapped strikes of spreads should be viewed or managed similarly.
    Initiating and managing a $15 (1 - 5 point gap) spread needs to be viewed and managed differently than a $50 (1- 5 point gap) spread.
    Those who do not differentiate between their similarly gapped spread set-ups and management, are at a greater risk of a devastating loss to their account value, than those that do.
  7. What you say relates relates.. i see i will check you in the future for further definitions haha what your saying is obvious though a five wide strike on a 15 dollar stock is obviously different then one on a 50 dollar stock... or is it cause you havent consodered the volatility. The implied volatility or anything else... I mean in reality a 5 wide strike might be more risky on a 15 dollar... There are to many varibles... one must have an unambigous EXAMPLE speaking in such wild generalities is pointless
    I agree with everything you have stated, and have actually stated the same things over the past several weeks, although you have stated them more eloquently.
    HOWEVER, at the same time you have "somewhat and slightly" glossed over the main issue I was making. Which was that not all similarly gapped spreads are created equal, which many here disagree with. So I'll address a few of your points:

    <<< If my catastrophy strategy is to buy the stock there is little sense to the spread (except see below). From a simplistic point of view, the long option would seem to be simply a cost for protection you don't intend to use. >>>

    For myself, and many other spread traders, the reason for doing a spread is NOT to avoid buying a stock between the strikes. It is to avoid a "severe" drop below both strikes.

    <<< If I am doing a stock that has a very high degree of stability, is not overvalued and is a stock that I would be happy to hold in a disaster at the strike then I might sell naked puts and avoid the long arm of a spread. >>>

    Again I agree and have published all my naked puts in real time, under the thread of MY OPTION TRADES. With $17 TRLG being the most recent example.

    <<< Put Master says there is no potential 'plan B' for the spread but that is not true..... If I am holding a spread I could, on the day before option expiration, sell the long arm of the spread and take the profit in my long option, let the short option expire naked and I will be put the stock just as if I had been naked short the whole time......Then I could hold the stock and wait for recovery..... In this case, just like in a naked short put position, the price of the stock is very important to my ability to use that strategy. I need enough money to buy the stock....BUT, of course, If I want to de-spread before expiration I will need enough cash to bear the increase in margin requirements for that last 24 hours. So the decision to spread or go naked short is a function of which of all of these possibilities you have most in the fore-front of your mind. >>>

    This is the essense of the point I have been trying to make. That not all similarly gapped stocks should be viewed as being the same, or be treated as being equal.
    That the price of the stock is an important consideration when considering a spread strategy.
    Because if it is not considered, then THERE IS NO PLAN "B", as I stated.
    And I used the $15 vs the $50 spreads in the $100,000 portfolio as my example. One being valued at $300,000 and the other at one million dollars.
    In your 1st sentence you disagree that there is no plan "B", but then you agree that there is no plan "B" if you don't consider the price of your strikes.
    Which again, is the point I am making. That not all similarly gapped spreads should be viewed as being the same, or be treated as being equal.

    <<< Put-master is stressing what to do when there is a market wide disaster and he wants to hold his good stock and wait for recovery (which you can do with a spread also of course)... but most disasters are not market wide but stock wide. If the disaster is stock wide you may not WANT to hold the stock because that will open you not only to upside on the stock but also to further downside. >>>

    I agree of course. I was just making the point and using the example, that we have had several severe market downturns that turned out to be temporary, which I discussed several weeks ago.
    Remember the flash crash? Remember what occured in the market for a few weeks, when the S+P downgraded the USA debt? Down 300 - 500 points repeately. Intraday market swings of nearly 1,000 points,....
    And over the past several weeks I've also listed several examples of when I think investors should use spreads instead of going naked,.... regardless of what the strike are.

    So i am certainly not anti spread strategy, as I use it myself occasionally. I just don't want investors, particularly novice investors, to think that all similarly gapped spreads should be viewed as being the same, or be treated as being equal.
    Because if you do,.... there is no plan "B" to fall back on.
    Once a high priced stock falls between your strikes, you'd better close immediately, or you risk a total wipe out.
    A lower priced spread gives you more "time" to make a decision, more "ability to maneuver", more "choices" to select from in terms of managing your risk, and is less stressful to manage.
  9. Are you referring to a credit or debit spread in the above example?
  10. I assumed he ment credit spread, but I didn't think he ment to say "the day before expiration".
    Why give away all that time decay, waiting until the last day.
    Thus I let that statement slide.
    #10     Aug 6, 2012