Vertical spread risk/reward?

Discussion in 'Options' started by turkeyneck, Dec 27, 2010.

  1. Is 100% potential maximum profit a reasonable risk/reward to shoot for? Or you should look for something higher than that?
  2. 1) ?....a vertical debit spread with 100% potential maximum profit? I believe that would mean that you are initiating the spread with the "long" strike-price slightly in-the-money and the "short" strike-price slightly out-of-the-money so that the current market price is in between the strikes which would also tend to be your approximate breakeven price? :confused:
    2) Translation.......You're risking "x", to make "x". :p
    3) You have to tailor the spread to your market expectation. :cool:
    4) Out-of-the-money spreads have a smaller debit and greater profit potential if the market can move past the short-strike. :)
  3. I make my living trading index options credit spreads. I've never seen those kind of returns on any one spread that did not have a high probability of getting into serious trouble before expiration.

    OTOH, a more sane strategy could still provide you with 8% to 12% yield per month. Why be greedy?
  4. I'm sure the OP is talking about debit spreads, not credit spreads. I don't think normally people sell credit spreads with 100% profit potential, since the risk would be out of sight.
    Of course this is the Internet, so anything is possible.
  5. Do you mean 8-12% of the debit or of the max potential profit of the spread?
  6. You are likely correct. Perhaps I overreacted.
  7. I'm speaking of credit spreads. I'm not sufficiently versed in debit spreads to speak authoritatively, although I am am aware of similar opportunities.

    I routinely earn 8% to 12% per expiration on money at risk when an Iron Condor is formed. This happens most of the time, although it may take hours, days or weeks to form the second side. I treat each spread as an entity for entry, management and exit or expiration purposes.

    For a credit spread money at risk is the difference in strike prices minus the credit received. However, many brokers round up and quarantine more funds than that at risk. If an Iron Condor is formed, no additional funds are required to be quarantined, so this additional spread adds lots of return for a small increase in risk.
  8. Yes, I'm talking about debit bull call spread.
  9. Carl K

    Carl K

    Look for 3:1 ratio, OTM Vertical (300% R/R)
    Exit your trading plan (say 30% Profit, 15% Loss)
    If it should move past your short (ITM) and there's lots of time to expiration,
    consider creating a Box spread of it and let it expire.

    Enjoy life, it's limited.
    You only get as much as you take.
  10. spindr0


    Out of sight risk for a vertical spread? If the reward of a vertical is 100%, it means that the premium is 1/2 the difference of the strikes. It doesn't matter if it's a credit spread or the synthetic put spread. The margin and the reward are the same.
    #10     Dec 28, 2010