I know the option you sell helps finance the one you bought, but you are also giving up a large chunk of your upside. Doing these w/ a week or two left has time value working vigorously against you. Doing them further out you get a pretty flat risk curve, so the delta is pretty low. Why would you leverage yourself and then un-leverage yourself? And giving up so much of your upside on a long-term trade seems almost criminal. You can look for implied vol. skew, but isn't that kind of like having the tail wag the dog? And a lot of times the vols are skewed for a good reason that has to do with the real world and not math. Sorry, but these seems like a way to stay flat or slowly go broke. My feelings are: 1) Use options to hedge assets already owned 2) Buy them un-hedged if you're a good directional trader (some trades will lose completely, but your big winners should more than over come the losers and break-evens) 3) Use calendar spreads for implied vol. trades. But placing hedged option directional trades seems counter intuitive in a number of ways. Do you agree? Do you guys use vertical spreads? Do you like them? Am I wrong?
You raise some cogent points as to why vertical spreads might be inferior in certain cases than outrights . But it also has its place such as 1. Sell the strike at a percieved support or resistance for ex. 2. protect somewhat from vol implosion which the calendar sometimes can't due to smile. 3. give more commission to your broker so when it is time to renegotiate you can say you trade size. 4. possibly make $ even if the stock does'nt move if the skew is good enough. Good points though...
IMHO, many, if not all, of the strategies that are popular and that are written about in books, if executed SIMULTANEOUSLY just do not have enough of an edge to make them worthwhile...For instance, this vertical spread you are talking about if done simultaneously limits your upside, (as you mention) to simply the difference between the strikes, yet still exposes you to the cash outlay because you did the spread for a debit... I think the real "edge" for all of us who have to "pay up" to get into any options trade is to almost always "leg into" and "leg out of" spreads, whether they be complicated or simple...Personally, I almost never put on any spread for a debit and with a little timing, patience and execution skill can typically get into any number of spreads for even money or a credit depending on how far out or close to the initial strike I want to play it... Options are so much more than just a pure science in my opinion...THere is alot of creativity behind them that no one ever discusses and which the scientists who write these books would invariably denounce as nonsense... IMO, even the interview with Saliba in NMW is very insightful if you have some experience with options and read between the lines...He gives the readers a real good insight into how he structured his positions and gained a very real edge by using some true artistic creativity... For what its worth...
Buying options is usually a losing strategy. Creating a spread can make it more fair because you don't have to pay the full premium. I would think that in general you are better off doing a credit spread or going naked. Many people think these strategies are more risky, however, they fail to realize that they have a far greater probability of success. On a theoretical basis I think the credit spread is the best way to get limited risk with a higher probability of success.
I tend to agree about credit spreads. If you're right, which you hopefully are, you can just let them expire worthless (no additional commission and spread to pay). If you're wrong, you can buy back what you sold and still own an option increasing in value (if the trend against your original position continues).