verticals

Discussion in 'Options' started by pjhaggerty, Aug 14, 2009.

  1. On other threads on this forum, I have seen the question of 'is selling or buying options better' generally with the answer being, if you sell you get a bunch of small wins and one big loss. If you buy you get a bunch of small losses and one big win. Either way, you don't have an edge.

    Now, after reading that the thought popped into my mind, why not just sell vertical spreads? You still have a string of small wins, but when those one or two big losses comes, it's only a medium loss for you because you bought the other option, limiting your risk.

    I'm sure there must be twenty holes that all the super advanced traders on this forum can shoot through this idea. So I'm asking, what would be the problem with this strategy? what are the down sides? looking forward to hearing your responses.
     
  2. Why not indeed... I personally don't find anything offensive about the idea.

    Obv, everything would depend on the specific circumstances.
     
  3. You mean that people really think that there's no edge to selling???
    I can't believe my own eyes!

    :D
     
  4. PS

    The problem with this strategy is if the underlying moves in the wrong direction. The downside is that you lose money.
     
  5. MTE

    MTE

    It doesn't matter whether you sell naked options or spreads, neither one has an inherent edge.
     
  6. RobtF

    RobtF

    Stay with it and you will find it is good strategy. The downside is that unless you use really good risk management you will not be adequately protected in a "black swan" event so don't get carried away.
     
  7. Huh? How do you come up with this conclusion?
     
  8. RobtF

    RobtF

    Personal experience.
     
  9. In your personal experience of selling call/put spreads (say, strikes K1 and K2; net premium recvd P), have you ever managed to lose more than ABS(K1-K2)-P?
     
  10. If strikes K1 and K2, and
    P = net premium received
    then

    ABS(K1-K2)-P = 1/2 the number of dead swans

    :)
     
    #10     Aug 14, 2009