Yes, I will be selling OTM. I also can't make an argument for buying OTM on that methodology. By the way, although I've been trading options for quite some time, there are those out there (e.g. riskarb) that are exceptional with the greeks, and can give a far more accurate mathematical analysis of strategies. Your input is always welcome Riskarb. Cheers, Cache
I do make a lot of trades like these. But some don't fall into any of these categories. I also implied (or meant to imply) in my first post that I wouldn't include past results. We'll see the success (or failure) as we go along. Those who know me know that I hate it when people promote a certain strategy by using past performance. My favorite statement in disclaimers is the one that says, "past performance in no way guarantees future results". I also hate it when people look at historical charts and apply a concept and say that they would've made $####. In my experience the same strategy is much more difficult in the real world. I've got to go build a house, so enjoy your weekend everyone. For those that prefer not to enjoy their weekend, would anyone like to expound apon why they think that this would work better with debit spreads (or visa versa)? No arguements please. Just simple ideas and opinions.
LOL. Ahhh, how well you know your fellow ET members! It doesn't matter how many disclaimers you put in your posts or how well you think you've covered your bases, they'll find something to moan about...but we love it! Again, good luck with your endeavour. I look forward to it.
Well I'm sad and pathetic enough to come here at this time to respond. Basically, you've unwittingly (or perhaps not) stumbled upon the "great divisor" when it comes to option trading practitioners here on ET. At least based on my observations. Assuming you know that for every credit spread there is a synthetically equivalent debit spread related to each other by a fairly constant known as a box then I will restrict discussion to differences in approach (moneyness) to credit spreading only as any given credit spread arguably has some cashflow benefits over the equivalent debit spread (again this is up for debate and matter of circumstance) In the blue corner we have: High probability/high risk/low reward credit spread traders who don't mind taking on large gamma exposure by selling FOTM credit spreads with high probabilities. Some refer to this as selling "cheap gamma" (which is leveraged in the wrong direction) and believe that this approach is just asking for trouble in the long term i.e. it's all fun and games until it's not. Others believe that if you have a good risk management approach you can overt disaster from ever happening. In the red corner we have: Low risk/high reward ATM credit spreading or arb equivalent butterflies where the gamma characteristics are much friendlier at the expense of lower probability of success. In Riskarb's terminology: an ATM butterfly is long upside gamma or convexity (the wings) and short downside gamma (the body) The thing to bear in mind is that although your probability of success goes up the further OTM you are, your reward appears to go down at a FASTER rate than the gamma exposure goes up. So from that point of view, the best risk/reward really is ATM and it just gets worse from there. Despite knowing that, some traders prefer giving the underlying a wide berth and take comfort in high probabilities. The key point to take away, if I'm not being too patronizing ,is the "short downside gamma" part which contrasts with the offending "short upside gamma" you have in a FOTM credit spread i.e. when your ATM, gamma has nowhere to go but DOWN - this is a good thing from an exposure point of view. When you're FOTM, gamma can only go UP as the underlying approaches and your FOTM becomes ATM. I'm sure I could have explained that better but the jist is there for those that care. So, as for your quesiton on whether this would work better with debit spreads vs credit spreads, I think you can agree that the credit/debit point is moot. The real question is whether this would work better ITM,ATM,OTM or FOTM whereby an ITM credit spread is synthetically the same as an OTM debit spread and so on etc. As stated above, there is the blue corner and the red corner, or you can just take a view on risk/reward and sit somewhere in the middle. If you are a good directional trader then none of this really makes a difference. If you can catch reversals reliably then you're bank. Presumably you came up with your percentage allocations from what fits with your personal risk appetite and style. Perhaps that is what it really all boils down to. Personal preference. Indeed, your percentage allocations is what piqued my interest as I'm curious to see the rationale and results from those choices. If you know the risks and you know what you're getting for your risk...and you're happy even though you know it's not neccessarily the best deal for your money, then who's to tell you to do otherwise! That should provide food for further expounding LOL. Happy trading. MoMoney.
I misunderstood your intital post. I had concluded you were going long-gamma verticals by scaling into a variety of delta positions. Rationale for trading ATM: 1) Long premium -- the gamma peaks at the 50d strike. Will perform better under one sigma up/down than an ITM or OTM positions. You're buying downside curvature, but it's negligible until you pass two sigmas favorable. If you're wrong, you'll lose less than you would with a larger initial delta position; if right, you'll gain more than a deep otm position, always assuming a one sigma move in the underlying. 2) Short premium -- ditto. You'll earn more at one to two sigmas in selling the peak-gamma with the 50d strike. Tight-verticals aren't terribly sensitive to price, so you'll want to trade into peak sensitivities whether long or short gamma. In #1 you're less-exposed to delta-pain while #2 limits your gamma-pain. Toss the above out the window if trading combinations, but it's valid[at least to me] when trading vertical spreads.
Thanks Mo. I must admit that it wasn't unwittingly that I asked that question. As you said, it is only obvious that for every credit spread there is a debit spread. The interesting thing is that everytime I start talking about spreads, everyone assumes I am talking about debit spreads. I've always been curious about this, so I thought I might take a sneek peek into the minds of those who would make that assumption. I expected more of a discussion, but I think you did such a good job summarizing the issue that we won't go much further with that topic. Although, comments are still welcome. I also have to admit that I usually take what many would consider a higher risk approach, and my credit spreads are majority ATM. What can I say, I like to chase the higher returns. Many would say that the risks are lower with OTM/FOTM. That might be true assuming that I never have to bail out of a position early at a loss much higher than the potential profit. In any case. For the time being I will try to stick to those percent allocations, but as I mentioned before it might take a while to get situated just right. The underlying objective is of course "aggressive growth" so the allocations might need to be adjusted depending on market conditions. We shall see. Thankyou for your input. Cache
Waiting patiently (or maybe not so patiently) for the FOMC announcement tomorrow. I don' t think it will reveal anything new but just in case I'd like to sit it out for a day or so. Looking at: PAAS (I think $20 will be the new support) SHLD (wondering if the resistance will hold again) COF (Double Top, now sitting below the 50 SMA) EBAY (waiting for it to break through support at $43) NEM (waiting for it to go above $60) SPX (bullish for now)
Today's Action All Credit Spreads Bull Put RIMM 60/57.5 @ .70 AAPL 75/72.5 @ 1.10 GS 135/130 @ 1.00 Bear Call BBY 50/55 @ 2.00 BSX 22.5/25 @ .70 AMZN 45/47.5 @ 1.10 Year to Date P/L Account Value: $10,000.00 YTD Gross P/L: - YTD Commiss: - YTD Net P/L: - YTD % P/L: 0.0%