1x2 put spread strategy

[cdowis]

Quote from sukikra:

but how can you lose money from this trade when it actually costs 0 initially.

Hopefully you are papertrading, and not using real money. At least, make your positions very small until you understand what you are doing.

On every trade, somebody is going to win, and somebody is going to lose == can you guess which one is the newbie.

 

[ghettotrade]

Quote from cdowis:

Hopefully you are papertrading, and not using real money. At least, make your positions very small until you understand what you are doing.

On every trade, somebody is going to win, and somebody is going to lose == can you guess which one is the newbie.

 

[Rodney King]

Quote from Maverick74:

Ratios are short vol trades so you don't want to have them on in a situation where vol could explode

Exactly, and thanks for explaining. Vega is more important than delta or gamma on these spreads, at least in the short term.

As to whether '1x2' is kosher terminology -- yes, it's heard, and it has the advantage of flexibility... 1x3, 1x4, 2x3, whatever.

 

[tomk96]

1x2 is common terminology.

same with every other ratio 1x1.5, 2x3, 1x3, whatever.

 

[ramaTrade]

Quote from sukikra:

but how can you lose money from this trade when it actually costs 0 initially.

If the underlying price stays above 118, then the short wont be exercised, only if we go below 116 could we lose money(at expiry). If inbetween 118-116 , could you not just unwind the position for profit ? (as the long would have gained intrinsic value).

Fine the strategy has net negative delta, but that doesnt lose you money in real terms.

It is a long delta, short vega, short gamma position that will have open-ended loss. Risk is on the downside.
You can play different cases in the Options Lab at http://www.TheOptionsLab.com make sure you choose Offline tab so that you can enter the data manually.

Also the price you mentioned does not make senses. IV between 118 and 117 puts cannot be that off.

 

[ramaTrade]

See attached analysis for the strategy you described.

 

[stevenpaul]

Quote from tomk96:

1x2 is common terminology.

same with every other ratio 1x1.5, 2x3, 1x3, whatever.

I'm clearly outvoted in my view that this is the wrong term for the trade. I've never worked on the floor, as I prefer staying home in boxer shorts to trade, so I don't know the floor lingo. My objection to the term is that it speaks only to the ratio of long and short options in each leg, which leaves out a few key details. I prefer frontspread or vertical ratio spread, which could even be qualified with the ratios if it seems pertinent. This of course is mere nomenclature, but it started out as a chance to hate on CNBC and the know it alls who throw around the ratio term. Who can blame me for that?

 

[Martinghoul]

In my neck of the woods, the term used exclusively is 1x2,...,AxB call/put spread.

 

[HowardCohodas]

Quote from stevenpaul:

I'm clearly outvoted in my view that this is the wrong term for the trade. I've never worked on the floor, as I prefer staying home in boxer shorts to trade, so I don't know the floor lingo. My objection to the term is that it speaks only to the ratio of long and short options in each leg, which leaves out a few key details. I prefer frontspread or vertical ratio spread, which could even be qualified with the ratios if it seems pertinent. This of course is mere nomenclature, but it started out as a chance to hate on CNBC and the know it alls who throw around the ratio term. Who can blame me for that?

Sounds overdressed by my standards. :eek:

 

[spindr0]

Quote from HowardCohodas:

Sounds overdressed by my standards. :eek:

Does this have anything to do with a joystick???