Beginner asks: Sell a Call Spread? Buy a Put Spread?

Quote from spindr0:

OK, I'll bite.

The Series 7 exam (for brokers) states that the OPTION PREMIUM is the amount that someone pays or receives for the option contract and is composed of two parts - extrinsic or time premium and if in the money, some intrinsic premium as well). Books by reputable authors say the same. Darn, even the Option Clearing Corp indicates this as well.

You got the intrinsic and extrinsic part right in terms of components of the option's cost (dare I say premium?). You say otherwise, eg. that the extrinsic value is known as the PREMIUM. What's your source that refutes most of the world? :)

(yawn)
More...


Fine - as the last 3 post claim that the word "premium" means the net price of an option - as defined by the series 7 exam.

Ask any market maker to check the premium on their position - (which every trading sheet from Goldman to Merrill Lynch) will clearly define it as the "premium over parity" - cause it sure isn't the net price you have paid for an option.

I guess the market makers are wrong when they are considering the net premium as the amount over parity or maybe just Goldman and Merrill got that wrong? Who knows - but as I clearly look at my clearing sheets and the "PREM" column clearly delinates my premium as defined by the math to mean - the amount over intrinsic value. As I look at my trading software the column premium means the same thing.

I can also tell you that a vast amount of brokers (who have taken the series 7) sure don't know the difference between intrinsic and extrinsic value = hence many morons who sell calls under water to market makers on expiration to close out positions and give away free money. Or the ones who sell deep in the money call/put spread for lower than the net box value. Or the ones who sell ITM cover-calls under water. The list grows long and while they might of past the test - they clearly don't understand the math.

OK - we will go with that term - since the government regulatory agencies are ALWAYS right and have apparently (again) confused everyone to the math.

If you guys are stuck on semantics and can't do the math and think that buying a call spread for a debit means you are net long "Premium" because that is how the "series 7" exam INCORRECTLY defines it - then be my guest.

Sorry for the rant - but when I try to take the time with detailed math examples to help clarify something and then people respond with semantics - I think they are obviously missing the point of the math. And at the end of the day if you are not doing the math - you obviously missed the point.

Give me sh*t about the math or debate me about the method, but get over the silly semantics.

Premium, Time Value, Juice, Risk Value, Premium over Parity - I have seen many words used to discribe the term extrinsic value.

I even heard one person years ago tell me (as silly as it sounds) that Premium has been adopted to refer to the net price to keep investors in the dark as to the math. Sounds like a silly conspiracy to me - but then I read a few posts on here and I am beginning to wonder if that person was really the nut job I thought he was?

Geez - no wonder I had stopped posting to this site a few years ago.
 
Which spread should I open a position in?

If up trend expected, do a Bull Put Spread or Bull Call Spread.
If down trend expected, do a Bear Call Spread or Bear Put Spread.

Please do not ask more. It's too much to explain all the Vertical Spreads strategies here, but use the above term to reseach further. It should give you good starting point.

Good luck.
 
Quote from SDiegoTrader:

Which spread should I open a position in?

If up trend expected, do a Bull Put Spread or Bull Call Spread.
If down trend expected, do a Bear Call Spread or Bear Put Spread.

Please do not ask more. It's too much to explain all the Vertical Spreads strategies here, but use the above term to reseach further. It should give you good starting point.

Good luck.
More...

The guy can't decide between a bear call spread and a bear put spread so you answer doesn't really help. :)
 
The guy can't decide between a bear call spread and a bear put spread so you answer doesn't really help.

Like I said, if down trend expected (that means do technical or fundamental analysis), then choose Bear call/put spread strategy. So, it does help. He just need to be proactive in his resaech first.:)
 
Quote from lionfish42:

Fine - as the last 3 post claim that the word "premium" means the net price of an option - as defined by the series 7 exam.

Ask any market maker to check the premium on their position - (which every trading sheet from Goldman to Merrill Lynch) will clearly define it as the "premium over parity" - cause it sure isn't the net price you have paid for an option.

I guess the market makers are wrong when they are considering the net premium as the amount over parity or maybe just Goldman and Merrill got that wrong? Who knows - but as I clearly look at my clearing sheets and the "PREM" column clearly delinates my premium as defined by the math to mean - the amount over intrinsic value. As I look at my trading software the column premium means the same thing.

I can also tell you that a vast amount of brokers (who have taken the series 7) sure don't know the difference between intrinsic and extrinsic value = hence many morons who sell calls under water to market makers on expiration to close out positions and give away free money. Or the ones who sell deep in the money call/put spread for lower than the net box value. Or the ones who sell ITM cover-calls under water. The list grows long and while they might of past the test - they clearly don't understand the math.

OK - we will go with that term - since the government regulatory agencies are ALWAYS right and have apparently (again) confused everyone to the math.

If you guys are stuck on semantics and can't do the math and think that buying a call spread for a debit means you are net long "Premium" because that is how the "series 7" exam INCORRECTLY defines it - then be my guest.

Sorry for the rant - but when I try to take the time with detailed math examples to help clarify something and then people respond with semantics - I think they are obviously missing the point of the math. And at the end of the day if you are not doing the math - you obviously missed the point.

Give me sh*t about the math or debate me about the method, but get over the silly semantics.

Premium, Time Value, Juice, Risk Value, Premium over Parity - I have seen many words used to discribe the term extrinsic value.

I even heard one person years ago tell me (as silly as it sounds) that Premium has been adopted to refer to the net price to keep investors in the dark as to the math. Sounds like a silly conspiracy to me - but then I read a few posts on here and I am beginning to wonder if that person was really the nut job I thought he was?

Geez - no wonder I had stopped posting to this site a few years ago.
More...
I'd answer you point by point but most of your reply had nothing to do with anything. Reality is, the general public uses the word premium to mean total cost. If you and your market maker friends want to use it another way, fine, but don't go to England and insist that everyone is wrong and that they should drive on the right (as in not left) side of the road.

You're right, that was quite a rant and I think that you have too much time on your hands.
 
Quote from spindr0:

I'd answer you point by point but most of your reply had nothing to do with anything. Reality is, the general public uses the word premium to mean total cost. If you and your market maker friends want to use it another way, fine, but don't go to England and insist that everyone is wrong and that they should drive on the right (as in not left) side of the road.

You're right, that was quite a rant and I think that you have too much time on your hands.
More...

Let's keep the responses to the math and toss the semantics to the side. I am just pointing out that market makers, institutions, and even many option orientated trading/risk management software refers to it as the value OVER intrinsic.

If you choose to ignore or interpret what the clearing firm sheets and software is telling you to mean something else - because the Series 7 told me so - be my guest.

Didn't you read the earlier posts by some of these people. One person actually thinks that the difference between the call debit spread vs. put credit spread is that one is short IV? He is basing that on the use of the word "premium" and clearly doesn't understand the difference between extrinsic and intrinsic value.

I am trying to help with giving detailed examples and you are caught up in some semantic argument - because some regulatory agency in a series 7 test calls it premium.

Let's focus on the math to offer some help and you can call it PURPLE for all I care.

Please go point-by-point over the math and trade examples - don't bother to respond to semantics.

BTW: I type very fast (excuse the mistakes)
 
Quote from lionfish42:

Let's keep the responses to the math and toss the semantics to the side. I am just pointing out that market makers, institutions, and even many option orientated trading/risk management software refers to it as the value OVER intrinsic.

If you choose to ignore or interpret what the clearing firm sheets and software is telling you to mean something else - because the Series 7 told me so - be my guest.

Didn't you read the earlier posts by some of these people. One person actually thinks that the difference between the call debit spread vs. put credit spread is that one is short IV? He is basing that on the use of the word "premium" and clearly doesn't understand the difference between extrinsic and intrinsic value.

I am trying to help with giving detailed examples and you are caught up in some semantic argument - because some regulatory agency in a series 7 test calls it premium.

Let's focus on the math to offer some help and you can call it PURPLE for all I care.

Please go point-by-point over the math and trade examples - don't bother to respond to semantics.

BTW: I type very fast (excuse the mistakes)
More...

Actually you are the one arguing about semantics.

The point is, the two spreads the OP is asking about are synthetic equivalents so they are identical in every respect. However, usually the OTM options have slightly tighter bid/ask spreads so you may be able to get a slightly better fill (a nickel) on the OTM spread.

Case closed.
 
Quote from MTE:

Actually you are the one arguing about semantics.

The point is, the two spreads the OP is asking about are synthetic equivalents so they are identical in every respect. However, usually the OTM options have slightly tighter bid/ask spreads so you may be able to get a slightly better fill (a nickel) on the OTM spread.

Case closed.
More...

I don't know why I bothered with doing all the math - with examples to offer some help - only to getting beat'n down.

If these people new to options (or ones that are just ignorant to them) are not getting it - shouldn't we try to help.

God forbid they use some option software that states NET PREMIUM of their position and they think it is their NET option value. Or they trade at Goldman, Merrill, or some firm that gives them daily sheets with PREM on them.

You are right - they are synthetic equivalents. I was trying to do the math long-handed so they could see the difference and three people respond to my use of the word premium - and failed to address the most important part - the math. I just didn't want people to be confused by the word.

Obviously I am offering no help and will gladly withdraw.

This thread is Kobayashi Maru'd!
 
Option premium = intrinsic value + time value.

Out of the money options have no intrinsic value, only time value.

I didn't look say your chart, but assuming IV's are equal, you also should determine if they are rising or falling. That would help in determining which play (long put spread or short call spread) gives you a better probability for success.

Any trade can win. Yes, any trade can win. Some just have better probability.

Selling otm spreads generally are more favorably since the market doesn't have to move for your position to be profitable, while buying otm spreads requires the market to move in your favor to win.
 
Quote from lionfish42:

Let's keep the responses to the math and toss the semantics to the side.

What math? The OP asked about which of two equivalent spreads is better. You went off on a pedantic wild goose chase, correcting people about the usage of the word premium

I am just pointing out that market makers, institutions, and even many option orientated trading/risk management software refers to it as the value OVER intrinsic.

Then it's probably a good idea that when you talk to market makers, institutions, and when using option orientated trading/risk management software that you use premium interchangeably with extrinsic value. Elsewhere, you might have a problem with the ignorant masses agreeing with you.

If you choose to ignore or interpret what the clearing firm sheets and software is telling you to mean something else - because the Series 7 told me so - be my guest.

Guest what (sic)? I don't use clearing firm sheets and software nor does the Series 7 speak to me.

Didn't you read the earlier posts by some of these people. One person actually thinks that the difference between the call debit spread vs. put credit spread is that one is short IV? He is basing that on the use of the word "premium" and clearly doesn't understand the difference between extrinsic and intrinsic value.

And that has what to do with the price of tea in China? So how come you're not ranting to him about short IV? Is defining PREMIUM as extrinsic value your Cause Celebre??

I am trying to help with giving detailed examples and you are caught up in some semantic argument - because some regulatory agency in a series 7 test calls it premium. Let's focus on the math to offer some help and you can call it PURPLE for all I care.

Naaaaaa. I wouldn't call it PURPLE because everyone here calls it GREEN. If I called it PURPLE then I'd be PINK SALMON like you, trying to swim upstream.

Please go point-by-point over the math and trade examples - don't bother to respond to semantics.

Is that from Internet Crowd Control 102? I'm still in 101, trying to figure how much more 102 is than 101. Ummm. Ummm. Got it !!(flashes one finger)

Obviously I am offering no help and will gladly withdraw. This thread is Kobayashi Maru'd!

Sayonara? Say it ain't so. You'll be baaaack, right Ahhhnuld?
More...
 
You must log in or register to reply here.
Back
Top