beginner with options trading question

[jimmyjazz]

Yes you are correct. I should re phrase that i am referring to OTM spreads, in which the debt and credit spreads would have different strike prices. I think it is easier to learn about spreads when you look at them as being OTM. I would recommend that thought process as a beginner.

I don't see the point of comparing an OTM put spread to an OTM call spread. They have different strikes and will obviously behave differently. The question at hand is, given a bias on the underlying (bull or bear), is it better to use a debit or credit spread, regardless of whether we are putting on that spread above or below the current price.

 

[Robert Modd]

Ummm . . . no? Disregarding the wider bid/ask spread on the typical debit spread, it is identical to the credit spread with the same strike prices & expiry. One downside to credit spreads is the fact that the short leg will go ITM before the long leg, which potentially exposes the seller to assignment w/o an ITM long option to cover.

There is no fundamental difference between the 2 spreads if pricing is equivalent (other than the risk mentioned above). By "equivalent pricing" I mean the debt is equal to the spread minus the credit.

Yes you are correct. I should re phrase that i am referring to OTM spreads, in which the debt and credit spreads would have different strike prices. I think it is easier to learn about spreads when you look at them as being OTM. I would recommend that thought process as a beginner. Thanks for catching that.

 

[Robert Modd]

I don't see the point of comparing an OTM put spread to an OTM call spread. They have different strikes and will obviously behave differently. The question at hand is, given a bias on the underlying (bull or bear), is it better to use a debit or credit spread, regardless of whether we are putting on that spread above or below the current price.

As we just discussed you can do either and obtain the same trade depending on being ITM or OTM. If we just talk about OTM strikes then purchasing a debit spread gives you more upside with a lower probability. If you have a strong directional bias then an OTM debit spread should be the choice. My bias is neutral almost 100% of the time so I like selling OTM credit spreads. Or ATM credit spreads. I like positive theta with a higher probability but that comes with a lower potential reward.

 

[Robert Modd]

Let me clarify if you are long then we are comparing a OTM call debit spread to a OTM put credit spread. This is where comparing put spreads and call spreads have a point. Both spreads have a long directional bias so the questions is how do you want to go long?

 

[Cyse]

I have been a user of the ToS platform (live and simulated) for many years. I trade emini S&P 500 options (Symbol ES) credit spreads. That said, your question begs a few more questions, e.g.;

what symbol did you trade
stock, etf, futures
why did you decide on that particular symbol
fundamental and/or technical analysis
what expiration date
how did you you choose expiration date and strike(s) of the call you sold
did you use ToS' Options Hacker (under the scan tab)feature to identify the call you sold
did you use ToS' Analyze tab to look at risk analysis and probabilities
what criteria did you use in your scan(e.g. Probability, Delta, days to exp, Vol)
did you have a stop loss number in mind and did you place that order along with your sell order
do you have a written trading plan and, along with that,
do you have a written trading strategy
did you follow your plan and strategy

When entering a trade i always use the foregoing questions before hitting the send order button. You need to have a plan and, as a part of that plan, a strategy and be able to stick to it.

I recommend that, if you haven't already, read the following books which are a part of my library and which I have found to be useful.

Options Pricing and Volatility (2nd Ed.)
Natenberg

The Complete Guide to Options Selling (3rd Ed.)
Cordier and Gross

Getting Started in Options (8th Ed.)
Thomsett

All About Options (3rd Ed.)
McCafferty

Trading Weekly Options
Rhoads

Options Spread Trading
Rhoads

Vertical Options Spreads
Conrick and Hanson

Options as a Strategic Investment (5th Ed.)
McMillan

The Bible of Options Strategies (2nd Ed.)
Cohen

Trading Psychology 2.0: From Best Practices to Best Processes
Steenbarger

Thanks for a great response. Poignant questions to work on. I read a book by Cohen titled "options made easy." To be honest, I didn't like it all that much. So I started watching the where do I start series with Tom sosnoff. His daughter is attractive. I think I'll read options as a strategic investment by McMillan next. Thanks for that recommendation. I was mulling over whether to buy it or not because I wasn't sure if I'd get anything out of it, much like Cohen's book.

 

[Cyse]

You said "a debt spread needs the stock to move a certain direction." That's not always true. If I am bullish on a stock and I buy a call debit spread in which both legs are ITM, then I don't need the underlying to rise. I don't even need it to NOT fall. I just need it to not fall so much that it expires below my breakeven point (assuming I am seeking a profit, which is pretty much the point of putting on a trade).

You also said "in other words credit spreads have a higher probability of profit but they don't have as much reward as a debit spread." This is not true. The P/L (or risk:reward) of credit and debit spreads are identical, at least at expiry. There might be minor differences along the way, but not much . . .

Would you say it's better to buy/sell two itm strikes on a debit vertical?

I was actually thinking about this today.

Why buy one itm and the other otm? If I get two strikes that are itm, I have a small cushion in case the trade goes against me.

What are the benefits of buYing itm/selling otm vs. Buying itm/selling atm

 

[OptionGuru]

Would you say it's better to buy/sell two itm strikes on a debit vertical?
I was actually thinking about this today.
Why buy one itm and the other otm? If I get two strikes that are itm, I have a small cushion in case the trade goes against me.
What are the benefits of buYing itm/selling otm vs. Buying itm/selling atm

Buying/selling ITM spreads to open a trade is absolutely useless.

 

[Cyse]

Buying/selling ITM spreads to open a trade is absolutely useless.

Even if your underlying moves in the direction you call?

 

[OptionGuru]

Even if your underlying moves in the direction you call?

Yes ........ Stick with ATM/OTM options when you open a trade.

 

[Cyse]

Yes ........ Stick with ATM/OTM options when you open a trade.

Hahaha. Ok then, thanks for clearing it up for me