Best Option Spread Strategy

J

jones247

FWIW, I thought it would be beneficial if we could collaborate, share and improve upon various option trading techniqes. It's a given that naked shorts are suicidal. Also, naked longs provide a slow bleed that eventually kills you (regardless of what Nassim Taleb asserts regarding his Empirica fund strategy). I've read on many occasions that the more successful options traders are spread traders that are long on the wings, having a favorable skew.

With that said, hopefully this can be an elightening thread that allows us to build and improve upon any number of creative and proven options spread strategies.

Personally, I've become fond of the Iron Condor and the backspreads. The problem is that one works best in a consolidating market, while the other works best in a trending market. Perhaps the best bet is to combine the two with a horizontal perspective (longs - front month or 30 days & shorts - next month or 60 days). This assumes that the options with a closer expiration date will decay at a faster rate.

Your thoughts...

Walt
 
Any thoughts on a reverse calendar spreads, especially since the market dropped more than 300 points on this past Friday. This may be a capitulation event coupled with a boost in IV. Of course, the challenge with a reverse calendar spread is the possibility that the underlying asset remains range bound. Perhaps offseting a reverse calendar spread with a Iron Condor, which benefits from being range bound, would be best. The problem with a the Iron Condor is that the losing leg may demand a synthethic covered call or roll it forward if the market price reaches the strike price. Personally, I'm leaning more towards the rolling forward preference. I suppose that instead of rolling forward, I could buy-back the losing short position once it doubles in price.

Hopefully this makes sense.

Walt
 
Amazing Results!!!! Based upon a test I just conducted thru Optionsxpress, using a call ratio spread with $50k for a March expiration (Apple) will yield a maximum profit of $1.2 million, while having a worst case loss of $0.

Test it for yourself...

I'm sorry that not many folks are willing to share their ideas and experiences. I trust that there are plenty of good folks willing to give back to forums such as this. Let's help each other achieve success...

Walt
 
"I'm sorry that not many folks are willing to share their ideas and experiences. I trust that there are plenty of good folks willing to give back to forums such as this. Let's help each other achieve success..."

Quote from jj90:
The best option spread is the one that fits your view. There is no win all.
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-This reply pretty much says it all.-


"Amazing Results!!!! Based upon a test I just conducted thru Optionsxpress, using a call ratio spread with $50k for a March expiration (Apple) will yield a maximum profit of $1.2 million, while having a worst case loss of $0."

-That doesn't make sense. No ratio spead has a max loss of 0. Having said that ratio spreads are one of my favs. Which strikes and what ratio?

Some strategies perform better in certain environments. McMillan covers all that stuff. No strategy is a trade in and of itself, rather, something should be predicted such as direction, volatility, etc.-
 
Quote from donnap:

[
"Amazing Results!!!! Based upon a test I just conducted thru Optionsxpress, using a call ratio spread with $50k for a March expiration (Apple) will yield a maximum profit of $1.2 million, while having a worst case loss of $0."

-That doesn't make sense. No ratio spead has a max loss of 0. Having said that ratio spreads are one of my favs. Which strikes and what ratio?

Some strategies perform better in certain environments. McMillan covers all that stuff. No strategy is a trade in and of itself, rather, something should be predicted such as direction, volatility, etc.- [/B]
More...

I think it's an bug in the Strategy Scan software application in Optionsxpress. I contacted the Live Help for assistance. At first they could not believe that their application was giving such info. However, after I e-mailed them a copy of the screen shot, then they mention that they will refer it to the Technical Dept. I'm becoming a bigger fan of the Iron Butterfly and the Ratio Spread. Actually, I wish there was a favorable exit strategy for the naked leg in a ratio spread. Currently, the only consideration I have is to roll the spread once the price of the naked leg doubles in value or buy DITM option to serve as the synthetic covered position against the naked leg once the market price reaches the strike price. Any suggestions on how to best manage the naked leg?

Walt
 
With the recent peaks in IVs, Iron Condors are nice and fat.

Outside of this, I have a hobby of trying to get free ootm call condors by careful strike selection and timing (and a bit of luck).

If you stick to standard strike intervals, your broker/platform /might/ not impose any margin requirements on them.

I can't say I've gotten then truly for free yet, but I have gotten them seriously discounted - often providing excellent RoC.

In theory you could use the same approach to get (nearly-)free OOTM put condors, but this is tougher as IV typically rises as the UL drops making these harder to get, and harder to get the same level of returns from.

Another important factor is timing... in order to maximise returns, you need to select your strikes such that the UL 'lands' dead center with little time-value left - preferably on the rise (so as to get low IVs).
 
Here's a very close to free OOTM Call Condor on AAPL for MAY'08.

This one cost less than $100 per basket and could return as much as $950. In this case, I'm fairly confident that the UL *will* cross the peak ($175), I just hope it does so just before the expiry.
 

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