Best option strategies to learn ....

[anycolour]

To start, learn vertical debit spreads. Its the backbone of almost any advanced spread such as butterflies, condors, and backratios. A good starting strategy that's directional is trading an at the money 2-5 point wide spread at around 30 days out. The key is to make sure your risk to reward is favorable. You want to make sure your risk is less than half the width of the spread.

For example, if your bullish on TSLA, you could place a 440/445 call spread at 1.70. Max risk is the debit you're paying for the spread, here it would be $170. The most you could lose is $170, and if your right and TSLA expires above 445, your max win will be $500. You want to make sure you're paying $250 or less, which is the max reward divided by 2. The thought process here is its a 50/50 chance TSLA goes up or down. So with that you want to make sure you're paying less than 50% of the reward if your right. If you place the trade 1000 times (and direction is actually a 50/50 chance), you have positive expectancy.

Thank you. I'm new to trading options, and I've been looking for a good strategy to start with. This one resonates with me.

Would appreciate clarification with the following:

The potential real net max profit here is $330 correct? $500 is gross, but you paid $170 for the option, leaving the potential max profit at $330?
Since you paid $170 for it and max potential gain is $330, that's almost a 1:2 risk/reward, correct? $170 x 2 = $340

Now, I also need help on how to manage the trade once I place it. Do I set a GTC order for both profit stop and stop loss? Do I aim to get the full $330 for a 1:2 R/R or would it be smart to take profits before that (like at a 1:1.5 R/R which would be at $255)? How would I go about doing this?

Can I configure the order to sell at a certain dollar value? Or can it only be set to flatten at a certain strike price (if so, can I set up alerts for when I've captured >$255 in gain)? Is it possible to move stops up like when trading regular stocks (e.g., my spread value goes above $200, and I want to guarantee $200 profits if the value goes back below that amount - how would I set a stop for this)?

One more question: What was TSLA trading at when you created this scenario?

I'm a visual learner, so I'd appreciate visual help if possible. E.g., if you hadn't attached the screenshot of the actual scenario in your original post, I would've had a hard time understanding the trade.

Thank you!

 

[Trade Theory]

The potential real net max profit here is $330 correct? $500 is gross, but you paid $170 for the option, leaving the potential max profit at $330?
Since you paid $170 for it and max potential gain is $330, that's almost a 1:2 risk/reward, correct? $170 x 2 = $340

Yep, your math is correct. From a quantitative perspective, as long as your entry price (max loss) is less than your max gain, there's edge. You could be right half the time and wrong half the time and in the end you'll end up ahead. You could definitely go on losing streaks so allocate accordingly. I've lost 10+ of these in a row before. If you're good at picking direction, you'll do good.

Now, I also need help on how to manage the trade once I place it. Do I set a GTC order for both profit stop and stop loss? Do I aim to get the full $330 for a 1:2 R/R or would it be smart to take profits before that (like at a 1:1.5 R/R which would be at $255)? How would I go about doing this?

I personally like to hold these until expiration. The primary reason I trade options is so I don't have to worry about triggering stops. I treat it like a binary trade, either win the whole thing or lose the whole thing. Its really up to you though. You just want to make sure if you do decide to adjust it or set stops, your adjusted max gain will still be larger than your adjusted max loss.

Can I configure the order to sell at a certain dollar value? Or can it only be set to flatten at a certain strike price (if so, can I set up alerts for when I've captured >$255 in gain)? Is it possible to move stops up like when trading regular stocks (e.g., my spread value goes above $200, and I want to guarantee $200 profits if the value goes back below that amount - how would I set a stop for this)?

You could set a GTC to sell at a certain profit point. So if you decided you were happy at $100 profit you could sell the spread GTC at 2.70 limit.

You could also set stop orders and trailing stops the same as you would trading a stock. The order rules should be the same as an equity order.

You could also set the order to flatten if it hits a certain strike price. This ones a bit trickier but can be done by setting a conditional order. In Thinkorswim you could click the sprocket just above Confirm and Send to open the order rules. In this pic it sells the spread at the mark price (AKA mid price) when TSLA is trading greater than or equal to $470.

One more question: What was TSLA trading at when you created this scenario?

It was trading at $442.28. The price is shown on the middle 0% price slice in the screenshot on my original post. Crazy how quickly TSLA rallied the past few months...

 

[taowave]

Would you please define "edge" and being "right".

The statement in bold is highly debatable

Yep, your math is correct. From a quantitative perspective, as long as your entry price (max loss) is less than your max gain, there's edge. You could be right half the time and wrong half the time and in the end you'll end up ahead. You could definitely go on losing streaks so allocate accordingly. I've lost 10+ of these in a row before. If you're good at picking direction, you'll do good.



I personally like to hold these until expiration. The primary reason I trade options is so I don't have to worry about triggering stops. I treat it like a binary trade, either win the whole thing or lose the whole thing. Its really up to you though. You just want to make sure if you do decide to adjust it or set stops, your adjusted max gain will still be larger than your adjusted max loss.




.

 

[anycolour]

...

Thank you very much!

At what time would it have been best (& cheaper than $170) to purchase that spread? When TSLA was trading at $435, $440, $442.28, $445, or $450? At which of these prices would it have not made sense to purchase the spread?

Also need help with the following scenario:

TSLA was trading at $442.28 but I wanted to enter a short instead of a long, via a spread. Can you do vertical debit spreads to short - if so, how? Or must you do credit spreads, if so- how?

Since in the original example $442.28 is very close to the midpoint between 440 and 445, I would want to be short that same width and strikes, i.e., 5 strike wide (hopefully I'm using the terminology correctly so you can understand). Meaning, I'd be confident that TSLA would go down to at least $440 or even lower, to let's say $435 within the next 30 days.

Would the price to purchase the spread and the profit potential (+ all the other parameters) in a short spread be similar to a long spread?

Thank you!

 

[taowave]

You are heading down a very slippery slope. Verticals offer no "edge" unless you believe the skew to be significantly mispriced.

What books on Options are you currently reading?

Thank you very much!

At what time would it have been best (& cheaper than $170) to purchase that spread? When TSLA was trading at $435, $440, $442.28, $445, or $450? At which of these prices would it have not made sense to purchase the spread?

Also need help with the following scenario:

TSLA was trading at $442.28 but I wanted to enter a short instead of a long, via a spread. Can you do vertical debit spreads to short - if so, how? Or must you do credit spreads, if so- how?

Since in the original example $442.28 is very close to the midpoint between 440 and 445, I would want to be short that same width and strikes, i.e., 5 strike wide (hopefully I'm using the terminology correctly so you can understand). Meaning, I'd be confident that TSLA would go down to at least $440 or even lower, to let's say $435 within the next 30 days.

Would the price to purchase the spread and the profit potential (+ all the other parameters) in a short spread be similar to a long spread?

Thank you!

 

[anycolour]

You are heading down a very slippery slope. Verticals offer no "edge" unless you believe the skew to be significantly mispriced.

What books on Options are you currently reading?

I haven't read a single book on options. Just learning here and there from various internet sources. If this is the wrong path, I'd really appreciate you pointing me in the right path. Thank you!

 

[taowave]

I agree that understanding verticals is a very good building block,but in no way can anyone say that any vertical trading for less than half the strike width offers "edge"..Its just not true,and even if it were,it's a gross over simplification.

Get a good basic book on Options and hopefully develop a general understanding.

I haven't read a single book on options. Just learning here and there from various internet sources. If this is the wrong path, I'd really appreciate you pointing me in the right path. Thank you!

 

[Trade Theory]

Would you please define "edge" and being "right".

The statement in bold is highly debatable

When I say being right, I'm referring to the underlying moving in the direction of your trade. So if you're trading a call debit spread, your bullish and a put debit spread you're bearish.

The topic of edge is highly debatable and even believing an edge can exist in the marketplace seems to be frowned upon around here. The counter argument would be the options are always priced perfectly and the reason you have favorable pricing is because its not a 50/50 chance that the underlying will move in one direction or the other. At the end of the day, the edge comes from a disparity between implied volatility and actual realized volatility. If you believe options are priced perfectly then take everything I say with a grain of salt as edge would not exist and you shouldn't even place a speculative trade to begin with. I believe otherwise.

It's a very beginner friendly trade. You don't need to worry about the greeks or volatility, and you cannot lose more than you put into the trade. The point of trading these tight vertical spreads is to learn price action. You'll see how the spread price reacts to time and movement in the underlying. Its also an easy way to understand risk and max profit. People swing trade stocks directionaly all the time, this is the exact same thing with options. It adds a time constraint to the picture as the underlying has to move in the direction of your trade before expiration. But it also takes away the high likelyhood of stopping out of your trade. Next time you were to buy a stock and set a stop, look at the options chain and check the "probability of touching" your stop strike price. The numbers would surprise you.

 

[Trade Theory]

Thank you very much!

At what time would it have been best (& cheaper than $170) to purchase that spread? When TSLA was trading at $435, $440, $442.28, $445, or $450? At which of these prices would it have not made sense to purchase the spread?

Also need help with the following scenario:

TSLA was trading at $442.28 but I wanted to enter a short instead of a long, via a spread. Can you do vertical debit spreads to short - if so, how? Or must you do credit spreads, if so- how?

Since in the original example $442.28 is very close to the midpoint between 440 and 445, I would want to be short that same width and strikes, i.e., 5 strike wide (hopefully I'm using the terminology correctly so you can understand). Meaning, I'd be confident that TSLA would go down to at least $440 or even lower, to let's say $435 within the next 30 days.

Would the price to purchase the spread and the profit potential (+ all the other parameters) in a short spread be similar to a long spread?

Thank you!

I like to trade these right at the money. TSLA was at 442.28 so I made that the midpoint of my spread, which is why I used 440/445 as the strikes. If you wanted to short TSLA instead of go long, you would do the same thing but with puts. So you would be long the 445 put and short the 440 put. It won't always price favorably so it won't work all the time. If the bullish call spread prices right, then put spread will not, and vice versa. A lot of the time the pricing will not work in the direction you wanted and you cannot place the trade because your max loss would be greater than your max profit.

 

[anycolour]

Great! I want to start journaling my spread trading on a spreadsheet. What data points should I gather (especially critical ones that might commonly go unnoticed)? (or if you have a template, I'd love to see it). Thanks