Bull Put Spreads for Beginners

O

OptionsOops

I`d like to clarify a few of the finer points of Bull Put Spreads. I am a beginner, so please go easy ;) My account is with IB.

Starting with just cash in my account, say I buy a XYZ 100 put and sell a 110 put. I receive say $900 credit, and have a margin requirement of $1000.
Do I earn interest on the $900 received?
Do I pay interest on the $1000 margin?

In other words, if an equivalent debit spread and credit spread cost the same, does the credit spread work out cheaper thanks to earning interest on the premium received?

Now let's say I start by purchasing stock (say a bond ETF to be conservative) on margin, then execute the XZY bull put spread. Does the credit received save me from paying margin interest on the stock?

My intentions are to hold the positions long term and roll them after 1-3 years. (I`m trading LEAPS). I want the spread to be wide for maximum upside potential, but what steps should I take to reduce the likelihood of the sold puts being exercised? Would I be correct in expecting the answer to be "don't sell puts if you don't want to be assigned, stop trading now you idiot"? :)
 
I don't know what the IB policy is on paying interest, so you'd better check with them for exact details, but, no you do not pay interest on the $1000 margin requirement (this is not the same as buying stock on margin) and, yes, you should receive interest on the $900. By the way, don't forget that the calls and thus the call debit spread prices-in approx. 5.25% carry (i.e. interest), which is probably more than what you get with IB. So don't get hooked up on this interest on the credit.

Unrelated to the interest issue, but why do you want to sell a 1-3 year vertical spread!? With verticals you want time decay to do its thing to either reduce the premium to zero (credit spreads) or widen out the spread to its maximum profit (debit spreads). LEAPS, however, have virtually no decay as they are so long term. Suppose you sell a 2-year LEAP put vertical. Essentially, for the next 21 months you'd receive almost no compensation in the form of time decay while retaining all the risk of an adverse move in the stock. Do you really wanna do that?

I'm not saying you should not proceed with your strategy, I'm just questioning your motives since you did mention that you are a beginner. It's all in good faith, though, so don't get protective.:)
 
You earn interest on the $900 received
You do NOT pay interest on the maintenance requirement.

IF THIS IS NOT THE CASE, YOUR BROKER IS FUCKING YOU OVER, because I have NEVER heard of a broker that doesn't pay interest (according to their regular interest payment schedule that is) on cash received from a net credit, or one that charges you interest on a maintenance requirement for options.
 
Thank you both for clarifying! My goal is to simulate a buy and hold stock portfolio using options to increase my leverage, while keeping my risk to tolerable levels.

If I buy and hold a deep in the money call for one year, I will have paid less in time value than if I had bought an ATM call. I was looking at selling puts as the opposite position, with the purchased put being required to meet my risk tolerance levels. My goal with the bull credit spread was to make money from the underlying moving past the strike of the purchased put. In this case I want to pay as little as possible in net time value to reduce my risk if the underlying goes nowhere or declines. With the time value in LEAPs being comparatively low, I was even hoping that the interest earned from selling the put would pay for the cost of the purchased put, so I would make money if the underlying goes up, and not lose too much money if it goes down or stays the same. It's going to be too tricky if my puts are exercised on a regular basis though, I need to figure out if this is solvable.

After doing some more research, it seems European style options would suit my idea better. I was hoping to get the hang of things with LEAP options before graduating to index options, but if they make more sense for me, I might just have to jump from the frying pan and into the fire.

I don't have permission to trade index options currently, or even view their prices, can you tell me how the real world risk/reward compares between buying a SPX 1500 put and selling a 2000 put, compared to buying a SPY 150 put and selling a 200 put? I`d want the expirations to be as far off into the future as possible. I have a nice risk/reward graph for the LEAPs, but when I say real world risks, I mean things the graph doesn't show, like the the options being exercised early, or the rewards such as interest earned ;)

(Later) I found some pricing using IB's demo system, and if I calculated this right, it seems that the SPX spread would earn enough interest to pay for the 1500 put in around 2 years? Does that sound like a sound strategy for a long term buy and hold investor?
 
The first problem I see with your strategy of selling an ITM put vertical spread is that unless the stock moves up above the short strike you will end up with a max. loss! In other words, you need the stock to move up to make a profit, if the stock stays flat or moves down you WILL LOSE MONEY!

By the way, the interest that you earn on the premium received is priced into the options, otherwise it would be like free money. That is, deep ITM European-style puts trade at a discount to fair value because of the cost of carry, and as they approach expiry the premium approaches fair value.

For example, you can sell a SPX Dec08 1500/1900 put vertical for about 237 now, however this spread will be worth 400 at expiry if SPX ends up below 1500. No amount of interest will make up that 163 loss.
 
Quote from demoship:

You earn interest on the $900 received
You do NOT pay interest on the maintenance requirement.

IF THIS IS NOT THE CASE, YOUR BROKER IS FUCKING YOU OVER, because I have NEVER heard of a broker that doesn't pay interest (according to their regular interest payment schedule that is) on cash received from a net credit, or one that charges you interest on a maintenance requirement for options.
More...


I know Schwab used to (don't know if it's changed) pay interest only on cash balances in excess of any short market value.

I've heard others do that as well.
 
Quote from Ateht:

Unless you have OVER £1/2 in account its pointless talking about interest payments. By the time you pay tax on the interest recieved your left with just a few crumbs.

You need to focus on what strats and brokers to use. Personaly i dont believe IB are good for Options trading their conditions,service and computer set up stinks. If your looking for cheap fees than IB is for you! if your looking for quality service and quality rules thats suits your trading and peace of mind? you need to look elsewhere. No doubt I'll have my head bashed in by the IB supporters, but that does not bother me one iota as i speak the truth on ALL things! and can PROVE ALL things i say!

I'm ready for the newbie bashers to start throwing the first stone on this thread. But, be warned I'm may be a newbie here but, that DOES NOT MEAN I'M A NEWBIE TRADER!

Happy trading and always hedge your trades if your a newbie to Options trading.
More...


is the english language your primary form of communication? no bash, just curious.
since you are interested in making everyone clear on your option trading background and abilities; can you give us all some insight on how you make profitable trades?
 
Quote from Ateht:

Unless you have OVER £1/2 in account its pointless talking about interest payments. By the time you pay tax on the interest recieved your left with just a few crumbs.

You need to focus on what strats and brokers to use. But, be warned I'm may be a newbie here but, that DOES NOT MEAN I'M A NEWBIE TRADER!

Happy trading and always hedge your trades if your a newbie to Options trading.
More...
That's great advice!!
Hopefully you will contribute many more gems of similar usefulness because, God knows, we really really really need it around here, especially us noobs. How long did you say you've been papertrading options?
db
 
Quote from Ateht:

Daddysmonkey,

Where can i see your LIVE PROFITABLE trades on here? [if any] :)

where did i say i was paper trading? Daddysmonkey.

Daddysmonkey READ my posts again wiv your daddy BEFORE YOU MAKE A COMMENT/POST, it might be the best FREE advice you recieved on here this century!! :D
More...
Thanks for the free advice atit, it's much appreciated and as always it's worth exactly what I paid for it :D. So are u going to answer any of my questions or just continue calling people 'monkey' (yawn)?
db
 
Hey guys, do you mind keeping your very productive discussion about monkeys and majority/minority to the two threads that have been plagued by this, namely:
- My selling options strategy. *Newbie*
- I just got an assignment...HELP

and leaving other threads alone!? Sure there have been a few similar bashing exchanges in the past, but they stayed on just one thread and died out eventually, this one seems to be spreading to each and every thread.
 
You must log in or register to reply here.
Back
Top