Catching falling knife with iron gloves

Q

qlai

So we were talking about stops in another thread and I proposed a "genius" idea which to my surprise did not get much admiration :)

Here it is re-stated to be commented/criticized/ridiculed. I have not tried this but I have a feeling I will get a chance soon. The idea is to get to a break even without using an initial stop. In other words, give it a large wiggle room while keeping max loss a constant. Example:

Let's say stock falls from $75 to $50. You buy 100 shares. Vol is up big. l want to catch the falling knife but obviously not sure if it is really a bottom. So I will enter an ITM put ratio back spread as below:
Sell2Open 2 $60 puts 30days
Buy2Open 4 $55 puts 30days

If stock moves to $55, I close the spread at a loss and put in a break even stop. In this case, will my gain from stock exceed losses from the spread?

If stock does not bounce within a week, I close the spread and flat the stock.

If the stock goes down hard(let's say to $45), I roll the spread down and possibly out or simply close the whole thing. My long puts should really help me out here.


 
Hey qlai, you should be very cautious about how you internally store information provided by Kirk and his team. All of the information I have seen from option alpha is very elementary and misleading.

In regards to the spread, why do you prefer it over an ITM Call? Your ITM back spread is very long implied volatility. Do you have a view on implied vol? If you get a rally in the stock will your delta gains outweigh your vega loss (usually Vol and delta are negatively correlated)? Personally I would only prefer a spread like this, if I had a view on skew. In your case it looks like you are bullish but at the same time a bit weary of a large loss. This has an ITM Call or OTM Fly written all over it.

But practice is the best teacher so maybe put on a spread, try it out and report back? Let us know if you end up putting on the spread.
 
TheBigShort said:
In regards to the spread, why do you prefer it over an ITM Call?
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I'm trying to set up a protective put for a long stock position. Once I am up on the stock with enough cushion, I am no longer interested in options ... I will give the stock as much time as needed. But I don't want the put to depreciate too much when the stock rallies. It's a substitute for using a stop.
 
qlai said:
So we were talking about stops in another thread and I proposed a "genius" idea which to my surprise did not get much admiration :)

Here it is re-stated to be commented/criticized/ridiculed. I have not tried this but I have a feeling I will get a chance soon. The idea is to get to a break even without using an initial stop. In other words, give it a large wiggle room while keeping max loss a constant. Example:

Let's say stock falls from $75 to $50. You buy 100 shares. Vol is up big. l want to catch the falling knife but obviously not sure if it is really a bottom. So I will enter an ITM put ratio back spread as below:
Sell2Open 2 $60 puts 30days
Buy2Open 4 $55 puts 30days

If stock moves to $55, I close the spread at a loss and put in a break even stop. In this case, will my gain from stock exceed losses from the spread?

If stock does not bounce within a week, I close the spread and flat the stock.

If the stock goes down hard(let's say to $45), I roll the spread down and possibly out or simply close the whole thing. My long puts should really help me out here.


More...
Way too complicated. Sell puts on stocks you don't mind owning. -or just buy an ITM call
 
qlai said:
If stock moves to $55, I close the spread at a loss and put in a break even stop. In this case, will my gain from stock exceed losses from the spread?
More...

Your results will be entirely dependent on three things *besides* price movement.
1) The DTE of the spread purchased.
2) The time expired during the time you hold the spread.
3) Exogenous movement of overall volatility.

So, you'll need a *few* studies over-which you might interpolate a pattern (NON-linear) for results. B.T.D.T. :thumbsup::thumbsup:
 
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