That spread he is talking about is probably a backspread in the front month done for a credit where if you are wrong on the mkt direction, you could keep the credit. BUT as it gets closer to expiration, that b/s moving towards your long OTM strikes will kill you. So yes, in theory you can have a spread that makes a little if you are wrong and make $ if you are very very right. What he did not tell you if that you will get killed if you are just a little right.
Coming back to optios. Need safer trades.
- Thread starter iSeriesGuy
- Start date
Maybe a back spread for a slight credit with more than 30 days left til expiration.
Safer doesn't determine success.
Buying long puts and calls and being absolutely wrong all the time about direction may be safer but loses significant $$.
A covered call may be safer than long stock but if you fixate on collecting the premium (as most do) and ignore the stock, you still get hammered. Granted, there are less option trades than the above...
Properly structuring a trade is only half the battle. Good money management is the other half. And then there's the 3rd half that involves luck
And get over the "unlimited" loss concept of short stock. Nothing goes to infinity and if you know what you're doing, losses are cut. AFAIK, I'd rather trade from the short side than the long (equities) because most of the time, they drop a faster than they rise.
...but minimized 30 out.
Obviously the only way to accommodate OP is to leg in.
The OP has been silent throughout this thread. For all I know, we are just talking to each other.
Check out the thread: http://www.elitetrader.com/vb/showthread.php?threadid=24449
for the "perfect option position." It's not really perfect, as the original poster of that notorious thread made clear at one point, but it has quite a few attractive attributes. There are "risk-free" strategies, as the OP of the current thread suggests, but even then there is execution risk. Conversions enable the trader to lock in a risk-free profit, but you'll never find the opportunity to put one on. They may as well be unicorns.
The site dividendium.com offers a list of collars that can be put on for a risk-free profit through dividend arbitrage, but the profit is fairly low and is contingent upon the dividend being upheld. Normally, the dividend is priced into the value of the put, but every now and then the put is underpriced and doesn't seem to include the value of the dividend. Thus, the strategist can buy the underlier, buy a protective put, and finance the put with the sale of a call. With the payment of the dividend, the trade nets a profit and there is no risk, thanks to the protective put. Of course, if the dividend gets cut, the trader may lose out up to the value of the dividend lost.
Back to the "perfect option position:" One of the original poster's most instructive statements, among many, is that we have to look for trades that offer multiple ways to make a profit. That has been a guiding philosophy for me. If a structure is a multi-tasker, it is more likely to be of benefit to the trader. I like to screen for stocks breaking out from low IV and use them on long vega plays, where the gamma is high and theta is low to neutral. Then, I'll look to scalp the gammas, hoping to cover the maximum risk on the trade. That's my style of multi-tasking in a trade, at least for now.