You mean there are people trading options who haven't read any books on options?
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Credit spread - deep otm - false sense of security?
- Thread starter Put_Master
- Start date
You mean there are people trading options who haven't read any books on options?
Quote from hedgeman:
I trade the RUT exclusively with back ratios and far out unbalanced put butterflys in a PM account. I say PM account not to impress but to show that I can trade size because I have control and confidence in these trades. These are in my opinion, the safest trades one can make in this business.
Can you give an example of this trade setup?
Thanks.
Quote from hedgeman:
Ok, to your point, if I had to choose, I'd rather sell a cash secured put over selling multiple bull put spreads. Its still a lousy trade. Well, sooner or later it will make you feel pretty lousy because you will lose all those tiny gains and a lot more eventually.
Buy/Write or selling covered calls is a terrible way to trade and so dangerous. What are covered call sellers going to do when the next bear market comes and they are exposed. Great way to financial ruin. At least collar the stock in some fashion.
I know its hard to believe in the times we are living with all the stimulus all around the world, but the next bear market WILL come and devastate credit spreads sellers, put sellers, buy/write or covered call sellers.... Don't be in that crowd. Its the wrong trade and especially in this low vol environment.
I actually prefer the idea of doing a buy/write vs buying a stock long and then selling covered calls.
I prefer the idea of being able to preselect ones, strike, credit and BE point, before the trade is even initiated,.... or the trade is not initiated. (Hence, the equivalent of a naked or cash secured put).
And I would never suggest someone not collar a long position.
My only issue with collaring is, that I wonder if some traders might be enouraged to buy at higher prices, and to buy more volatile stocks than they normally would.
And thus to be less picky and/or more reckless than they normally would, because they feel a sense of security via the collar.
Thus, while a collar may reduce your potential loss, it may put you in a higher probability of actually having a loss.
Same thing with credit spread. Because your loss is limited, investors may be encouraged to invest in higher priced stocks, more volatile stocks, more contracts than they normally would, and more potential leverage, than if they were buying them long or as a naked or cash secured put.
Thus they become less picky and/or more reckless than they normally would, because they feel a "false"sense of security via the protection.
That risk is not something all investors consider, until they have to consider the consequences of either buying all those shares of stock they can't afford to buy, or the alternative of taking a massive or total loss on those trades.
Speaking for myself, because I am NOT protected via options AFTER a trade goes bad, I instead try to protect myself BEFORE a trade is initiated.
I do that by being picky about stock and price selection, and not being on excessive potential margin, and diversifying, and doing a detailed "fundamental" and technical analysis, ect....
It's my opinion that because of the "false" sense of security option protected investors have, they may not realize they may be putting themselves at a higher "probability" of actually incurring a loss.
I don't expect anyone to agree with me, but I'm just speaking for myself. I know when I felt that false sense of security of being protected, I was way more reckless than when i was not protected.
Bottom line...... I wonder if the only investors who really benefit via option protection, are those who are going to be reckless to begin with. But then again, I'm sure my definition of reckless differs from most. As I'm considered the reckless one, because I'm not option protected. But as I stated, I try to protect myself BEFORE I initiate a trade, via the criteria I listed above.
Option protection is best utilized by those who don't want to spend the time being picky, or like to place risky bets about stocks staying inside or outside of narrow trading ranges, or want to use excessive leverage.
Quote from hedgeman:
If you look on page 3 of this thread, there's an example there. I'm in this trade and looking to add to it soon.
Thanks. Very, very interesting trading strategy. Can you explain a bit more about how volatility will affect this position? Let's look at some different scenarios with a couple of weeks having past (i.e. when we get to about Sept 12th):
1 - Vol is unchanged. Looks like you will be showing profits within a range of about 760 to 830. Not bad. But, you will show massive profits on a break below 600 or above 905.
2 - Vol is up 5%. Showing profits above 780 and massive profits below 615 and above about 850. As vol increases, your vega increases, I assume this is because you have positive vomma? Can you please confirm?
3 - Vol is down 5%. Showing profits between 745 and 845. Massive profits below 595 or above 915. As vol decreases, your vega decreases, I assume this is because you have positive vomma? Can you please confirm?
4 - Vol is up 25% due to a tail event. You are profitable within any range with profits increasing exponentially below about 670.
Very interesting strategy indeed, and I do love the fat tail protection. I have a couple of questions in addition to the ones above if you don't mind.
a) What are the downsides to this strategy? Obviously there is huge upside in the case of a fat tail event, but what can hurt this strategy? What is your worst scenario?
b) What's your plan for managing the trade? Adjustments, stop loss, profit target etc.
c) Do you have any criteria for trade entry, or is this something that you put on each month no matter what? Does the current vol levels determine how much tail protection you buy?
d) Anything else i'm missing?
Thanks very much for sharing and providing advice.
Since tail
One other question, since tail events typically occur on the downside, why are you trading the extra calls on the long side? Wouldn't it be better to just buy the same number of calls that you are selling?