credit spreads

[optionsplayer]

Credit spreads are most effectively done in the very basic sense. If you really want to speculate or be a guru, try the calendar stuff, etc.

The keys to consistently making profits on spreads ( i.e. in the same class and expiration date, selling a put and buying a lower strike put to cover........or selling a call and buyer a higher strike call to cover)

1. you have to have a significant enough amount of $$$$ to cover the difference between the two strikes.

2. This allows you to get deep enough out of the money to diminish risk and protect yourself against volatility ranges.

3. Balance this with the right amount of leverage in terms of the number of contracts you want to open.

4. Timing, timing.,...should you leg in or open all at once?? I would not go more than 30-60 days on an open position. The only way would be if your thinking more of the broader picture.

For example, in late 1999, early 2000, a great strategy would have been selling at the money credit sread call leaps on indexes (DIA, SPX, QQQ, BBH) and big cap technology stocks.

Conversely now, if you think this is it and two years from now we can only be higher, than sell at the money or out of the money put spreads.

Also, just in case, always open a spread on a position that you would not mind owning, holding, or rolling.

 

[GATrader]

Judging from the tone of these posts, there seems to be a presumption that credit spreads are better that debit spreads. In addition, I've read in a couple of stocks magazines past 3 months that credit spreads are the "way" to go.Why? Other than financing other positions or lending out $, they are merely the converse leg of the box? So in theory, they are no better than buying the debit spread on the other side. i.e. Selling the 100/105 call spread is just buying the 100/105 put spread. Their pnl char are the same. Sorta like why buy the fly for $2 when you can sell the iron fly for 3$. All it boils down to is vol judgement. If IV is high over HV and you are making a judgment call that IV will go down then sell the ATm strike and spread it off with the other strikes since they have less vega. Simple as that. Maybe delta lean + or - depending on stock outlook.

 

[ArchAngel]

Quote from GATrader:
Judging from the tone of these posts, there seems to be a presumption that credit spreads are better that debit spreads. In addition, I've read in a couple of stocks magazines past 3 months that credit spreads are the "way" to go.Why? Other than financing other positions or lending out $, they are merely the converse leg of the box? So in theory, they are no better than buying the debit spread on the other side. i.e. Selling the 100/105 call spread is just buying the 100/105 put spread. Their pnl char are the same. Sorta like why buy the fly for $2 when you can sell the iron fly for 3$. All it boils down to is vol judgement. If IV is high over HV and you are making a judgment call that IV will go down then sell the ATm strike and spread it off with the other strikes since they have less vega. Simple as that. Maybe delta lean + or - depending on stock outlook.

A quick couple of simple reasons - no cost to close out a credit spread if it's expiring worthless (where as the comparable debit spread will be in the money and incur dual exercise commissions) and if there's a sharp move in your favor you can often close a credit spread if you want to for higher net prior to expiration than the comparable debit spread.

 

[GATrader]

Not to antagonize anybody here but the dual exercise works both ways. Assume short a/b call spread for credit. Stock goes down huge , yes no exercise you keep credit.Edge goes to credit spread over put debit spread. BUT stock goes to the moon, your debit put spread won't have the dual exercise, the credit spread will on the calls.

Regarding getting out at a better price on the credit spread, how could that be when there are arbs out there whose sole existence is to bring the conversion/reversal back in line?

Am still confused about superiority issue.

What gets me are those magazine articles that have this pnl tables that says credit spreads make $ when market sits, goes down and only lose $ when sotck goes up, so you have a 66% chance of making $. If you base winning pct on that then most options strategies have those pnl profiles.

 

[vulture]

Quote from GATrader:

Not to antagonize anybody here but the dual exercise works both ways. Assume short a/b call spread for credit. Stock goes down huge , yes no exercise you keep credit.Edge goes to credit spread over put debit spread. BUT stock goes to the moon, your debit put spread won't have the dual exercise, the credit spread will on the calls.

Regarding getting out at a better price on the credit spread, how could that be when there are arbs out there whose sole existence is to bring the conversion/reversal back in line?

Am still confused about superiority issue.

What gets me are those magazine articles that have this pnl tables that says credit spreads make $ when market sits, goes down and only lose $ when sotck goes up, so you have a 66% chance of making $. If you base winning pct on that then most options strategies have those pnl profiles.

"Credit" spreads have been hyped for years...Fishback, amongst others, were promoting these strategies years ago...Seems they disappeared for a few years and have made their way back into fashion...Most of those Active Trader Magazine articles are really amateurish...The material is so one sided and geared towards the "hype" side of the trading industry, that I stopped reading that magazine awhile ago...

Some argue that doing the vertical for a net credit, as opposed to a net debit, has some sort of edge...I don't see it that way, but everyone is entitled to their opinion...The biggest drawback I see towards executing a credit spread at one price is that you really have no profit participation, but mainly just sit on a position in which you are hoping the price does not strike you before expiration...I think there are better versions of the credit spread that enhance the risk profile...

 

[optionsplayer]

Remember the key basic premise here......

Yes the stock could move up or down and your ultimate position is limited. That is the whole point of the spread. If done properly with the right amount of money, leverage, strikes, timing, and out of moneyness, you simply do not care what happens.

Your goal is to capture premium. When you are talking about out of the money options whether calls or puts, the percentages alone are in your favor in terms of depreciating time value for writers.

Now how you measure and gauge risk factors of market trends and volatility is soley on you and your particular system.

Remember, if your worried about missing a big move up or down and being capped by the spread, than you do not have enough working capital to be doing this kind of strategy.

In other words, to open a spread and sit on it for 1-2 months to capture a measly premium of 300 or 500 bucks while missing significant moves, simply does not make sense from an opportunity cost perspective. You are much better off applying your bias in the stock, bullish or bearish, and jumping on the other side and simply longing the puts or calls where the upside is unlimited if you are correct.