I'll dissent a litte bit here. The PUT index does show similar rates of return to the SPX index with a lower standard deviation. It does exclude returns from dividends of course.
Debit spread to minimize loss
- Thread starter John9999
- Start date
A little bit of dissent is acceptable.
And yet, the SPX has outperformed the PUT Index by about 5% over the past 5 years. Timing and selection, eh?
Generically, if selling had such an edge over buying, why would anyone buy? They'd be arbing the sh*t out of that edge.
This is the old argument. The current consensus among academics seems to be that there is a natural imbalance between vol sellers and vol buyers, especially on the put side. And market makers bias their quotes high, demand for puts exceeds supply, buyers are not entirely economically motivated and are willing to pay for "insurance" etc...
It may be an old argument but you haven't presented anything that indicates that selling is superior. And FWIW, the post by Jack that I was replying to implied that selling options has an edge over buying. You have changed that into" selling puts (the PUT Index) outperforms buying the SPX. Apples and oranges.
Also what academics derive sitting in a university office without ever trading tends to be ivory tower dribble based on unrealistic assumptions 
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.I am a net options buyer since 2013. Happy to buy from you and send money your way.
Happy holiday to you.
You have a misunderstanding of "Debit Spreads". They are still a "direction play" but they can be placed with a positive time decay so they give you an advantage in that the underlying can stay at the same price or go down slightly and you can still make money.
For example Apple closed Friday at 169.23 and if you are bullish on apple for the next week you could have put on a long 167.50 call and short 170.00 call vertical spread for about $1.54. If Apple falls to $169.04 on Jan 5th you can still break even on the trade. But if it falls below your purchase strike of $167.50 you still lose it all.
Of course your profit is limited to $.96 per share no matter how high Apple goes by Jan 5th.
Great example, this has really helped me understand how debit spreads work.
For a newbie like myself, would you say that buying vertical spreads is a better strategy than just going long on calls and puts? Thanks.
For a newbee I would say yes because it limits your risk. Per my example above you pay for the long 167.50 call but you receive a credit for the 170 call that you sold. This limits what you pay for the position and eliminates that dreaded time decay that option buyers suffer. If the price of Apple stays the same you still make a little. It is not just for newbees either -- a lot of pros use this strategy extensively.