Directional spreads
- Thread starter candeo
- Start date
I agree with you "near expiration". What if the stock moves right away? Then the outright call will be much better. Can you really time this? If so, is buying a vertical at that time a good strategy?
All I am trying to say is that in real life trading it seems that it is extremely rare to find a solution where a bullish spread has a better risk/reward than a call. You have to be right timing, direction, but not too right as the loss of profit potential can be very important above the strike of the short call. Like I said I am not an expert in spreads, even greeks, IVs etc...but I have been trading options for a very long time and most of the time the premium that you would get from the short call is just not worth giving-up the profits from being naked long (on a short-term fast move AND on a long sustained large move). And the risk can always be managed with money management and stops.
Not sure if this satisfies your request on "good money management and position sizing." but, if you have the book:
Options as a Strategic Investment by Larry McMillan
(3rd edition pgs. 158-160; Ranking Bull Spreads):
From page 160:
"The longer it takes for the underlying stock to advance, the more the advantage swings to the spread."
IMHO "one" of the best books for beginning to intermediate option traders.
Regards,
Nanook
Nanook,
I agree with you, this is in fact what I was trying to say in my previous post: outright call is better when the stock moves fast AND when the stock moves a lot. Not when it moves slowly and closes at expiration close to the second strike.
Unfortunately I am not very good at timing or guessing the velocity of the move. I like to just follow the trend and when I take a directional position I really don't like it if the stock moves my way and I barely make money. If you have traded vertical spreads you probably know that this situation happens VERY often and I don't think there is anything more frustrating. I personally like to use vertical spreads only as a "follow-up", for example to "save" a call on the stock that has gone against me, transforming it into a spread that would lower my BE at no cost. Or to protect a profit..
I agree with you, this is in fact what I was trying to say in my previous post: outright call is better when the stock moves fast AND when the stock moves a lot. Not when it moves slowly and closes at expiration close to the second strike.
Unfortunately I am not very good at timing or guessing the velocity of the move. I like to just follow the trend and when I take a directional position I really don't like it if the stock moves my way and I barely make money. If you have traded vertical spreads you probably know that this situation happens VERY often and I don't think there is anything more frustrating. I personally like to use vertical spreads only as a "follow-up", for example to "save" a call on the stock that has gone against me, transforming it into a spread that would lower my BE at no cost. Or to protect a profit..
Again, I answered the question but you already have a bias in your head as to what you consider right so every example will be dismissed by you changing the assumptions. You asked for an example and we gave you several and I can keep giving you more and you can keep changing the assumptions so that only your point looks valid.
If you are gifted with ESP to trade high IV options knowing the exact nature of the potential move and how it will overcome theta and vega and higher risk then stick with long options only since you already are stuck in doing so. But you already told us you do no understand the greeks so how can you argue against the greeks and the value of the sold call. You need to understand that spreads are not just bull call and bear put. Since you also ignore that it makes it hard to really show you the answers.
For example, you will not understand how calendars in high IV skewed stocks can be quite directional with less risk than long calls.
I do not understand your original question when you were already determined to overlook any answers. Spreads are very popular with many professional option traders and they are very good to use in certain situations. The situations are ones you will not understand because you admitedly do not understand greeks and IV.
So for the 3rd time here is the answer to your question. In certain situations the spread will perform better than the outright call or put depending on volatility and directional bias. You seem to only see situations where the stock is going to make a humongous move higher or lower and therefore only see the value of long calls or puts. However this is not always the case and spreads work better in certain situations.
If you are gifted with ESP to trade high IV options knowing the exact nature of the potential move and how it will overcome theta and vega and higher risk then stick with long options only since you already are stuck in doing so. But you already told us you do no understand the greeks so how can you argue against the greeks and the value of the sold call. You need to understand that spreads are not just bull call and bear put. Since you also ignore that it makes it hard to really show you the answers.
For example, you will not understand how calendars in high IV skewed stocks can be quite directional with less risk than long calls.
I do not understand your original question when you were already determined to overlook any answers. Spreads are very popular with many professional option traders and they are very good to use in certain situations. The situations are ones you will not understand because you admitedly do not understand greeks and IV.
So for the 3rd time here is the answer to your question. In certain situations the spread will perform better than the outright call or put depending on volatility and directional bias. You seem to only see situations where the stock is going to make a humongous move higher or lower and therefore only see the value of long calls or puts. However this is not always the case and spreads work better in certain situations.
Well, you don't want to hear what I am trying to say, but just insist on repeating that I don't want to look at your examples. This is fine, I am giving up. Just as a last point:
- I said I was not an expert in greeks, IVs, etc...this is not my way to trade. It does not mean that I don't understand the basics. Does it make me a bad trader? If I am successful it is probably because I have been lucky, right?
- I am not closed minded about trading anything else than straight options. I have posted right here, but you obviously did not read it, that I use calendars very regularly.
- I understand that traders use spreads. I myself use ICs on indices almost every single month for income. If you look at my previous posts you will see that I also trade RCs and ratio backspreads around earnings/news. I just don't like the risk/reward offered by simple directional vertical spreads.
- When asap made some good comments, not insulting, I had an open mind and even said that I should consider verticals on DITM Leaps. Read my message, this is exactly what I said and goes against everything you have been saying about me not wanting to change my mind. Sorry if I did not like your examples, but I am not going to say I did just to satisfy your ego.
I am done arguing with you as well, as your goal is obviously not to participate in a constructive discussion but to try and show that you know better than anyone else. Like I said earlier, I hope you guys are really that good and that you are making millions. It would be a shame if you are not with all this knowledge
I hope asap will still post the explanation he said he would about front-month.
- I said I was not an expert in greeks, IVs, etc...this is not my way to trade. It does not mean that I don't understand the basics. Does it make me a bad trader? If I am successful it is probably because I have been lucky, right?
- I am not closed minded about trading anything else than straight options. I have posted right here, but you obviously did not read it, that I use calendars very regularly.
- I understand that traders use spreads. I myself use ICs on indices almost every single month for income. If you look at my previous posts you will see that I also trade RCs and ratio backspreads around earnings/news. I just don't like the risk/reward offered by simple directional vertical spreads.
- When asap made some good comments, not insulting, I had an open mind and even said that I should consider verticals on DITM Leaps. Read my message, this is exactly what I said and goes against everything you have been saying about me not wanting to change my mind. Sorry if I did not like your examples, but I am not going to say I did just to satisfy your ego.
I am done arguing with you as well, as your goal is obviously not to participate in a constructive discussion but to try and show that you know better than anyone else. Like I said earlier, I hope you guys are really that good and that you are making millions. It would be a shame if you are not with all this knowledge
I hope asap will still post the explanation he said he would about front-month.
I tried several times to answer your question. Remember you asked for examples when a spread would be better than the outright call or put. I gave you a few examples which answered the question. I am not arguing with you but if I give you an example that answers what you are asking and then you change the parameters it is hard to keep up.
The general answer is this as it always was, spreads perform better than outright calls or puts in certain situations, and I provided a few examples.
If you want more detail and I more than happy to provide it if you truly are curious. But I have not insulted you or been argumentative, just wondering what the real motive is if you keep overlooking the answer to your question.
The general answer is this as it always was, spreads perform better than outright calls or puts in certain situations, and I provided a few examples.
If you want more detail and I more than happy to provide it if you truly are curious. But I have not insulted you or been argumentative, just wondering what the real motive is if you keep overlooking the answer to your question.
What parameters did I change?
Yes, I am truly curious. I like selling premium, as I do with calendar spreads. I would like to do it as well with verticals, to reduce my risk to time decay and IV drop. My experience has been that it does not work most of the time, either because the premium you receive for OTM call is too low, or because the stock moves right away. I also believe that it is wrong to say that you reduce your risk. Yes, you have less dollars on the line, but all this can be achieved with money management without giving up the upside potential. Now the only way to make money (compared to a straight call) is really if the stock moves slowly to the higher strike and does not go above it. In real life it very rarely happens. I am more interested in making money than debating about greeks and for the 10% when you will be right in timing such an event, 90% of the time you will give-up a large profit. This is why I don't like your example with the underpriced way OTM spread. It just feels like you constructed this example to prove me wrong without bringing anything to the table.
Now, there might be other ways to capture some premium, that work in real life, maybe with ITM, maybe using Leaps and I would love to hear about it. I think asap had something interesting to say about it. I am also curious to know if it is a good strategy to roll the short leg to a higher strike when price gets close to it. A little bit like many are doing with calendars, rolling the short call to another month, capturing the premium, doing this every single month until your Leap is paid for.
Yes, I am truly curious. I like selling premium, as I do with calendar spreads. I would like to do it as well with verticals, to reduce my risk to time decay and IV drop. My experience has been that it does not work most of the time, either because the premium you receive for OTM call is too low, or because the stock moves right away. I also believe that it is wrong to say that you reduce your risk. Yes, you have less dollars on the line, but all this can be achieved with money management without giving up the upside potential. Now the only way to make money (compared to a straight call) is really if the stock moves slowly to the higher strike and does not go above it. In real life it very rarely happens. I am more interested in making money than debating about greeks and for the 10% when you will be right in timing such an event, 90% of the time you will give-up a large profit. This is why I don't like your example with the underpriced way OTM spread. It just feels like you constructed this example to prove me wrong without bringing anything to the table.
Now, there might be other ways to capture some premium, that work in real life, maybe with ITM, maybe using Leaps and I would love to hear about it. I think asap had something interesting to say about it. I am also curious to know if it is a good strategy to roll the short leg to a higher strike when price gets close to it. A little bit like many are doing with calendars, rolling the short call to another month, capturing the premium, doing this every single month until your Leap is paid for.
You are missing the point so dont worry about it.
If you know for a fact that all the stocks which make a large moves quickly 90% of the time and does not have an IV crush or bounces around towards expiration then you should be making serious dollars.
You keep harping on underpriced way OTM spread and I alreayd told you pick different strikes, it does not matter. There will be situations in high IV stocks where the spread will perform better.
And money management is nto the same as comparing a spread with a long call. Doing 10 spreads versus 10 long calls is has less risk no matter what you want to define it as. You could say whatever you want but there is no way equivalent contract positions have the same risk.
Now if you put the same dollar value in both the spread and the long call, the spread still has a better risk/reward ratio.
If you expect the stock to jump to the moon regardless of IV or time, then go with the long calls. But if you are like the rest of us without the powers of ESP, then spreads can reduce your cost risk and your vega risk and that is what they are used for.
if you admit you know nothing about greeks and IV, , then why are you not willing to explore how spreads reduce risk.
You have a predetermined bias that all stocks (90% to quote you) move in a big way and do not move slowly to expiration. So if you can pick all the stocks with large moves and buy outright calls, then you should be floating in it.
Here was your initial question and I have tried to answer it.
This is typical of ET, someone asks a question with the answer in their head already and simply argues against a simple answer.
If a stock has an inflated IV a spread produces better results in certain situations.