Directional spreads

[candeo]

Quote from optioncoach:



if you admit you know nothing about greeks and IV, , then why are you not willing to explore how spreads reduce risk.

This is unbelievable. You are so wrapped up in trying to make a point that you don't to hear me. I told you many times that I trade spreads, that I am interested in looking at how to reduce Vega risk. In my second post here, after asap comments I even posted : "Maybe I should consider verticals".
But you just keep repeating the same points, saying that I am not interested in spreads. Why are you doing this?
You keep going back to your example. This is just something I would not use in real life. I never said that 90% of stocks will go up fast, you misquoted me again. I said that in 90% of the situations the spread is not advantageous.
You are looking at a specific example, at a specific point of time ("near expiration" to quote you). But when you enter a trade you don't know what is going to happen.
Let's say you buy your 45 days spread and the stock moves to $52 in a couple days (not something crazy): you'd be way better off with the calls. A lot of things can happen during 45 days, that would make the call a much better bet. If you have traded those in real life you know exactly what I am saying even if you are pretending you are not. It is not a coincidence if in your example you chose a price close to second strike NEAR expiration. But this is not very different than "optimizing" backtesting to show what you want to prove. This is why I don't like your example: no application in real life unless you can say: "Ok, at expiration the stock will be exactly at that price". If you can do it go for you, I can't. But what I am interested in is: "At the time when I enter the trade, not knowing what will happen, can I improve my risk/reward by selling a call?". Saying that your example answers this question is not true. You answer in the case when stock is at $56 or $60 at expiration.
About your comments saying that I should stick to straight options if I am able to pick big winners 90% of the time, it is ridiculous.
I only have a 35% winning rate on speculative trades (much higher on my monthly ICs of course). This is what stops are made for. If I am wrong I am out quick. But if I am right I want to capture as big of a move as I can and vertical spreads don't seem to be well adapted to this strategy. The goal of my question was to find-out if I was wrong and if there were some techniques worth investigating that would reduce my risk and that could not be easily duplicated with basic money management. I have been saying this 10 times now, but obviously you don't really care.

 

[El OchoCinco]

Quote from candeo:

But what I am interested in is: "At the time when I enter the trade, not knowing what will happen, can I improve my risk/reward by selling a call?".

Yes you can.

You cannot have your cake and eat it too. If you want to reduce risk you cannot expect to still have unlimited reward potential of open long call. If IV is high and inflated then you are taking on a lot of risk with a long call alone. A bull call spread, diagonal spread, calendar spread or even a butterfly spread all can reduce the risks of IV crush and net debit over long call at the expense of giving up some reward to the upside.

Simple risk/reward trade off.

I don't know what you are looking for in an answer.

 

[spreadn00b]

Actually, a diagonal or calendar will get smooshed (technical term) on an IV crush. But the bull call and especially the butterfly certainly help in a falling IV environment.

Quote from optioncoach:

Yes you can.

You cannot have your cake and eat it too. If you want to reduce risk you cannot expect to still have unlimited reward potential of open long call. If IV is high and inflated then you are taking on a lot of risk with a long call alone. A bull call spread, diagonal spread, calendar spread or even a butterfly spread all can reduce the risks of IV crush and net debit over long call at the expense of giving up some reward to the upside.

Simple risk/reward trade off.

I don't know what you are looking for in an answer.

 

[El OchoCinco]

Quote from spreadn00b:

Actually, a diagonal or calendar will get smooshed (technical term) on an IV crush. But the bull call and especially the butterfly certainly help in a falling IV environment.

An OTM calendar will make money on IV crush and move higher in the stock. A diagonal can be set up to profit from the move and IV crush as well. The crush usually hurts the front month more due to the extent of the crush versus the back month even though back month has more vega.

It all depends on strike selection on expectatin in the underlying move.

 

[candeo]

Quote from optioncoach:

If you want to reduce risk you cannot expect to still have unlimited reward potential of open long call.

But I do have limited risk when I use money management and stops with an open long call, and still unlimited reward potential, don't you agree?
Don't you agree that by selling a call you are only reducing your "money at work", which can be done by just reducing your size, without having to sacrifice your profit? Shouldn't we be focusing more on stops and money management?

I guess my concern is that I am always wondering if it is really worth getting too much into spreads, studying the greeks like crazy etc...when the edge /risk management you would get seems to be a very small factor compared to good position management. It seems especially true on vertical spreads. A lot of people love them, as well as covered calls, until they realize that they don't make money with them. There is a big difference between "reducing your risk" and "reducing your money at risk". When you really think about it, a bull spread works pretty much like a call, except that it is cheaper. And that your profit potential is capped
A long call has limited dollars at risk as well. In fact in exactly the same way that a bullspread does.

I am a big believer that what is more complicated is not necessary what makes you money. I used to have dozens of indicators on my chart, which now have only a couple MAs.
Now, asap said that professional option traders use these kind of spreads very often. I am very curious to see how they do it.

 

[spreadn00b]

Hrm. I might be confused. For example, take a long calendar on MSFT with the 32.5 JUL/OCT calls. If the IV falls, the value of the long calendar goes down. Are we talking about the same thing?

Quote from optioncoach:

An OTM calendar will make money on IV crush and move higher in the stock. A diagonal can be set up to profit from the move and IV crush as well. The crush usually hurts the front month more due to the extent of the crush versus the back month even though back month has more vega.

It all depends on strike selection on expectatin in the underlying move.

 

[atticus]

Quote from spreadn00b:

Hrm. I might be confused. For example, take a long calendar on MSFT with the 32.5 JUL/OCT calls. If the IV falls, the value of the long calendar goes down. Are we talking about the same thing?

Neutral vs directional. The otm calendar has large dvega/ds exposure, and therefore virtually zero vegas when trading otm.

ATM calendars can earn more from vol-surface than is lost from net vega. More often than not it's an issue of gains from gamma, not vega.

 

[candeo]

Spread,

I agree with you on the calendar. IV going up is good for calendar as the longer-term options have a higher vega.

 

[candeo]

It is true though, as Optionscoach said that when you have a big IV crush, such as after earnings, then the front month usually suffers more than the back month, even if Vega is higher.

 

[El OchoCinco]

I was referring to a more directional calendar than a neutral one. You are correct for a neutral strike.

Quote from spreadn00b:

Hrm. I might be confused. For example, take a long calendar on MSFT with the 32.5 JUL/OCT calls. If the IV falls, the value of the long calendar goes down. Are we talking about the same thing?