first spread

M

mynd66

I've been getting alot of great input here so I wanted to share my first trade using a spread. I may want to start a journal but I'll take a few trades first to get a feel.

The past few months I have been fading (if thats what you call it) every rally in the spy. I would buy an OTM put when the market rallied and then would close my position out within the week. My forcast is relativley short term. I try to keep from losing too much in theta so I buy at least one month till expiry with the plan of closing out within 5-6 trading days. So I am taking my trades to the next level with the intention of possibly holding even longer maybe till expiration.
I was previously buying puts with a short term bearish outlook. So I asked myself why I should take the risk of losing my entire premium when I can sell a further OTM put against it. I can look at the chart and honestly say I don't think the market will drop past a certain point. If it had just plummeted while holding only the long put then great but then I would be profiting due to luck and I don't plan on being profitable based on luck.

So here is my feelings on the market and here is my trade. I am not very educated when it comes to market fundamentals but I will look at the chart and determine basic near term support and resistance. I feel comfortable with that so far. I'll check to see what the past few days have done. My outlook right now happens to be bearish and I am seeing that the past few days have closed higher and price is approaching resistance. My feeling is that the market can break the resistance and continue upward or we can have a reversal and possibly a few down days. I think we go lower. Here is my trade:

Spy is currently at (about) 92
Buy 3 Jan 16 '09 89 PUT for 1.50 Debit= 450
Sell 3 Jan 16 '09 86 PUT for .82 Credit= 246

Net Debit= 204


Worst case senario: At expiration the SPY is at 89 (or above) which will result in a loss of $204.
Best case senario: At expiration the SPY is at 86 (or below) in which the 89 long PUT will be ITM by 3. The short PUT will be worthless. All of the time value will be gone and the difference in strike prices will be my profit. Credit from short PUT is 246 plus intrinsnic value in the long PUT will be 300. This would yield a profit of $546 with a max risk of $204 (not unlikley for my math to be off on simple things).

Jan 16 '09 86 PUT:
Imp Vol=41.16%
Delta=-.1776
Gamma=.0353
Vega=.0479
Theta=-.0687

Jan 16 '09 89 PUT:
Imp Vol=37.91%
Delta=-.2923
Gamma=.0502
Vega=.0625
Theta=-.0843

I am not very educated when it comes to implied volatility and the greeks but I recorded what they were at the time of my transaction. If anyone thinks that I made a foolish decision because of anything please let me know so next time I will be able to correct myself. I know I will be confused whether I should hold till expiration or not depending on what happens. I would appreciate any input regarding appropriate action or any advice at all. I have never been exercised on or exercised upon probably cause I haven't sold many options in the past so that may be a first. FYI I use IB and quotetracker for charts. Wish me luck and thanks in advance. -Ray
 
Best case scenario:

One spread cost you $ .68
If below 86 at expiration, worth $ 3.00
That's a max profit of $ 2.32
You did 3 of em
Max profit is $ 6.96

Short answer is difference is strikes less premium paid or $3.00 - .68 = $2.32 times 3
 
Quote from mynd66:

Wish me luck and thanks in advance. -Ray
More...

Ok Ray, I wish you good luck.

As SPIN explained, when determining the max profit, don 't forget to subtract your cost 68, cents in this case.

Comments

1) Spreads are more difficult to close at a price that you will deem satisfactory than a single option.

The spread is a good risk reducer, and you should continue to think in terms of trading spreads. But, you may have to hold longer to generate a profit that satisfies you.

But, what you sacrifice is the chance at a jackpot. If the market gaps much lower, your profits are limited. Over the longer-term, you will like spreads, but be prepared to be disappointed on occasion.

2) For discussion purposes, it's much easier for everyone if you write in terms of a single unit (i.e. as if you did a one-lot).

3) DO NOT plan to hold to expiration. You may choose to hold that long, but don't be rigid.

You can close the spread any time that you are satisfied with the profit. You may close the spread any time you no longer like the profit potential compared with the risk. IOW, if the spread can be sold for $2.25- you have another $0.75 maximum profit whereas the amout at risk has become $2.25. You will be forced to decide whether to hold or sell the spread.

4) Yes, do keep careful records.

Mark
http://blog.mdwoptions.com/options_for_rookies/
 
Yea I basically confused myself to the point that I couldn't figure out my max profit. Thanks guys for pointing that out.

Long 89 PUT for 1.50
Short 86 PUT for .82

Net Debit= .68

Max Risk=.68
Max Reward=2.32 -Which is occurs if the SPY is at 86 or less at expiration.

Ok I just had to spell that out for myself so I don't screw it up next time.

Hey so say they SPY is lower than 86 tomorrow (not that I expect it to be) but would the profit be ideally the same as if it were below 86 at expiration? And I understand what you are saying dagnyt when you say that I may be in a position to close out for a profit sometime before expiration and if I decide not to I will risk losing what I have by waiting it out. Also I would take it that means I may deem it necessary to close out for a loss sooner than expiration not holding out longer for a possible bigger loss. And yes I'll leave out how many contracts I'm holding to make it more clear.
-Ray
 
Quote from mynd66:

say they SPY is lower than 86 tomorrow (not that I expect it to be) but would the profit be ideally the same as if it were below 86 at expiration?

No. And if you think about it, you already knew that. With time remaining, why would anyoe be willing to let you get out of your trade at the maximum possible profit? Who would take the other side of your trade by paying $3.00 for the spread? That person could earn nothing and could lose up to $300 if the market reversed direction.

But, you an expect a profit. The amount varies depending on different circumstances. But if you find SPY that low, you can look at the option prices and determine if closing the trade makes sense to you.

I take it that means I may deem it necessary to close out for a loss sooner than expiration - not holding out longer for a possible bigger loss.

Right. You can take an early profit, or you may decide to take an early loss. Those are decisions you can expect to make often as a trader.

Ray
Mark
More...
 
Hey guys I just closed out my position. I bought the short puts for $1.50 and sold long calls for $3.15. Overall I am pretty satisfied with my outlook. But I am a bit disappointed with the trade as I cannot figure this out.
I use IB. My long calls for example were bought for $1.50 and I sold them for $3.15 for a difference of $1.65X300= $495. Right when the order executed (sell limit for $3.15) realized p&l for some reason was $367.80 and it was saying $495 the moment before the order went through. Now the same was for the put execpt I lost less then I thought but only a difference of $20.
Even with commissions it doesn't make sense to me. I know its probably somthing rather obvious but I don't see it. And for $180 profit I kind of feel like I got ripped off. I thought the trade should have paid more especially when my max profit would've been almost $700 with at least another 1 point drop in the spy by week end.



Trades January 2, 2009

SPY 17JAN09 86.0 P 2009-01-02, 12:56:42 2009-01-05 2009-01-17 USD SELL -3 0.83 249.00 -2.64 0.00 O
SPY 17JAN09 89.0 P 2009-01-02, 12:56:37 2009-01-05 2009-01-17 USD BUY 3 1.49 -447.00 -2.64 0.00


Trades January 12, 2009

SPY 17JAN09 86.0 P 2009-01-12, 15:36:35 2009-01-13 2009-01-17 USD BUY 1 1.50 -150.00 -0.70 0.00 C
SPY 17JAN09 86.0 P 2009-01-12, 15:36:35 2009-01-13 2009-01-17 USD BUY 2 1.50 -300.00 -0.50 0.00 C
SPY 17JAN09 89.0 P 2009-01-12, 15:40:21 2009-01-13 2009-01-17 USD SELL -3 3.15 945.00 -1.20 0.00 C
 
1) What the spread would be worth at the end of the week has no relevance to executions done today.

2) Your spread cost you 67 cts. You sold it for $1.65 for a gain of 98 cts per spread. You did three. That's a gain of $294, excluding commissions.

3) I have no clue why you think that the P&L is different. Check your account page again.
 
You are right I went into account balance and this trade had a profit of $289.76. I guess I have to look into what exactly the P&L columns are indicating. Ok I don't feel too bad now.
 
Quote from mynd66:

I guess I have to look into what exactly the P&L columns are indicating.
More...

Don't make it difficult for yourself.

You know the credit you collected for each spread.

All you have to do is look at the current price of each option (IB risk navigator works for this) and determine the price for the spread NOW.

The difference is your P/L

Mark
 
Thanks Mark, I realized after I placed the trade that IB has the spreads already there to choose from. I was initiating orders seperately. But next time I'll do it the right way.
Now I'm going to wait for another setup.
 
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