General Questions on Debit Vertical Spreads

R

raphaelg

Hi everyone,

I am new to these forums and new to option trading. I have some knowledge in option pricing and understand the concept of implied volatility and some of the greeks (delta, gamma and theta). I want to start trading debit vertical spreads with a low cash balance becuase i really like the leverage that option trading provide. I have a few generic questions that i will love some pros to answer please.

1- How do I choose a good stock or index to trade on? (what are some TA indicators or any other thing you pros uses like IV vs HV to choose a good opportunity)

2- I understand that if i trade for example an ITM call bull spread i have a lower return but a higher chance of having a profit than trading an ATM spread or even an OTM spread. How do you guys decide when to trade an ITM or an ATM spread?(again some indicators)

Thanks for the help guys,

appreciate it
 
Options provide a variety of ways to profit (and lose) on your opinion of a stock. There are more complex strategies such as trading the delta or IV of of the options but that's for a higher pay grade right now :)

A "good stock or index" is one where you have some success at predictng its movement, or lack thereof.

TA indicators are backward looks in the rearview mirror. They have no predictive value. If anyone tells you otherwise, ask them to post their specific price entries and targets in real time

While you may really like the leverage that option trading provides, be very careful. Options are designed to take your money and they will if you don't have a firm understanding of their behavior, of the various strategies and of good money management. Forget the leverage. It's a double edged sword that shouldn't be used until you these abilities are second nature. Even then, you're gonna lose :)

IMHO, do yourself a favor and read a number of books. Check out the multitude of web sites about them. Read. Learn. Paper trade.
 
Very good advice above. Strongly suggest you pay attention.

A few random thoughts.

Verticals are directional plays, so IV is not as important. The key thing is getting the move in the underlying right. Then you add in the complications of knowing when and how to exit.

Basically, if you have an edge in trading the underlying, you are generally better off doing it directly rather than through a vert. A vert does give you leverage, but it is a two-edged sword.

Personally I prefer to use credit spreads, ie sell a put vert as opposed to buying a call vert. The reason is they can expire worthless and you don't incur additional costs closing out the position.


It is essential to have a stop loss point set ahead of time. It is very easy to end up taking the max loss, which is a real account killer. You also have to be prepared to take profits if it goes your way, or at least adjust the position.
 
my .02 is to paper trade long enough to witness all the market can throw you and when you are ready to go in with real money, maintain the paper account like it is also real money. although the fills in the paper account will be easier and more generous to you, it is still the closest thing to reality that you will have.

as mentioned above by spindr0, the technical indicators can only tell you where a stock or index has already gone so please do not be led by those technical analysist guru's who claim to know where a stock or index is going next. it is a monumental waste of time following indicators not to mention dangerous.

know all those greeks you mentioned but you left out the most important one, vega. know what a negative versus positve vega position really means and how a positive or negative gamma position could protect or hurt you. spend enough time understanding the location of your shorts in relation to their deltas rather than the delta position of the entire trade. know when and how to adjust not just when things are going against you but in an attempt to increase returns. good luck.
 
Quote from AAAintheBeltway:

Very good advice above. Strongly suggest you pay attention.

A few random thoughts.

Verticals are directional plays, so IV is not as important. The key thing is getting the move in the underlying right.


Personally I prefer to use credit spreads, ie sell a put vert as opposed to buying a call vert. The reason is they can expire worthless and you don't incur additional costs closing out the position.
More...

Re IV: The vertical spread does much to tame vega, but vol can still throw in a curve ball from time to time.

Re credit v debit spread expiring worthless: It depends on what you are trying to do, the strikes you choose and direction the underlying takes.... not to mention bid/ask spreads

There are situations where a credit spread make more sense, others where a debit makes more sense. YMMV
 
Wow thank you all for the good advices and the fast response.

Ok so i'll try to read more on the subject and do some paper trades. I just bought the book of natenberg of options is it a good one?

Thank you all again,

and just to have some example when a debit makes more sense than a credit spread and the other way around?

Raphael
 
Quote from raphaelg:

and just to have some example when a debit makes more sense than a credit spread and the other way around?
More...
Stock is 52 and you expect (hope) it to rise over 55. It goes to 57.

55 bullish put spread expires worthless over 55.

55 bullish call spread requires closing both sides out. Two more commissions and possibly more slippage on the B/A spread.
 
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