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High Probability - Low Risk Spreads
- Thread starter jones247
- Start date
Quote from jones247:
Perhaps my perspective is too simplistic; however, I rely on the volatility crush after earnings and/or after capitulation.
Vol crush is not an edge. The street knows vols will come in after the event. That hardly increase your odds.
Maybe ask IV trader nicely to elaborate on his low risk high prob comment as there is no such thing at face value.
the real issue is how much margin must you put up to make real money once a month before the options you sold expire...please explain this...the real issue.Quote from jones247:
I am completely convinced that the best way to minimize "gambling" in the market is with the use of spreads. I've narrowed down my list of high probability, low risk spreads to the following 5 spreads:
(1) Reverse calendar spreads
(2) Short condor
(3) Reverse Iron Condor
(4) Short Butterfly
(5) Reverse Iron Butterfly
Which ones do you propose have the best risk:reward & success probability profile? Of course, they are all IV plays.
thanks,
Walt
Quote from rallymode:
Vol crush is not an edge. The street knows vols will come in after the event. That hardly increase your odds.
Maybe ask IV trader nicely to elaborate on his low risk high prob comment as there is no such thing at face value.
Would you care to share what would be better than a 1:1 r:r with a IV play, especially after capitualation?
Quote from increasenow:
the real issue is how much margin must you put up to make real money once a month before the options you sold expire...please explain this...the real issue.
The reverse calendar is treated as a naked short by most brokers; therefore, that strategy has the worst margin requirement. The Reverse Irons are net debit strategies. The shorts are hedged, and thus require a fraction of an otherwise naked position. Most brokers have a margin requirement calculation module to test on a specific set of options.
Walt
just sell a put spread. you'll end up with theta and vega working for you (rather than in a reverse cal spread, where time decay works against you). If the volatility crush happens, vega will get you a profit, if nothing happens at least you're benefitting from time decay. You also just have two legs and you'll have minimal margin requirements if you have portfolio margin and a decent broker like IB or TOS.
Quote from jones247:
I am completely convinced that the best way to minimize "gambling" in the market is with the use of spreads. I've narrowed down my list of high probability, low risk spreads to the following 5 spreads:
(1) Reverse calendar spreads
(2) Short condor
(3) Reverse Iron Condor
(4) Short Butterfly
(5) Reverse Iron Butterfly
Which ones do you propose have the best risk:reward & success probability profile? Of course, they are all IV plays.
thanks,
Walt
Hi Walt,
Before trying to answer your question, take a look at what probabilities you refer. How are they computed, underlying assumptions, in which "univers"...
You then would realize that probabilities mean nothing (see gaps, jumps, crashes...) and the main point is costs and common sens.
You would need the all set of eventuality to work with probability, and there is no such a thing available on markets.
A 1800 S&P oct call got a probability much smaller than a 1500 put to be in the money at expiration date, but it doesn't mean it will.
Lehman or Bear stern collapses were out of probability 2 years ago. Hence, LEAPS deep out of the money puts were no probability, but common sens.
Probabilities don't make money, but costs always eat it.
Quote from Engine99:
just sell a put spread. you'll end up with theta and vega working for you (rather than in a reverse cal spread, where time decay works against you). If the volatility crush happens, vega will get you a profit, if nothing happens at least you're benefitting from time decay. You also just have two legs and you'll have minimal margin requirements if you have portfolio margin and a decent broker like IB or TOS.
thanks for the suggestion Engine... however, the vertical put credit spread will be painful if IV increases or the market drops. And more often than not, when the market drops, IV rises. I must admit that the notion of 2 legs is much better. I ended up at the various strategies in th poll because I was observing that the Iron Condor was losing alot of $ for folks... hence, if the IC was losing, how about the opposite side where one profit from material movements in the underlyer...
Because of the theta effect, I could not afford to hold a reverse calendar spread for too long. After about 3 days, if I'm not profitable, then I look to liquidate.