Watch video 10 its just over 4 minutes long. It shows the actual inverted credit spread position on TLT. After watching if you have any detailed questions let me know.
IC adjustments
- Thread starter newyorktrade
- Start date
Of course you won't. You have to pay to learn that it's a variation of a selling tails strategy or worse.
I took the time to create a PDF that explains the Inverted Credit Spread in as simple terms as I could. Its all in writing. If you read the PDF and have any more questions let me know.
http://theperfectpassiveincome.com/index.php/871-2/
Thanks Robert ........ Good info, the PDF is well written. Anybody that does any sort of option trades will find it very helpful.
Thanks Option Guru. It took me many years to come up with the concept.Thanks Robert ........ Good info, the PDF is well written. Anybody that does any sort of option trades will find it very helpful.
I see a few errors. For starters, you claim you booked a credit of $1.56 on the initial position, but in your "what if" scenarios, you then claim:
=====
What happens to this positions in 7 days when the options expire? Let’s look at 4 possibilities. 1. TLT price is 115.50 a. The 119 sold call expires worthless b. The 121.5 bought call expires worthless c. The 119 sold put costs $3.50 to buy back d. The 116.50 bought put can be sold for $1.00 The position losses $2.00 from buying the 119 put and selling the 116.5 put, but remember the position was sold for $1.38. Actual loss $2.00-$1.56= .42 loss. (This is the width of the spread minus the credit received).
=====
That should be $2.50, not a $2 buyback, and the loss should be $0.94, not $0.42 (which in itself is wrong, it should have read $0.44 . . . but really $0.94.)
Dig in and fix the math. Then we can talk about your "adjustment" which apparently relies on a reversal in the underlying.
=====
What happens to this positions in 7 days when the options expire? Let’s look at 4 possibilities. 1. TLT price is 115.50 a. The 119 sold call expires worthless b. The 121.5 bought call expires worthless c. The 119 sold put costs $3.50 to buy back d. The 116.50 bought put can be sold for $1.00 The position losses $2.00 from buying the 119 put and selling the 116.5 put, but remember the position was sold for $1.38. Actual loss $2.00-$1.56= .42 loss. (This is the width of the spread minus the credit received).
=====
That should be $2.50, not a $2 buyback, and the loss should be $0.94, not $0.42 (which in itself is wrong, it should have read $0.44 . . . but really $0.94.)
Dig in and fix the math. Then we can talk about your "adjustment" which apparently relies on a reversal in the underlying.
I'm sorry, I couldn't help myself. What an absurd notion, this revolutionary "inverted credit spread". Your new position is a bull spread that you happened to sell for a credit, but it has the same risk/reward profile as any bull spread (either puts or calls).
You basically did this:
1. "bought" a synthetic long stock for a credit (bought OTM long call, sold ITM short put at the same strike)
2. sold a slightly less OTM call
3. bought an OTM put
You created a synthetic collar, or a bull spread. You still have more downside risk than upside reward. This is not some magic position -- you're just hoping to eventually start booking gains to offset your loss in the original iron butterfly. Good luck when TLT keeps dropping instead of exhibiting your expected "cyclicality".
You basically did this:
1. "bought" a synthetic long stock for a credit (bought OTM long call, sold ITM short put at the same strike)
2. sold a slightly less OTM call
3. bought an OTM put
You created a synthetic collar, or a bull spread. You still have more downside risk than upside reward. This is not some magic position -- you're just hoping to eventually start booking gains to offset your loss in the original iron butterfly. Good luck when TLT keeps dropping instead of exhibiting your expected "cyclicality".
Looks like a slight calculation error which can occur with a lot of calculations. I didn't have any one else double check the work. My proofreader had computer problems and was not able to edit this piece. I fixed it. Thanks for reviewing for any possible errors.
When the question is about possible iron condor adjustments (iron condors and iron flys are very similar I think we can agree on that. This technique can be used to adjust iron condors.) and I provide an answer to that question how is that absurd? Did you have any possible adjustments to iron condors to add?
Just because you can name a synthetic equivalent doesn't mean its a bad trade. In the example the TLT position started neutral at 119 with a break even of between 117.44 to 120.56. When TLT moved outside the break even down to 115.44 you can take a loss OR increase duration and create the Inverted Credit Spread adjustment which adds credit of 1.58 to the position gets directional, keeps the risk defined, and moves your break even to any price above 115.86 with zero upside risk. If you believe TLT will be cyclical and move back toward 119 then this is one way to play it.
This is a new way to trade for cyclicality aren't we here to learn new things?
I'm open to your iron condor or iron fly adjustment ideas.