Income Through Vertical Spreads

[akivak]

Quote from martymjp:

What strategy do you employ to minimize the loss on a bad trade?

I don’t want to guess the market direction, so usually I trade iron condors (put and call spreads, for the same margin). If UL goes close to my short strike, I can usually close the opposite side for about 20% of the credit. Depending on the time left, I might close the losing side, roll or buy some straight options. I will NEVER let my total loss become more than 2 times my original credit. In most cases, the loss will be much less.

 

[danshirley]

"If I sell a MSFT Jan Vertical 32.5/31 for a credit of 1.12
max profit is 112 max loss is 38"
??
If Prob that MSFT is > 32.50 is 21%, , between 32.50 and 31 50% and less than 31 28% then
Expectation = .215(112) - .5(50) - .28(38) = 24 - 25 - 10 = -11

http://www.optionistics.com/f/probability_calculator

It does no good to have your possible loss lower than your possible gain if the probability of loss is so high.

Of course if this is a directional bet that MSFT is going up and not down...

 

[darwin666]

"a viable way to produce monthly income over the long term?"


yes , it does produce income for the other side... the Market Makers and institutional big fish/smart money. .. lol.

95% of all retail traders loose. period....