Income Through Vertical Spreads

Hester · Oct 18, 2009

Quote from spindr0:

You've stated that "Selling vertical spreads is not a viable way to produce monthly income of any amount" and "Vertical spreads are no way to produce income." Yet covered calls, writing puts and credit collars are. Interesting premise.

Now what happens if someone substitutes a call for the stock in order to limit risk? That will provide a yield somewhat similar to the covered call and more often than not will have less risk. Yet it's a vertical. So one is not an income producer but the other is??

Better yet. You say that a collar is an income vehicle but a vertical is not. But in reality, a collar is a vertical so it's just another contradiction. I'd use that confused face but I'm not

"It really just depends how you want to use options, how you view the profit on some strategies."

Thats a quote that I wrote. Some people view covered calls or writing puts as income instead of profit. I was just giving general conservative strategies to produce income. Yes, income is profit and vise-versa, but I know some who write covered calls on stocks they own, and collect the premium and then live on that as income.

I never meant to say that vertical spreads absolutely could never produce income, I just said it isn't a viable way. Meaning it isn't realistic to expect 8-10% income from investments in vertical spreads every month. You completely took that out of context.
If someone would ask could I get 8-10% a month using cc or writing puts or collars or any other option strategies, I would say the same thing as I did about verticals, no. Not consistantly. If you could get that much a month without many or no losses then everyone would be doing it. If that were the case we wouldn't be debating options we would be debating which brand of private jet to buy.

Theoretically, you could get a steady income from buying one lottery ticket each month and winning. But is that realistic?
If someone asked you, should I buy lottery tickets every month to produce some income, you'd laugh. Thats more extreme than anything to do with options, but I think its a valid comparison.

I was just trying to help answer a question. Can you get 8-10% income a month from vertical spreads? That was the question. I basically said no, its not viable, not everymonth. not without a crystal ball.

Your paragraph about substituting calls for options to limit risk doesn't go against anything I said. I agree, verticals can be much better than stocks in CERTAIN SITUATIONS. But not always. As I just said, if you do a vertical every month, dont expect steady income. You dont agree?

Your not confused about what? You know what, I'm not confused either. It really doesn't surprise me at all that you didn't bother to think about what I wrote. Why try to add anything of value when you can just try to ruffle feathers? They didn't have a smiley for an unsuprised face.

spindr0 · Oct 18, 2009

Quote from Hester:

I never meant to say that vertical spreads absolutely could never produce income, I just said it isn't a viable way. Meaning it isn't realistic to expect 8-10% income from investments in vertical spreads every month. You completely took that out of context.]

I took your statement out of context? Your exact statements were:

1) No, selling vertical spreads is not a viable way to produce monthly income of any amount, much less 5-10%.

2) Bottom line is vertical spreads are no way to produce income.

NOT VIABLE in ANY AMOUNT and NO WAY mean just that. Nada. Zip. Zilch.

So now the answer is it's not viable to make 8-10% per month. I see.

I'm sorry that your feathers are ruffled because I pointed out the inconsistencies and contradictions.

traderlux · Dec 20, 2009

.....good thread, deserves a bump....

martymjp · Dec 22, 2009

Just curious if anyone has set strict rules for exiting failing credit spreads. I have seen those who just hold on to the spread as it goes in the money thinking that there is time for it to come back and often it does. Another method I have seen is buying back the sold leg (assuming a bull put spread) when the stock crosses the last support level and looks like it will continue down. This assumes that the spread was set up with at least 3 support levels to be broken. The lower spread leg would be sold when appropriate. Another method is to just close the spread when that last support level is broken. Just curious as to what others do.

traderlux · Dec 22, 2009

For credit spreads one exit rule I found is as follows:

If the UL starts to move against the position in a strong way, counter to the original T/A, then consider a loss exit if the spread price becomes greater than 2X of the original price, (credit received).

Thus trying to avoid a total wipe out, which could be much greater.

I trade mainly ETFs as the UL, so I am not sure if this works well with stocks as the UL, as the greater volatility might not allow enough time to react.

riskaddict · Dec 22, 2009

Haven't read this whole thread yet but isn't the whole point of a vertical spread to have a defined loss and a defined gain? When I set them up I know I can make up to X and lose up to Y. I make sure X is bigger than Y and place the order and don't really think to much after that. If I achieve something close max profit before exp. then I close it out. These are great for traders that can't force themselves to take a loss. Like Me!!

akivak · Dec 22, 2009

Quote from AAAintheBeltway:

In fact, the strategy is a tradeoff. Any directional stretgy will be more efficient if done using the underlying. In other words, if you think a stock will go up, buy it, don't sell a put vertical. The vertical does give you a defined max loss, plus you profit from a sideways market, but your profit is severely limited. The main reason I stopped using verticals as my main strategy is that the transaction costs tend to eat up a lot of your bottom line.

I hear this argument a lot. It depends how you look at it. In terms of dollar amount, it might be correct. In terms of return on margin, Iâm not so sure. If you can make 8-10% a month on index credit spreads, itâs not very often that index goes up by 8-10% per month. And your margin of safety is higher. If you are bullish and you sell put spread, even if you are wrong, you can be wrong by 10-13% and still make money. If you buy an index and you are wrong, you start losing from the first percent. Of course the tradeoff is that your maximum loss is much higher, but itâs up to you not to let it happen.

As for transaction costs â yes, they are higher, but with cheap broker, you can still keep it under 1%.

martymjp · Dec 22, 2009

Quote from riskaddict:

Haven't read this whole thread yet but isn't the whole point of a vertical spread to have a defined loss and a defined gain? When I set them up I know I can make up to X and lose up to Y. I make sure X is bigger than Y and place the order and don't really think to much after that. If I achieve something close max profit before exp. then I close it out. These are great for traders that can't force themselves to take a loss. Like Me!!

If you are entering a credit spread, how is this possible? Because of the spread in option prices, the buy back price is already greater than the credit.

martymjp · Dec 22, 2009

Quote from akivak:

I hear this argument a lot. It depends how you look at it. In terms of dollar amount, it might be correct. In terms of return on margin, Iâm not so sure. If you can make 8-10% a month on index credit spreads, itâs not very often that index goes up by 8-10% per month. And your margin of safety is higher. If you are bullish and you sell put spread, even if you are wrong, you can be wrong by 10-13% and still make money. If you buy an index and you are wrong, you start losing from the first percent. Of course the tradeoff is that your maximum loss is much higher, but itâs up to you not to let it happen.

As for transaction costs â yes, they are higher, but with cheap broker, you can still keep it under 1%.

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

riskaddict · Dec 22, 2009

Quote from martymjp:

If you are entering a credit spread, how is this possible? Because of the spread in option prices, the buy back price is already greater than the credit.

If I sell a MSFT Jan Vertical 32.5/31 for a credit of 1.12
max profit is 112 max loss is 38