Mav's Verticals
- Thread starter Maverick74
- Start date
I just want to make sure everyone including me understands that put credit spreads are the SAME as call debit spreads in terms of profitability. To have it trade away from that basic premise would invite arbs who will arb the box spread. Example: with stock @ 100, buying the 100/105 Call spread for debit is the same as selling the put spread for credit. It is the same delta wise and pnl wise.
Other than liquidity considerations it makes materially no difference in putting either one on.
Other than liquidity considerations it makes materially no difference in putting either one on.
I would open this question to everybody. What do you think is a better play. Going with strong stocks that pull back to support or using range bound plays. My hunch is to go with more strong and weak stocks. I figure if the market is range bound and then breaks out of the range, then so will these stocks if they are range bound. If I use strong stocks for my bull put spreads then even if the mkt goes sideways or down, they should hold up and vice versa. What do you think?
Agree. With one-sided credits, strong/weak stocks nearing support/resistance are the best candidates. Butterflies or iron condors are better strategies for range-bound stocks/indices.
Eldrige says:
Let's use your example of xyz trading at 100. If you believe this will hold, it seems to me that you could either buy the100 puts and sell the 105 puts for a 2-3 dollar credit; or you could sell the 100 calls and buy the 95 calls for a 2-3 dollar debit. Either way, wouldn't you have a 2-3 dollar profit at expiration if the stock is at 100. Or, the strikes could be adjusted depending upon your outlook and the profit range you want. If that is the case, does the credit still have an advantage over the debit
I was about to go in to how put and call credit and debit spreads can be interchangeable, but then I just saw GATraders post explaining this.
To reemphasize a point, whenever you are spreading up and down the same calendar, you can virtually always find the mirror opposite that will give you the same deltas and almost the same gammas. Something to keep in mind some time if you think buying the call spread looks good. There will be a put sread you can sell that will give most of the same greeks but with time decay.
With that said, it is very difficult to get 2-3 bucks for 100-105 spread with the stock at 100. If the stock is at 102.50, then you will get that kind premimum. The premium will reflect the deltas you are selling. So, with the stock at 100 the 100-105 spread has about a 30-40 negative delta, so you will get 30-40 percent of 5 bucks or about 1.10-1.40. To get more, you have to have the underlying in the spread to some degree.
Something that will help is to think of deltas as probabilities. If the stock is 100 at that moment has a fifty fifty chance of going up or down. Therefore a 100 call has a delta 0.50 (simplifed for all the other greeks) The 100 put also has a delta of 0.50 because of the fifty fifty component. The only difference is the sign of the put is negative. A call and put option can be thought of as nothing more than half of each side of a coin. It is the underlying broken in half, with the delta size being a reflection of the probability of it occuring. If at 100 the calls have a .50 delta and puts a -.50 delta, then at 105, the calls will have about a .8 delta and the puts a -0.20 (I know, gamma and vol will skew this) This all just for clarification
So in a credit spread, you are selling the high probability and buying the low probabilty for insurance. At the money, the probabiltiy you are selling is going to be about fifty fifty to give you about 0.50 deltas. But you gotta buy some deltas to hedge, so it will be less.
Another way to get more premium is buy less deltas, or less probability. How? Move up a strike. Buy the 110s. Now you go from being short about 0.3 deltas to being short about 0.45, so you will get more premium, but take more risk.
Anyway, as GATrader said, you can always get the mirror opposite if you are debating going credit or debit when spreading like this.
Thanks again Maverick for gettting a good thread going
Let's use your example of xyz trading at 100. If you believe this will hold, it seems to me that you could either buy the100 puts and sell the 105 puts for a 2-3 dollar credit; or you could sell the 100 calls and buy the 95 calls for a 2-3 dollar debit. Either way, wouldn't you have a 2-3 dollar profit at expiration if the stock is at 100. Or, the strikes could be adjusted depending upon your outlook and the profit range you want. If that is the case, does the credit still have an advantage over the debit
I was about to go in to how put and call credit and debit spreads can be interchangeable, but then I just saw GATraders post explaining this.
To reemphasize a point, whenever you are spreading up and down the same calendar, you can virtually always find the mirror opposite that will give you the same deltas and almost the same gammas. Something to keep in mind some time if you think buying the call spread looks good. There will be a put sread you can sell that will give most of the same greeks but with time decay.
With that said, it is very difficult to get 2-3 bucks for 100-105 spread with the stock at 100. If the stock is at 102.50, then you will get that kind premimum. The premium will reflect the deltas you are selling. So, with the stock at 100 the 100-105 spread has about a 30-40 negative delta, so you will get 30-40 percent of 5 bucks or about 1.10-1.40. To get more, you have to have the underlying in the spread to some degree.
Something that will help is to think of deltas as probabilities. If the stock is 100 at that moment has a fifty fifty chance of going up or down. Therefore a 100 call has a delta 0.50 (simplifed for all the other greeks) The 100 put also has a delta of 0.50 because of the fifty fifty component. The only difference is the sign of the put is negative. A call and put option can be thought of as nothing more than half of each side of a coin. It is the underlying broken in half, with the delta size being a reflection of the probability of it occuring. If at 100 the calls have a .50 delta and puts a -.50 delta, then at 105, the calls will have about a .8 delta and the puts a -0.20 (I know, gamma and vol will skew this) This all just for clarification
So in a credit spread, you are selling the high probability and buying the low probabilty for insurance. At the money, the probabiltiy you are selling is going to be about fifty fifty to give you about 0.50 deltas. But you gotta buy some deltas to hedge, so it will be less.
Another way to get more premium is buy less deltas, or less probability. How? Move up a strike. Buy the 110s. Now you go from being short about 0.3 deltas to being short about 0.45, so you will get more premium, but take more risk.
Anyway, as GATrader said, you can always get the mirror opposite if you are debating going credit or debit when spreading like this.
Thanks again Maverick for gettting a good thread going
Yeah, that goes without saying, you can always put on the synthetic if you get better prices. Also, as far as the credit goes, yes it will depend on where the stock is for the amount on your credit. Obviously the more ITM the spread, the larger the credit and vice versa. That is a personal prefence how each trader wants to handle that.
Any ideas on how to scan for candidates?
which brings up another "option".... to consider, and one about which I have always wondered just what the consensus view might be:
e.g
How many option traders consider "legging" into these (and other) strategies a viable choice. And should they?
I tend to leg in a lot, but have indeed found that much like the first loss is your best loss... getting fancy with credit and debits spreads often does more harm than good.
Any thoughts?
ICe
p.s. Thanks for another good thread
Mav:
You're making it too hard.
Seems to me that you have to have two conditions to make your strategy work:
1) You have to do enough of these to diversify away firm-specific risk.
2) You have to have the "secret sauce" with respect to spotting resistance/support levels. My experience is you make money the 80% of the time these work and lose it all back the 20% of the time they don't. Net of commissions, you lose.
So...1) is straight forward, and not that difficult to do if sufficiently capitalized.
But...if you really believe in 2) aren't there more straight-forward ways to trade it?
Thanks for the thread,
TF
You're making it too hard.
Seems to me that you have to have two conditions to make your strategy work:
1) You have to do enough of these to diversify away firm-specific risk.
2) You have to have the "secret sauce" with respect to spotting resistance/support levels. My experience is you make money the 80% of the time these work and lose it all back the 20% of the time they don't. Net of commissions, you lose.
So...1) is straight forward, and not that difficult to do if sufficiently capitalized.
But...if you really believe in 2) aren't there more straight-forward ways to trade it?
Thanks for the thread,
TF
Mav said
Any ideas on how to scan for candidates?
Im sure there is a way. But to really simplify it, I will refer to some of my old reading.
There was a book called "Trade the OEX" in which the author really goes through a ton of trades that he did. It has been a long time since I read this, but a big component of his trades was trying to get and edge. When spreads of $5 should trade at the 0.50 delta of 2.50 and he could get them for 2 1/4 or 2 3/8 (I know, decimals really date this) then he would take it. So, in this case, you where dealing with a person who specialized in the OEX and was always looking at the book for spreads.
Been a long time since I read the book. I'll have to take a look at it again.
Any ideas on how to scan for candidates?
Im sure there is a way. But to really simplify it, I will refer to some of my old reading.
There was a book called "Trade the OEX" in which the author really goes through a ton of trades that he did. It has been a long time since I read this, but a big component of his trades was trying to get and edge. When spreads of $5 should trade at the 0.50 delta of 2.50 and he could get them for 2 1/4 or 2 3/8 (I know, decimals really date this) then he would take it. So, in this case, you where dealing with a person who specialized in the OEX and was always looking at the book for spreads.
Been a long time since I read the book. I'll have to take a look at it again.