Mav's Verticals

Quote from iceman1:




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
:cool:

p.s. Thanks for another good thread
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I never try to leg my spreds for more then a .05 or .10. I figure If I can leg in enough to buy on the bid and sell of the offer then that's good enough for me. Any more then that is simply too much risk. In fact the way I look at it, if you are so good at legging in, then why not just trade the stock itself since your timing is so good. Make sense?
 
Quote from TempusFugit:

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
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Well, I have to disagree with you on number two. Most of the time, this strategy will produce small gains or small losses. But when the market is choppy and directionless, the profits can be huge. The risk you are taking for the reward is very favorable. The purpose for doing a strategy like this is to actually make money in a quiet choppy trendless market, which is 80% of the time. When the market breaks out either way and makes a big move you will most likely make a little or lose a little.

Why do this you say? Well, I think it's obvious, let's say you decided instead you just wanted to trade the stocks themselves buying strong stocks and selling weak stocks right. Well, 80% of the time you are going to get chopped up in a choppy directionless market and will more then likely give back any of the profits you made from buying false breakouts and selling false breakdowns. This strategy allows you to hold these positions and ride them out through expiration. While at the same time hedging your other trades that could be either long vol, short vol or directional type trades.
 
Quote from mbradley:

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.
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Yeah I'm not trying to get any theoretical edge here. I have 7 other portfolios for that. I want this setup to basically profit from choppy markets. I'm not trying to get cute here per se. I just want a good balence of long and shorts to hedge my losses from other positions that are exposed in flat markets.
 
Nice thread, wish I would have found it sooner. I came accross this other thread on et talking about vertical spreads and thought it might prove useful on this one here it is:

"IMO, doing it with e-minis is one of the harder ways to do it.. it takes an experienced trader (or one with insider connections) to consistently make money on the S&P. however, you can achieve your goal in 38 months using option spreads. instead of playing e-minis, sell vertical spreads (credit spreads). you can get 15% every month doing that. over 38 months, that is 202x your initial account. hint 1: sell bull put spreads under stocks that gap up, no more than 1-3 weeks before expiration. hint 2: sell bear call spreads above stocks that gap down, once/if they make a move up and fail to close the gap."

BTW has anyone been doing any vertical spreads lately? (interested in posting any examples?)
 
This a great thread. I have been doing these and using a portfolio somewhat like Mav suggests. It is a constant profit producer or has been for some time. I am slowly moving away from the put verticals and using even more call verticals to spread the risk. I don't know why except maybe I can't pick strong stocks but the success rate on call verticals is very high.
Last weekend when the Saddam bubble happened and I had on lots of call verticals I thought Monday morning I would have a big problem but the weakness of the underlyings was so strong that not one moved into the danger zone. By weeks end all closed out by expiring worthless except one that was slightly in the money but still could be closed with a small profit.

An example of my experiences with put credit verticals happened this week in SNDK. I had entered a call vertical 65/70 when the stock was near 60 several days before expiration. After it hang there for a while there were some buy signals on SNDK so I looked at a put credit vertical. I held back for a while and then MER downgraded SNDK and the stock dropped exactly one strike before rebounding. Looking back at the put open interest figures for SNDK there was a large buildup earlier in December. Could MER have been holding those puts and the downgrade made them profitable? These types of market manuevers are hard to predict but they definitely affect the positions.
 
Quote from Doubter:

This a great thread. I have been doing these and using a portfolio somewhat like Mav suggests. It is a constant profit producer or has been for some time. I am slowly moving away from the put verticals and using even more call verticals to spread the risk. I don't know why except maybe I can't pick strong stocks but the success rate on call verticals is very high.
Last weekend when the Saddam bubble happened and I had on lots of call verticals I thought Monday morning I would have a big problem but the weakness of the underlyings was so strong that not one moved into the danger zone. By weeks end all closed out by expiring worthless except one that was slightly in the money but still could be closed with a small profit.

An example of my experiences with put credit verticals happened this week in SNDK. I had entered a call vertical 65/70 when the stock was near 60 several days before expiration. After it hang there for a while there were some buy signals on SNDK so I looked at a put credit vertical. I held back for a while and then MER downgraded SNDK and the stock dropped exactly one strike before rebounding. Looking back at the put open interest figures for SNDK there was a large buildup earlier in December. Could MER have been holding those puts and the downgrade made them profitable? These types of market manuevers are hard to predict but they definitely affect the positions.
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Way to go Doubter! I'm happy to hear these are working out for you. For someone that can pick levels in stocks this is an excellent strategy. And You made my point about stock selection and the weak stocks. That is where the edge is. Even though the market ripped, your weak stocks held like they typically do. I think any of the guys on ET that has a good feel for support and resistance levels can absolutely clean up with these.

Again, congrats on doing well. It's nice to hear when others are using these strategies and making money. Happy Holidays!
 
Thanks Mav. I guess the secret comes from my handle I can smell a sick stock from a mile away and doubt the good ones. I am spending a lot of time looking at open interest in putting these on, almost more than technical analysis. Sentiment is potential supply and demand and that with support and resistance is just another edge.

I am intrigued enough by your perfect position to be ready to jump in soon. I look at the position as 4 vertical credit spreads and 1 strangle. All around one strike but with different maturities using the credits to pay for the strangle. The only two downsides I can see are small movements in the stock, in the lower wings, and the amount of margin per position required. TOS is the only margin I have checked and it is the same as for the vertical credits.
 
Quote from Doubter:

Thanks Mav. I guess the secret comes from my handle I can smell a sick stock from a mile away and doubt the good ones. I am spending a lot of time looking at open interest in putting these on, almost more than technical analysis. Sentiment is potential supply and demand and that with support and resistance is just another edge.

I am intrigued enough by your perfect position to be ready to jump in soon. I look at the position as 4 vertical credit spreads and 1 strangle. All around one strike but with different maturities using the credits to pay for the strangle. The only two downsides I can see are small movements in the stock, in the lower wings, and the amount of margin per position required. TOS is the only margin I have checked and it is the same as for the vertical credits.
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You are correct sir. The perfect option position is 4 verticals plus the strangle. As for the downsides, I would say moderate moves is what hurts the most. Small moves that go back and forth are good. But once it gets into the grey area on the front month fly you have some risk although it is offset by the back month spread early on. As you get closer to expiration the back month will help less and less until you move out of that grey area.

Again, I would put many of these on and play the numbers game like with everything else. As for the margin, take a look at Greentree, better margin then TOS. You need to get a risk based haircut on these vs reg t margins.
 
Thanks for the heads up about Greentree margins. I have been looking at them for a new account I need to set up soon. I like to keep my potential margins low so my bread and butter verticals can be spread out over several positions. With the length of time that the margin is tied up in the back months, on the perfect position, my front month earning capacity is limited. However, continuing to do more front month flies may help the monthly income picture.
 
:)

Maverick:

Thanks for sharing your ideas.

Have you considered using the QQQ, SMH or another index tracking stock for your spreads?

There would not be any specific company risk...ie., earnings, accounting problems and etc.

Hope everyone has a Merry Christmas and a Happy Hanukah.
 
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