Beyond the fact that we apparently disagree over the best use of vertical credit spreads, I think we would both agree that the selection of any options position should be based on where one would derive the greatest edge and which would provide the greatest expected return given a specific market environment, security, and directional and volatility outlook.
See I disagree with this, but only on this strategy. Normally, I would always look at vol and skew and examine all my risk, but the edge in this trade is with the stock picking ability of the trader an not in the analytics of the options. In other words if you did this strategy and another guy did this strategy on this board only he is a great underlying trader and you are not, I would bet hands down this guy would do better then you regardless of which options he chose. Therefore the edge here is in picking the right stocks and not the right options. Of course this is the only strategy where I will say this.
Frankly, it seems to me that, in general, there's just no edge at the moment in selling ITM vertical credits. OTM I can understand, but even there, as you acknowledge, the credits to be received at the moment are miniscule and hardly worth the risk. So the edge, I gather from your comments, is in the directional bet and has nothing to do with trivial stuff like probabilities, relative volatility levels or the Greeks. Fine. Then I will return to my suggestion of going long options.
I think you are still missing the point. It's not about options edge, its about stock edge if there is such a thing. This is a stock picker's strategy pure and simple. And I will say this again, the fact that vol is so low does not play a role in this at all. Remember you have to buy the outside strike so in a high vol environment you will be paying more that outside strike and possibly paying a much higher skew.
First, I need to correct a misimpression you have about what I suggested. I never proposed buying front month options. Indeed, for the same reasons I would only sell options with less than 45 days of life, I would never buy such short-dated options. You're right about that being way too risky and generally ill-advised.
Yeah i know you want to buy long dated options but the problem you have here is vega. The guy that simply wants to bet on direction, thats it, does not want to also be making a vega bet. You are exposing him to a enormous vega risk and if the stock he is long calls does just that, go up, then the vol will surely go down and thereby hurt his position. I have nothing against long options as you know, I love long straddles, but for a vega play, not a delta play.
Rather, I was talking about 3-6 month options, or even leaps if one is less confident about timing and had a longer time horizon. The idea is to evaluate each strike and series in terms of all the trivial stuff like IV, break-evens, the Greeks, probabilities, etc., and determine which would give you the highest expected return in light of a directional and volatility outlook.
Again, we want to make only a directional bet here, not a volatility bet. I'm sorry I keep repeating this but I think you are ignoring this important fact.
And yes, straight stock is certainly an "option" to play direction. I never said it wasn't. But I thought the point of your question was to suggest alternative ways to bet on direction using options. Plus, for the reasons you yourself mentioned as to why credit spreads might be a better way to play direction as compared to straight stock, namely limited risk, the same reasoning applies to going long options.
Yes, we are leaving straight stock out of this, I just wanted to point out the advantages the credit spread had over the long stock play.
But I would agree with you that buying long options is a low probability exercise (though I thought you said probabilities were irrelevant to the discussion). I would never suggest one do that as their sole trading strategy. Indeed, as I think you know, I use other strategies, such as iron condors on the indices for non-directional bets, while I go directional and long gamma in individual names in an overall "quasi-dispersion" approach.
Yes, probability is irrelevant. I was simply stating that most directional traders I know if not all have never made a dime just making directional delta bets. I stated why this was the case in the last post. It's because you are essentially making a parlay bet where you are betting on not only direction but volatility and time. Most guys on this board can't even make money just trading direction, how do you expect them to make money if they have to add two more variables to the equation?
However, it seems to me that at this particular moment in time, with vol so low on a relative basis, long options (or perhaps vertical debit spreads to reduce risk) are a much more viable way to play direction. (By the way, another alternative, which is the subject of another thread as you know, is to buy OTM time spreads as a way to play direction, be theta positive and take advantage of the low vol levels.)
Just so you know, the vertical debit spread has the same profit/loss graph as the credit spread. They are the same thing as I'm sure you know. The reason I don't like the OTM cal spread is because what happens if the stock doesn't move. See with the vertical credit spreads you can make money if the stock rallies or if it just sits in the support range.
Finally, for educational purposes, I would challenge you to provide some support for your assertion that you could right now come up with 100 vertical credit spreads that fit the specific criteria you've described in this thread. Actually, just 10 would do.
Sure tell me what criteria you are looking for. Almost every credit spread I see can be done for about 2 pts give or take .10. Obviously if go more ITM you raise the credit and if you go further out you raise the credit some.
Take a look at AMZN. Stock is at $45 right. You could put on the feb credit spread for about 1.70 just hitting the bids and offers. I could leg into that for at least 1.90 if not 2 pts. That is selling the feb 45 put and buying the feb 40 put. And that is right at 45 so thats not even ITM. Every stock I look at is the same. So I am very confused as to what you are looking at. I could post the entire CBOE quote screen here, they are all the same. Again, the only reason I am choosing feb right now is because jan expiration is too close. Normally I would wait a few weeks then put on the feb spread. Are we on the same page here?
