Mav's Verticals

[BlueHorseshoe]

Quote from Hello_Dollars:

... 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 ...

If one wants to make a directional bet, more often than not it is much mo' betta' to buy the underlying rather than buy the calls.

Thus, I would agree w/ Mav that vertical spreads are best for trading against support or resistance, where there isn't necessarily a strong expectation for the stock to move significantly in a particular direction, but rather that it Won't move beyond a particular level (in the case of credit spreads.)

 

[Hello_Dollars]

Quote from Maverick74:

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? [/B]

AMZN at $45 and the Feb 45/40 bull put spread selling for $1.70? Really? Gee, I'm showing $53 and change for AMZN and the Feb 45/40 bull put spread selling for maybe 60 cents.

Perhaps, I'm getting the bizarro quotes by mistake and the Dow is actually plummeting towards 9,000 and not rapidly melting up to 11,000. Hey, wait a second. Maybe that means my long puts are actually very profitable and not wasting away to nothing. Nice!!!

 

[Maverick74]

Quote from Hello_Dollars:

AMZN at $45 and the Feb 45/40 bull put spread selling for $1.70? Really? Gee, I'm showing $53 and change for AMZN and the Feb 45/40 bull put spread selling for maybe 60 cents.

Perhaps, I'm getting the bizarro quotes by mistake and the Dow is actually plummeting towards 9,000 and not rapidly melting up to 11,000. Hey, wait a second. Maybe that means my long puts are actually very profitable and not wasting away to nothing. Nice!!!

HD, that quote was from hours ago. Nice try. I wanted to use the $45 price because you f*cking nitpick so much about me using spreads that are ITM so I decided to use a spread that was right at the strike. Can I ever win with you? What is your deal.

I keep breaking apart your posts one line at a time and you just don't get it. Almost all these vertical spreads can be done for around 2 pts plus or minus lets say .15 instead of .10 ok? Now let me clarify this that if you use stocks that are too cheap this obviously won't be the case. I have been using stocks over $50 for the most part except AMZN.

What about this strategy do you not understand? A vertical credit spread/vertical debit spread is much much much much better then buying calls outright. You know this which is why I am at a loss for why you keep going on and on and on about how you don't understand this strategy. Are you trying just to make conversation or do you really not get it?

 

[Maverick74]

Quote from Maverick74:

HD, that quote was from hours ago. Nice try. I wanted to use the $45 price because you f*cking nitpick so much about me using spreads that are ITM so I decided to use a spread that was right at the strike. Can I ever win with you? What is your deal.

I keep breaking apart your posts one line at a time and you just don't get it. Almost all these vertical spreads can be done for around 2 pts plus or minus lets say .15 instead of .10 ok? Now let me clarify this that if you use stocks that are too cheap this obviously won't be the case. I have been using stocks over $50 for the most part except AMZN.

What about this strategy do you not understand? A vertical credit spread/vertical debit spread is much much much much better then buying calls outright. You know this which is why I am at a loss for why you keep going on and on and on about how you don't understand this strategy. Are you trying just to make conversation or do you really not get it?

My mistake, that wasn't AMZN, I can't remeber which stock that was. I just pulled up the first one I could think of, let me see if I can find which one that was. Sorry.

 

[Maverick74]

Quote from Maverick74:

My mistake, that wasn't AMZN, I can't remeber which stock that was. I just pulled up the first one I could think of, let me see if I can find which one that was. Sorry.

I think it was YHOO. Sorry about that. I just pulled up a quote at random. Thought it was AMZN.

 

[riskarb]

Quote from Maverick74:

HD, I could find 100 not 20 to 40. All you have to do to increase the credit is increase the time or go deeper in the money. The amount on the credit has NOTHING to do with low vol.

Uh, no... actually, the current low volty has a HUGE impact on the credit-recieved on a vertical. Credits are much smaller than they would be if we were seeing higher volty.

If you compare XYZ vertical credits, one strike OTM, under a X% and X+1% volatility comparison you'll get a much larger credit under 50% volty -- it *implies* a larger price distribution, but also a greater prob. of profit due to the larger credit and larger +expectation.

arb.

 

[riskarb]

Quote from riskarb:

Uh, no... actually, the current low volty has a HUGE impact on the credit-recieved on a vertical. Credits are much smaller than they would be if we were seeing higher volty.

If you compare XYZ vertical credits, one strike OTM, under a X% and X+1% volatility comparison you'll get a much larger credit under "X+1%" -- it *implies* a larger price distribution, but also a greater prob. of profit due to the larger credit and larger +expectation.

arb.

typo fix

 

[Maverick74]

Quote from riskarb:

Uh, no... actually, the current low volty has a HUGE impact on the credit-recieved on a vertical. Credits are much smaller than they would be if we were seeing higher volty.

If you compare XYZ vertical credits, one strike OTM, under a X% and X+1% volatility comparison you'll get a much larger credit under 50% volty -- it *implies* a larger price distribution, but also a greater prob. of profit due to the larger credit and larger +expectation.

arb.

Yes risk arb that is true but my point in this discussion was that then skew would be greater as well with high vol options making the spread less attractive. Sure you get a higher credit, slightly higher credit with high vol but then you also as you pointed out increase your risk. These work much better in low vol environments then high vol for this exact reason.

 

[riskarb]

Quote from Maverick74:

Yes risk arb that is true but my point in this discussion was that then skew would be greater as well with high vol options making the spread less attractive. Sure you get a higher credit, slightly higher credit with high vol but then you also as you pointed out increase your risk. These work much better in low vol environments then high vol for this exact reason.

Man, I don't see that is the case, in theory, yes, the skew will be higher in a high volty environment, but I'm not seeing skew in equity options. Even assuming there is a skew, you're able to sell further OTM with higher volty under a larger dist. assumption, larger volty = larger curve, and that will beat the skew disadvantage in every instance I've ever seen/traded.

I know you know this, but it seems like you're intent on battling windmills here.

Anyway, it's all good, let's all resolve to make '04 our best trading year to date.

Peace out,

arb.

 

[Maverick74]

Quote from riskarb:

Man, I don't see that is the case, in theory, yes, the skew will be higher in a high volty environment, but I'm not seeing skew in equity options. Even assuming there is a skew, you're able to sell further OTM with higher volty under a larger dist. assumption, larger volty = larger curve, and that will beat the skew disadvantage in every instance I've ever seen/traded.

I know you know this, but it seems like you're intent on battling windmills here.

Anyway, it's all good, let's all resolve to make '04 our best trading year to date.

Peace out,

arb.

Riskarb, I am not disagreeing with you. I was trying to leave skew out of this altogether. I am trying, and maybe not very successful here, to get new guys to understand options better. I get all these PM's asking me to post more directional stuff which I'm not too fond of but I am very fond of debit and credit spreads as they pertain to direction. I am trying to simplify this as much as possible.

So yeah it gets annoying when people complain that I'm using a quote from a few hours ago or I put in the wrong symbol. I am just trying to get the point across that if you want to play direction, the verticals are the way to go period. Buying calls and puts outright for even the most experienced trader is quite a daunting task never mind the newbie trader.

You guys can argue semantics all day long but the idea behind them is the same. I will say this one more time, these spreads are for directional traders. The edge that the credit spreads have over the debit spreads is simply transactional in that one could save the commission and the cost of the spread on the exit. Now riskarb, I'm sure you agree that if you want to play direction then you would choose vertical spreads over outrights.