Methodology of the DITM Vertical Bull Call Spread

reply to beltway.

I have a more agressive account that amounts to 145K.
I have 10k cash, 115k in DITM Bull spreads, and the rest in Long positions. (was 100k in jan06)

I have a less agressive account with 62k - with 27.5k in spreads, 46k in long positions, cash is -11k. (was 46k in jan06)

Another account is 49.5k with 23.7k in spreads, 34k long. (was 40k in jan06).

This is in no way a guidline for ANYBODY else.

These accounts are not the total investment picture with has more conventional investments

These are accounts set up to generate cash for income.
 
to beltway again

I am maybe over diversified, but I prefer that to underdiversified. A lesson I learned last year.

So the account that has 115k in spreads has about 220 total spreads in 54 different stocks and ETFs.

Again, not a recomendation.
 
Quote from yucca_mtn:

to MTE, you are making a lot of false assumptions about my trades.
I'm handling over $350k in spreads for me and family members. I'm handling over $200K in IRA accounts. I consider it an awesome responsibility, NONE of this money can be replaced if I screw this up. I have been handling this for several years.
I started using vertical bull spreads only 14 months ago as THE only strategy for maximum growth. There have been times when I worked very hard to make ridiculously little money (when I thought covered calls was a cool strategy for growth, but I NEVER LOST MONEY on these accounts during the months when my experience levels were lower than they are now.

What I have tried to do is become as good as I can at one single solitary thing, the DITM Bull CALL spread. I do worry about nickles I assure you. When I'm buying spreads, I'm searching for bad days in a rising market, or waiting for the shoe to drop in toppy markets. I watch the minute charts watching the stock price (with a firm memory of the yearly chart of the stock) and I wait for a good buy time on a day that the stock is gennerally trading in a range I like. Thats what I worry about, not puts and calls. I watch volatility like a hawk. I pay close attention to delta, and sometimes delta is a dealbreaker.
My nightmare is buy a position at it's high and watching it erode.
My nightware is not that I missed a good implied volatility entry point.

So maybe I am clueless.
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The only assumption I made is that of your account size and it was a false one, I admit. Still, the point remains, OTM have better liquidity than ITM options.

The other point I made, as pointed out by MajorUrsa, is that you cannot conclude the long term profitability of a bullishly biased strategy based on 14 months of trading in a bull market. If you do as well in a bear/flat market then your strategy has some merit, otherwise it's pure luck.
 
Just another thread by a newbie to lure people in, acting inexperienced and naive, asking for advice and opinions about their strategy, only to toot his horn about his success and then belittle and argue with others after a few well meaning responses.

...and to argue "Don't confuse a bull market for brains"...um...ok...

Can't see the forest cuz the tree's are in the way.
 
Quote from yucca_mtn:

reply to beltway.

I have a more agressive account that amounts to 145K.
I have 10k cash, 115k in DITM Bull spreads, and the rest in Long positions. (was 100k in jan06)

I have a less agressive account with 62k - with 27.5k in spreads, 46k in long positions, cash is -11k. (was 46k in jan06)

Another account is 49.5k with 23.7k in spreads, 34k long. (was 40k in jan06).

This is in no way a guidline for ANYBODY else.

These accounts are not the total investment picture with has more conventional investments

These are accounts set up to generate cash for income.
More...

When you say you have 115k in bull spreads, do you mean that is your debit or is that your exposure?

Those are a lot of spreads to watch. Do you leave resting stop loss orders or just watch them?
 
Quote from MTE:

The only assumption I made is that of your account size and it was a false one, I admit. Still, the point remains, OTM have better liquidity than ITM options.]

This is the singlest largest drawback to this strategy. Deep in the money equity options have perhaps the least liquidity of all. So if a position gets into trouble...getting out may be far more costly. I can't see the advantage of trading this strategy over just the underlying equity other than perhaps leverage.

The more (and longer) you trade options you really do get a feel for the volatility/theta etc relationship and you do trade differently than when you are doing equity and or CC type strategies.

So far I remain unconvinced this is a very good strategy for the novice or experienced option trader.

But hey whatever trips your trigger. GL
Richard
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I agree with the others about urging caution.

As has been mentioned many times here, there is no "built in" edge with any retail options position. Except perhaps with some very rare and fleeting situations.

How could there be a "just do this and this and you will make 40-60% a year, etc, etc"?

And I'm pretty sure researching stocks and buying the best "value", "PEG", whatever, is no edge beyond the "normal" stock market upward drift over time.

There are just too many unknown things that are going to happen. You can't predict it, or at least not for very long.

I traded various option spreads from about 1999-2001. What would happen to your DIM spreads if the market, and ALL your stocks dropped 50% over the course of a few years?

I know what would happen...:(


Keep the leverage low, guys. Stay in the game!

Best to all. :cool:
 
Quote from AAAintheBeltway:

When you say you have 115k in bull spreads, do you mean that is your debit or is that your exposure?

Those are a lot of spreads to watch. Do you leave resting stop loss orders or just watch them?
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I thought debit = exposure with debit spreads...
 
A word to Beltway:
The 115k means the “liquidation value” of the spreads.
The liquidation value contains a certain amount of “unrealized gains”.
The “maximum return” of the spreads is the amount that the spreads would return if they all complete perfectly.
I’m not giving out that info.



ABOUT LIQUIDITY......
There have been comments about liquidity problems with DITM spreads. Here are my thoughts.

When I enter into a DITM spread there are no liquidity problems by definition (or I wouldn’t be in it).
When I enter a DITM position I have done so because I expect a certain return in a certain time and I am happy with that.

Now what are the future prospects for that position?

The stock can go up resulting in the spread increasing in value, not a bad thing. Now, because the stock is increasing, the spread is getting more DITM. So maybe the liquidity is getting less, maybe not. The worst case scenario I see here is that the spread approaches the maximum yield earlier than the expiration date, which means we want to exit the position early if we can so we can put that money to better use if we have already gobbled up most of the profits early. So now we may indeed have a liquidity problem – but do I lose sleep about it. No. I’m sitting on a much less risky spread than when I started, I’m well on my way to making the maximum profit that I was originally happy with so I just forget about early execution and patiently wait for the spread to exercise. Take the stock ICE for example. This thing has skyrocketed during the past few months. The volatility has been very high. The stock has been highly rated by analyst. This all meant for guys like me what a good opportunity for a VERY DITM Bull Call Spread. When the stock was around 85, I was buying 60/65 spreads six month out for 25% yield. When the stock hit about 100, I was buying several 70/75 spreads. And finally when the stock hit 120 I bought several 90/95 spreads. All the spreads I bought had June07 strike dates. The stock is now at 143. When I wanted to close out the 60/65 spreads to capture profit early I did bump up against liquidity problems it took several days to finally close them, but it was never a problem since I could always wait for expiration (or early execution by the short call). The same with the 70/75 spreads. I finally was able to leg out of those, but again it was never a problem.

So when you start with a DITM and it stays a DITM, why would you ever choose to fight liquidity problems when you have a winning position?
 
Quote from yucca_mtn:
So, even with monkeys picking stocks, I like the odds.
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There is nothing to like about those odds, because you get exactly what you pay for. In the long run spreads costing 75% of their strike distance will on average end up on the 75% point between the strikes. Sometimes higher sometimes lower. Sometimes the market overestimates IV and you payed to much, sometimes volatility is not as high as expected and you payed less and have a profit. But on average and in the long run the value of the spread is a good estimate of the exp-value of the underlyer. How will you be a better estimator than thousands of traders who will not want to pay or receive a penny too much or too little for their options. Options prices are the best estimate of the future of a stock, and so are all combinations of them. You can do better, but it would be surprising or luck.

Now, strategically adjusting your position due to new info from the markets can of course change this picture. but that is not a property of the spread itself but of your ability to make the right decisions. You then aren't trading the spreads theta aspect, but it's directional and vega aspects.

I personally find your strategy very risky. All the money in the spreads will be lost someday. You don't get 25% for nothing...

Ursa..
 
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