I think I've been insulted
If you are doing less than 5 contracts then I am still not convinced that slippage and commission won't eat your profits. Your better off trading the underlying directionally.
Methodology of the DITM Vertical Bull Call Spread
- Thread starter yucca_mtn
- Start date
I think I've been insulted
If you are doing less than 5 contracts then I am still not convinced that slippage and commission won't eat your profits. Your better off trading the underlying directionally.
To maybe answer some questions:
I use Interactivebrokers.
They charge 75 cents per option contract ($1 minimum).
To open 2 spreads, the cost is .75 X 2 contacts X 2 spreads = 3.00.
There is no cost to exercise options -
There is no cost to exercise spreads -
There is no cost to buy or sell the stocks resulting from exercise.
To exit a spread by selling it cost $1.50 per spread (or $2 minimum).
Since my average spread (when I enter it) cost a little less than $4. That means to open 2 spreads, a position of $800 cost $3 in commision. This does not seem burdensome to me. Typically I would be looking for a gain of $100 per spread, so $200 for 2 spreads. If I choose to exit the spread, my total commision for entering and exiting the spread is $3.00 per spread.
I hope this clarifies some of the mystery.
I use Interactivebrokers.
They charge 75 cents per option contract ($1 minimum).
To open 2 spreads, the cost is .75 X 2 contacts X 2 spreads = 3.00.
There is no cost to exercise options -
There is no cost to exercise spreads -
There is no cost to buy or sell the stocks resulting from exercise.
To exit a spread by selling it cost $1.50 per spread (or $2 minimum).
Since my average spread (when I enter it) cost a little less than $4. That means to open 2 spreads, a position of $800 cost $3 in commision. This does not seem burdensome to me. Typically I would be looking for a gain of $100 per spread, so $200 for 2 spreads. If I choose to exit the spread, my total commision for entering and exiting the spread is $3.00 per spread.
I hope this clarifies some of the mystery.
Reply to DaddysBoy:
RESPONSE PART 1
Iâll be clear.
I am very happy with my strategy and have NO intention of changing it.
On my very first post, I think I stated my goals clearly as follows:
âI hope we can discuss in some detail the topics related specifically to this type of strategy.â
Another post: âA strategy is just a strategy. The implementation or methodology is what makes it work or not.â
Another post:
âLearning how to do the trades and what they are is the price of admission to this club, but that is the EASY part. Learning the terminology is easy. Learning how to operate a trading platform like InteractiveBrokerâs is challenging, but this is still the EASY part.
The hard part is what follows, but the hard part is still common sense.
My goals are to discuss the issues that are challenging in using these spreads and determining what are the BEST solutions to these challenges.
Here are the big challenges:
1. Stock selection and market timing. Everybody who invests or trades has these problems. But the techniques used by participants in this strategy are vastly different from those used by day-traders, long term investors, and by those who use a thousand other spread strategies different than this one. Bull spreads donât work so well when the market is crashing down around our ears. So we donât enter these spreads anticipating that scenario. My contention is we don't have to become stock gurus, we have to become good at picking our sources of information.
2. Position management. What do we do when stocks rise and when they fall? What can we do to reduce risk and losses, and to maximize profits? What is a good exit strategy for this specific type of spread? When is the optimum time to implement these management techniques?
The post by FullyArticulate mentioned that things can go bad very quickly. He is absolutely right. When the shit hits the fan, it happens so fast it takes your breath away! These spreads are leveraged, and they move a lot from day to day. We expect that! We donât depend on luck or prayer, or good luck charms. The only way we withstand that vicious onslaught is to have a LOT of confidence in the prospects of the sectors and stocks we selected, or at least our ability to find the sources of information about them that we trust, and also to have a PLAN for position management to handle the situation. The novice should not be overly fearful about this. You stick your toe in the water and try it out first. You will grow into it.
3. How to properly diversify for safety. What are the consequences of having multiple positions in the same stock but with different strike dates or different strike levels? How does that affect margin requirements?
4. How to anticipate early executions and plan for them. How to anticipate expiration problems and how to avoid them.
5. How much cash do we keep on hand to handle maintenance issues? Rolling spreads? How can we raise cash from our positions when we need to?
There are many more issues that concern traders but they are more general in nature, like money management, margin issues, etc.
So Iâll listen to arguments about what is better bull put spreads or bull call spreads, but honestly I donât have any of the problems you talk about. I can enter and exit the positions just fine (mostly). I can easily find spreads that yield my target of 50% per year profit, assuming I have handled stock selection properly. I donât have a big problem with liquidity issues. I feel I am making optimal use of the funds I have available. If I can grow my portfolio by 40 to 50% anually, I really have no complaints.
I want to learn better techniques for stock selection and sector selection and timing my entries. All the rest is secondary.â
I donât know how to be more clear.
RESPONSE PART 2:
Iâm no expert on synthetics, but I have looked into the subject to the degree that I wanted to.
I even keep the following notes on my palm pilot:
*************************
OPTION SPREAD TYPES:
EXAMPLES WHERE STOCK IS AT $75
DEEP ITM BULL CALL DEBIT SPREAD
BUY THE 65 - SELL THE 70 CALLS
PAY 400 PER CONTRACT, 100 PROFIT IF EXERCISED
RISK 400
SUCCESSFUL WHEN STOCK STAYS ABOVE 70.
DEEP ITM BULL PUT CREDIT SPREAD
BUY THE 65 - SELL THE 70 PUTS
RECIEVE 100 CREDIT, AND 400 REMOVED FROM SMA (MARGIN REQUIREMENT)
RISK 400
SUCCESSFUL (EXPIRES) WHEN STOCK STAYS ABOVE 70.
Owner of 70 put makes me buy stock at 70 (if stock is below 70), then I make someone else buy it at 65. when stock stays above 70, I keep the credit. If stock is at 67, I have to pay 70 but can only sell it at 67.
DEEP ITM BEAR PUT DEBIT SPREAD
SELL THE 80 - BUY THE 85 PUTS
PAY 400 PER CONTRACT, 100 PROFIT IF EXERCISED
RISK 400
SUCCESSFUL (EXERCISED) WHEN STOCK STAYS BELOW 80.
Owner of the 80 puts make me buy the stock at 80 (if stock is below 80), and I make someone else buy it at 85, and make a 5/shr profit
DEEP ITM BEAR CALL CREDIT SPREAD
SELL THE 80 - BUY THE 85 CALLS
RECIEVE 100 CREDIT, AND 400 REMOVED FROM SMA (MARGIN REQUIREMENT)
RISK 400
SUCCESSFUL (EXPIRES) WHEN STOCK STAYS BELOW 80.
Now I hope we donât have to argue about my personal notes.
The reason I keep these notes in my possession constantly is cause I know I may have to implement one of these strategies on a moments notice if the market suddenly changes direction.
When things get interesting, and you have to work fast, on any given stock at any given moment, one strategy might work better than another. These notes will quickly let me analyze a situation when I donât have time for proper research and planning.
So when I was experimenting, I tried out all this stuff. What seemed to be consistently better (for me) was the Bull call debit spread. I have no apology to make about that. You like what you like and I like what I like.
*****************************
RESPONSE PART 1
Iâll be clear.
I am very happy with my strategy and have NO intention of changing it.
On my very first post, I think I stated my goals clearly as follows:
âI hope we can discuss in some detail the topics related specifically to this type of strategy.â
Another post: âA strategy is just a strategy. The implementation or methodology is what makes it work or not.â
Another post:
âLearning how to do the trades and what they are is the price of admission to this club, but that is the EASY part. Learning the terminology is easy. Learning how to operate a trading platform like InteractiveBrokerâs is challenging, but this is still the EASY part.
The hard part is what follows, but the hard part is still common sense.
My goals are to discuss the issues that are challenging in using these spreads and determining what are the BEST solutions to these challenges.
Here are the big challenges:
1. Stock selection and market timing. Everybody who invests or trades has these problems. But the techniques used by participants in this strategy are vastly different from those used by day-traders, long term investors, and by those who use a thousand other spread strategies different than this one. Bull spreads donât work so well when the market is crashing down around our ears. So we donât enter these spreads anticipating that scenario. My contention is we don't have to become stock gurus, we have to become good at picking our sources of information.
2. Position management. What do we do when stocks rise and when they fall? What can we do to reduce risk and losses, and to maximize profits? What is a good exit strategy for this specific type of spread? When is the optimum time to implement these management techniques?
The post by FullyArticulate mentioned that things can go bad very quickly. He is absolutely right. When the shit hits the fan, it happens so fast it takes your breath away! These spreads are leveraged, and they move a lot from day to day. We expect that! We donât depend on luck or prayer, or good luck charms. The only way we withstand that vicious onslaught is to have a LOT of confidence in the prospects of the sectors and stocks we selected, or at least our ability to find the sources of information about them that we trust, and also to have a PLAN for position management to handle the situation. The novice should not be overly fearful about this. You stick your toe in the water and try it out first. You will grow into it.
3. How to properly diversify for safety. What are the consequences of having multiple positions in the same stock but with different strike dates or different strike levels? How does that affect margin requirements?
4. How to anticipate early executions and plan for them. How to anticipate expiration problems and how to avoid them.
5. How much cash do we keep on hand to handle maintenance issues? Rolling spreads? How can we raise cash from our positions when we need to?
There are many more issues that concern traders but they are more general in nature, like money management, margin issues, etc.
So Iâll listen to arguments about what is better bull put spreads or bull call spreads, but honestly I donât have any of the problems you talk about. I can enter and exit the positions just fine (mostly). I can easily find spreads that yield my target of 50% per year profit, assuming I have handled stock selection properly. I donât have a big problem with liquidity issues. I feel I am making optimal use of the funds I have available. If I can grow my portfolio by 40 to 50% anually, I really have no complaints.
I want to learn better techniques for stock selection and sector selection and timing my entries. All the rest is secondary.â
I donât know how to be more clear.
RESPONSE PART 2:
Iâm no expert on synthetics, but I have looked into the subject to the degree that I wanted to.
I even keep the following notes on my palm pilot:
*************************
OPTION SPREAD TYPES:
EXAMPLES WHERE STOCK IS AT $75
DEEP ITM BULL CALL DEBIT SPREAD
BUY THE 65 - SELL THE 70 CALLS
PAY 400 PER CONTRACT, 100 PROFIT IF EXERCISED
RISK 400
SUCCESSFUL WHEN STOCK STAYS ABOVE 70.
DEEP ITM BULL PUT CREDIT SPREAD
BUY THE 65 - SELL THE 70 PUTS
RECIEVE 100 CREDIT, AND 400 REMOVED FROM SMA (MARGIN REQUIREMENT)
RISK 400
SUCCESSFUL (EXPIRES) WHEN STOCK STAYS ABOVE 70.
Owner of 70 put makes me buy stock at 70 (if stock is below 70), then I make someone else buy it at 65. when stock stays above 70, I keep the credit. If stock is at 67, I have to pay 70 but can only sell it at 67.
DEEP ITM BEAR PUT DEBIT SPREAD
SELL THE 80 - BUY THE 85 PUTS
PAY 400 PER CONTRACT, 100 PROFIT IF EXERCISED
RISK 400
SUCCESSFUL (EXERCISED) WHEN STOCK STAYS BELOW 80.
Owner of the 80 puts make me buy the stock at 80 (if stock is below 80), and I make someone else buy it at 85, and make a 5/shr profit
DEEP ITM BEAR CALL CREDIT SPREAD
SELL THE 80 - BUY THE 85 CALLS
RECIEVE 100 CREDIT, AND 400 REMOVED FROM SMA (MARGIN REQUIREMENT)
RISK 400
SUCCESSFUL (EXPIRES) WHEN STOCK STAYS BELOW 80.
Now I hope we donât have to argue about my personal notes.
The reason I keep these notes in my possession constantly is cause I know I may have to implement one of these strategies on a moments notice if the market suddenly changes direction.
When things get interesting, and you have to work fast, on any given stock at any given moment, one strategy might work better than another. These notes will quickly let me analyze a situation when I donât have time for proper research and planning.
So when I was experimenting, I tried out all this stuff. What seemed to be consistently better (for me) was the Bull call debit spread. I have no apology to make about that. You like what you like and I like what I like.
*****************************
In the spirit of trying to get some useful diolog here, I offer the following -then I'm done unless there are some responses:
The first time I was exposed to the incredible flexibility of vertical spreads was when I listened to a lecture by Fontanills.
It was on a 2 CD set that I bought off ebay. It was âOption Spreads Made Easyâ. I listened to this about 2 years ago, so my memory might not be exact. I think he talked first about the way he like to trade with is OTM spreads, far out in time (âgive yourself time to be rightâ), and far out of the money â by finding stocks that he researches painfully and expects to pop. He likes the big gains. He likes the action. He sounded young in the lecture. Later he talked about ATM and ITM spreads.
It blew me away, when he spent a reluctant 2 minutes discussing ITM vertical spreads. He clearly stated it is not his thing, but he dutifully went on to explain how you could put on DITM spread 1 or 2 months out and pick up an 10% to 15% gain with pretty good safety and pretty good yield when annualized. Well that struck a nerve in me, as a guy close to retirement and looking for safety and perfectly satisfied to gather a low yield of only 50% per year, if only it would work
So I started working that DITM Vertical Bull spread, little by little for about 10 months, learning as I went, âpoco a pocoâ. It was about 14 months ago that I had my trading portfolio filled exclusively with this single spread strategy, plus a few long positions.
Do any of you share similar investment goals?
Here is a brief history of my 2 years experience with DITM Verticals, if anybody is interested.
At first I set up ITM vertical spreads like he suggested, short-term âscalpsâ for 40 to 70 cents gain on $5 spreads. Didnât work for me. A month or two out turns out to be a VERY LONG time in the options business. Stock prices wiggle all over the charts. I tried perfecting my entries, looking for dips, avoiding earnings reports, etc. Still didnât work. But I was breaking even (by exiting early for small losses on losing positions), and I was learning.
So I started working spreads 3 to 4 months out. Things got a lot better. To get my goal of 50% annual return, I could now go deeper ITM and get that added safety. A time horizon a few months out seemed to smooth out some of the wild gyrations of the market. Now I was making money. But I was making mistakes too. My positions were unbalanced, not enough sector diversification, making the wrong management moves at the wrong times, exiting good positions because of short term panic. And other mistakes.
So I realized that the methodology used makes or breaks as perfectly good strategy. Now Iâm stressing spreads 5 to 7 months out, picking stocks carefully, watching market conditions closely, going as deep ITM as I can and still get the target yield.
So anybody have any ideas about improving methodology for vertical spreads?
What do you think about the volatility picture now, it is generally low? Should we avoid opening spreads now?
Do we need to consider the VIX before trading or are DITM spreads more immune to general volatility conditions?
What about setting up spreads that are over one year long? Say in Dec or Early Jan, we set of spreads with strike dates for the following Jan? Are there tax benefits, like long-term capital gains, instead of short term?
The first time I was exposed to the incredible flexibility of vertical spreads was when I listened to a lecture by Fontanills.
It was on a 2 CD set that I bought off ebay. It was âOption Spreads Made Easyâ. I listened to this about 2 years ago, so my memory might not be exact. I think he talked first about the way he like to trade with is OTM spreads, far out in time (âgive yourself time to be rightâ), and far out of the money â by finding stocks that he researches painfully and expects to pop. He likes the big gains. He likes the action. He sounded young in the lecture. Later he talked about ATM and ITM spreads.
It blew me away, when he spent a reluctant 2 minutes discussing ITM vertical spreads. He clearly stated it is not his thing, but he dutifully went on to explain how you could put on DITM spread 1 or 2 months out and pick up an 10% to 15% gain with pretty good safety and pretty good yield when annualized. Well that struck a nerve in me, as a guy close to retirement and looking for safety and perfectly satisfied to gather a low yield of only 50% per year, if only it would work
So I started working that DITM Vertical Bull spread, little by little for about 10 months, learning as I went, âpoco a pocoâ. It was about 14 months ago that I had my trading portfolio filled exclusively with this single spread strategy, plus a few long positions.
Do any of you share similar investment goals?
Here is a brief history of my 2 years experience with DITM Verticals, if anybody is interested.
At first I set up ITM vertical spreads like he suggested, short-term âscalpsâ for 40 to 70 cents gain on $5 spreads. Didnât work for me. A month or two out turns out to be a VERY LONG time in the options business. Stock prices wiggle all over the charts. I tried perfecting my entries, looking for dips, avoiding earnings reports, etc. Still didnât work. But I was breaking even (by exiting early for small losses on losing positions), and I was learning.
So I started working spreads 3 to 4 months out. Things got a lot better. To get my goal of 50% annual return, I could now go deeper ITM and get that added safety. A time horizon a few months out seemed to smooth out some of the wild gyrations of the market. Now I was making money. But I was making mistakes too. My positions were unbalanced, not enough sector diversification, making the wrong management moves at the wrong times, exiting good positions because of short term panic. And other mistakes.
So I realized that the methodology used makes or breaks as perfectly good strategy. Now Iâm stressing spreads 5 to 7 months out, picking stocks carefully, watching market conditions closely, going as deep ITM as I can and still get the target yield.
So anybody have any ideas about improving methodology for vertical spreads?
What do you think about the volatility picture now, it is generally low? Should we avoid opening spreads now?
Do we need to consider the VIX before trading or are DITM spreads more immune to general volatility conditions?
What about setting up spreads that are over one year long? Say in Dec or Early Jan, we set of spreads with strike dates for the following Jan? Are there tax benefits, like long-term capital gains, instead of short term?
Your spreads are relatively vol-neutral; if anything, when high IV they are cheaper and their value increases when IV goes down.
Re: longer terms, I don't see an advantage there. Of course you can get farther down and still get your 25% ratio, but otoh there is more time for the underlyer to cross your borders. Again, the probability of this happening is fully priced in the premiums. There is no edge.
Since you're really doing a theta play, I'd say trade only the nearest option, since decay is highest then.
I would never use Fontanillis as an example personally. Of course he knows his spreads by name and number, but I never saw any expertise from him regarding position equivalence and premium probability. Of course he makes a living teaching wannabe n00bs, and in that sense it would be disadvantegeous for him to explain these matters, because it would take away the magical shine that options have for these ppl.
I still think you are missing the point here and I still think your risk is too high. Let me remind you again: one day the stocks will go below the long call and you will lose everything invested; and that is a large part of your equity apparently.
Btw thanks for explaing the number of spreads vs. the capital. I now see you have 50 different position running. My question then becomes: how can you make FA estimates for 50 different funds??
And why all long? Isn't it better to have half of them bearish, in case the whole market tanks, as will happen.
Ursa..
I am a private investor and a friend of yucca_mtn. I am a less experienced trader than most folks on this site. However, I have seen and read yucca_mtn's E-book on the methodology of the DITM Vertical Bull Call Spread. Using the strategies outlined in his book I invested several thousand dollars in DITM Vertical Bull Call Spreads and in my first 4 months of trading have earned a 25% return. The E-book is clearly written with a touch of humor and can guide even a novice trader to earning big in option spreads. I believe this E-book is a valuable tool for all option spread investors and I'm sure yucca_mtn would be happy to tell any interested users how to obtain a free copy of his E-book.
Sincerely,
nuggo
Sincerely,
nuggo
So, how much does the free e-book cost?
daddy's boy