My OPTION TRADES..... part 2

Quote from Put_Master:

<<< If I read you correctly,it is not the concept of selling spreads that ruffles your feathers, it is way of "spread traders". It appears that your basic argument is spread traders are overleveraged,have no regard for initial delta and are out of control. >>>

That would be a reasonable summation.
But the part about being out of control, refers back to them being over leveraged. However, it's not so much that they are over leveraged, per their "choice".
It's more along the line that most spread traders don't even know they are leveraged at all!
Let alone leveraged at 5... 10... 15 or even 20 times the value of their account.

Danshirley is a perfect example of that. He's been doing spreads for years, and had no idea he was even on leverage at all.
He spent several weeks arguing with me, telling me that i was crazy, and that he is NOT on margin. That there is no margin with spreads.
He finally asked his broker and apologized to me. He may have even thanked me for pointing it out to him.
I have no idea how leveraged he was, but he was selling a lot of spreads in the 40, 50 and 60 area.
GULP!

Now Dan doesn't do just credit spreads. He uses a variety of strategies. While his account was at more risk than he was aware of, it was not in the insane crazy degree of leverage, that traders who specialize in credit spreads are in.
A spread here and there is one thing. But a portfolio of "all" or even "mostly" spreads is another.
Those are the folks who need to be educated and warned.
THose are the accounts that can drop to zero in no time, during difficult times.

Most simply don't realize, that the "limited risk" of credit spreads, which is the aspect about them they find so apppealing,... refers to their account value. That their account value can not drop below zero.
They are overly focused on the limited risk "per trade", and NOT how too many of those individual trades going bad at once, can devastate their account value.
WHY?
Because they are over leveraged and don't know it. Hence their only choice during difficult times, is to sell for a loss.
If you are trading spreads as a strategy, you have no plan "B", for 90% of your trades, during difficult times.
It's actually more than 90%, but I'll save that discussion for another day.
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you guys sure know how to beat a subject to death!
 
Quote from webicknell:
Put, I can't speak for all Sread Traders... I always have a plan "B" and work to limit my downside risk. You keep talking about massive or total loss... The maximum loss on any credit spread is the difference between the strike prices of the two options minus the net credit received. There is built-in down side protection. You need to take in account, both legs of the spread,
Just because I have been trading these spreads for a short time, does not mean I do not understand risks or risks management.
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I suggest you re-read all my posts on the subject, beginning from page one.
If the strategy you are using to trade funds from your account is credit spreads,.... then based on your comments above,....you actually have NO IDEA of the risks you are taking with your accounts cash and value.
But that is why i am having this discussion. To inform traders like you of the risks you are taking.

And just for the record, I'm NOT saying don't take risks, and I'm not saying don't sell credit spreads.
My discussion is all about merely informing spread traders of the actual risks they are taking, so they can invest in credit spreads as informed and safely as possible.
You really can not "manage risk", if you are unaware of the risks that need to be managed.
And the risk I am refering to is MARGIN LEVERAGE.
 
Quote from Put_Master:

Sold puts on $31 LRCX for Oct.
Credit $0.60
otm safety cushion 11%
Annualized % return........ 14%

Solid company. FInancailly healthy. Good value at my $31 strike, with a BE at $30.40. Tech support at $30 per the 5 year chart below:
http://finance.yahoo.com/q/bc?s=LRCX&t=5y&l=on&z=l&q=b&c=

If/when stock drops closer to $33, I will sell a $30 strike for Dec.
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You should turn that into a Put spread. Buy the 28 Put @ $0.25 for "insurance" against a sharp drop.


---------------------

z
 
Quote from diaoptions:
You can't buy and sell options on "Margin".
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In Theory World, which is connected to Fantasy Land by way of a gold filled path, lined with candy trees and bubble gum bushes,..... you are correct.
In the real world, 98% of credit spread investors will invest in credit spreads using the potential for margin leverage.
MASSIVE MARGIN LEVERAGE
 
Quote from diaoptions:
You should turn that into a Put spread. Buy the 28 Put @ $0.25 for "insurance" against a sharp drop.
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Insurance is never a bad idea.
I decided to spend time analyzing the stock as my form of insurance.
My main risk is, the earnings come out for LRCX on Oct 15, shortly before the trade expires. If they miss, the stock could drop.
Hopefully the L-T support at $30 will hold.
If not, the stock can drop to the $27 area, and i will earn a similar dollar and % return income,... selling a covered call at a 30 or 31 strike.
Thus, I have no issues with the stock dropping another 20 - 22% from it's current price.
If it does, I'll earn similar income on a Dec covered call.
Hopefully the VIX (IV) will be higher at that time,.... if the 20% drop occurs.
 
Putmaster,how long have you been trading?

Not for nothing,you real "risk" is if the stock should rally 2 weekly ATR's in your face.

Stop maximising the likelyhood of making money and put on positions tha make real money if you are right.


Quote from Put_Master:

Insurance is never a bad idea.
I decided to spend time analyzing the stock as my form of insurance.
My main risk is, the earnings come out for LRCX on Oct 15, shortly before the trade expires. If they miss, the stock could drop.
Hopefully the L-T support at $30 will hold.
If not, the stock can drop to the $27 area, and i will earn a similar dollar and % return income,... selling a covered call at a 30 or 31 strike.
Thus, I have no issues with the stock dropping another 20 - 22% from it's current price.
If it does, I'll earn similar income on a Dec covered call.
Hopefully the VIX (IV) will be higher at that time,.... if the 20% drop occurs.
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Quote from taowave:



Stop maximising the likelyhood of making money and put on positions that make real money if you are right.
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yeah babee...now we are talking options 102....as dyedmyoptions would say...
 
Quote from diaoptions:

You can't buy and sell options on "Margin".
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You can't write outside of a margin account. A margin req is applied to naked short positions; initial and variation. 100 shares of GOOG runs $68,200 in cash and 34,100 overnight. Shorting the 680 Sep put (ATM) runs $14,500 in req for 45-deltas. WTF would you call that?

No, the premium is not leveraged, but the notional risk certainly IS leveraged and margined.
 
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