Need your help on put spreads

A

ARNYC

I have a few questions based on my first put spread that I sold.

How do you select which put to sell (and which to buy to complete the spread)- Do yopu go by delta, how far out of the money, or where the stock previously bottomed?

Do you generally sell one month beofre expiry or shorter or longer.

Wht type of risk reward do you generally use? (I am not asking what "everyone" should use.. I know it depends on one's risk tolerance)

At what point do you get out if the stock starts to go down

(I am narrating below what happened with my first transaction:
I sold CMG 655 April put and bought $650 put on Marh 19. I selected this because CMG went down to almost this level. later I read that the sentiment now is not as bullish on this stock as it used to be. The low it made a few months ago was $645 and not $655. When I looked at the risk/reward on this after reading more about this stock, I got out on March 20 with very little profit, becasue I ws worried I may be doing something stupid. Wanted to ask you guys for general guidance)



Thanks

Arnyc
 
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Frame your trade to the magnitude of the move you are expecting is the simplest way. There are also scanners which also provide with the spreads listed by risk return payoffs based on your outlook.

Actually, what you did is a reverse calendar and is not a bad way to trade a rebound. A lot of sophisticated operators use that. I can't seem to model a nice trade for myself because I am depending on a much bigger drop in volatility in the back month. It probably works better in practice than what I see on the model.

i think the rebound has to be fast to knockdown back month IV.
 
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If this is your first put spread, it is a little bit risky. The reason is that after the front month expires, you are left with a naked call.

How about starting with more basic vertical spreads and normal calendar spreads? Limited risk,limited reward is a good way to start.
 
I didn't realize it was so deep OTM. Here is the PnL for that trade. Better check your margins, I don't think this trade has favorable margin treatment. Looks like a dog and I'm qualified to say that.

upload_2015-3-20_19-47-23.png
 
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xandman and Victor123:

Thanks for your reply.

I think I confused everyone due to my English as second language background. My apologies

I am re-writing my question, so that I will not give the impression that I have done a Calendar spread. It was a simple spread:

On March 19, I sold a put credit spread expiring April 17. Sold the CMG $655 put and bought $650 put. Becasue of the very low reward for the risk, I got out on March 20, with a small profit. (I sold the $655 becasue CMG went down to apporximately this level earlier. Later I saw that the actual level reached was $645. Not $655)

Should I have sold such out-of-money put spread (with such low reward/high risk) and do you think selecting 1 month expiration was toll long? Would you have done this trade and held on to this through expiration?

Sorry for misleading you guys. Hope you will reply.

Arnyc
 
How much credit did you take for selling the spread? And what was the delta of the position? That is a good starting point to assess if the reward was worth the risk. You want very low delta, I.e very small chance of expiring in the money.

I personally select 1$ wide strikes because I am conservative.
 
I think you have a good command of English. Your punctuation and grammar is better than mine. However, You can express trades in simpler psuedo-code that others can understand, sa as not to be wordy:

Trade 1: Sold CMG Apr17 655P, Bought CMG Mar20 650P
Trade 2: Sold to close CMG Mar20 650P

Your question about the poor risk/reward can only be argued in hindsight. Most won't sell such a poor risk reward. I was being flippant in the other post. But there may be other reasons why people should be doing this trade. ie a pervasive steepness in skew such as the S&P since 1987.
 
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Victor/xandman:

Thanks. I took in $93 of credit on one contract. The Deltas were about 17% to 20% range, if I recall correctly

If I am not asking too much, would you mind taking a look at the Option chain of CMG as of now and see if you would take this trade (say buy the April 17 655P and sell the April 17 660P at yesterday's prices)? Will you please explain the why (why you would take or why you will not) And, if you do take the trade and if CMG starts coming down, when will you exit from the trade? How will you determine this when-to-exit part?

Sorry, I hope I am not asking for too much of your time. I am trying to learn. This is my first such credit spread and I got nervous after I took the trade, thinking I may be doing something stupid. I hope I am not looking at risk reward in an erroneous way for put credits (because I also can't even see if I can get better risk reward if I want a high probability of the contract not going againt me).


Just to give you the background,

Thanks
 
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xandman said:
I think you have a good command of English. Your punctuation and grammar is better than mine. However, You can express trades in simpler psuedo-code that others can understand, sa as not to be wordy:

Trade 1: Sold CMG Apr17 655P, Bought CMG Mar20 650P
Trade 2: Sold to close CMG Mar20 650P

Your question about the poor risk/reward can only be argued in hindsight. Most won't sell such a poor risk reward. I was being flippant in the other post. But there may be other reasons why people should be doing this trade. ie a pervasive steepness in skew such as the S&P since 1987.
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That's not what the OP did. he/she sold a simple put spread with April expiration 655/650

$407 risk

$93 max reward.

On March 20,2015 he/she closed the position for a small gain upon revisiting the potential risk/reward of the position.
 
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