[newbie question] Is $2000 enough to buy a bull put spread combo?

[Justrade]

Thanks for your response.

Sorry I can't answer this. Does this depend on what the value of both puts are on the day my stop loss is hit? Is there a way to tell this in advance?

I'm not sure if this is helpful but the MinInvest (in Interactive Brokers) is -156 (credit). This is the minimum amount required to invest in the strategy.

yes you can (approximately)... hint: 80/2000... and it will probably be more...
most believe that to be too high and would cut it in 1/2

you need to evaluate all the questions from everyone and more B4 putting trades on...

Put a bracket order on and let the trade play out

Then record it and move on to the next one

 

[Axon]

Thanks for your response.

Sorry I can't answer this. Does this depend on what the value of both puts are on the day my stop loss is hit? Is there a way to tell this in advance?

I'm not sure if this is helpful but the MinInvest (in Interactive Brokers) is -156 (credit). This is the minimum amount required to invest in the strategy.

Justrade hinted at it but I'll spell it out.
GSX is $87.50 right now. By your description if you open a spread by selling the Sep 18 70p and buying the Sep 18 60p the credit will be $160 (I get a slightly different number but close enough) and the collateral is $1000. So, yes, technically the "max loss" is $840 but that assumes you have no stop.
But you've said you do have a stop at $80.
The worst case scenario is you open the spread first thing tomorrow and the price runs immediately down to $80 where you get stopped out. How much do you lose after closing the trade in this scenario? By my calculations and without taking slippage into account roughly $70.
So without slippage (lack of liquidity, adverse changes in IV, etc.) and assuming the worst price action you are risking 70/2000 or 3.5% of your total stack. If you're cool with risking 3.5% (a little more with slippage) on a single trade and you are confident you can actually get out near your stop then you're good.
Note that if you let this trade go to expiration your break even is $68.40 so while the first day a drop to $80 would cost you $70, this situation rapidly improves and at expiration as long as GSX is trading above $68.40 your trade profitable. If on expiration GSX is above $70 you keep the entire $160 and get your collateral back.

Bottom line
Max gain: $160
Max loss if stopped out: $70
Max loss as percentage of $2000 stack: 3.5%
reward:risk 2.29:1

 

[.sigma]

75% chance for max return
13% chance for max loss

according to Interactive Broker's Performance Profile for the spread

Do you have a minimum 'chance for max return' that you look for when trading credit spreads?

First off, keep pushin and learn as much as you can via optionality.

second, idk what a bull put combo would be? A combo is a spread with calls and puts. A bull put spread only has puts. A combo would be if you sold the 60/70 combo or bot em’, creating a strangle. Or you could buy and sell em creating a risk reversal.

also, when looking at a positions metrics (percentages of success, max gains/losses) while these numbers are good to know, do not rely on them. The second you place your bid the probability scale is shifted.

look at your positions synthetic counter part and compare, sometimes the debit spread is more efficient than the credit s.

 

[nwoptions]

Thanks Axon This post really helped clear things up for me.

Do you recommend that I use a limit order when closing out my trade prematurely if it hits my stop loss at $80? Or should I use a market order?

Justrade hinted at it but I'll spell it out.
GSX is $87.50 right now. By your description if you open a spread by selling the Sep 18 70p and buying the Sep 18 60p the credit will be $160 (I get a slightly different number but close enough) and the collateral is $1000. So, yes, technically the "max loss" is $840 but that assumes you have no stop.
But you've said you do have a stop at $80.
The worst case scenario is you open the spread first thing tomorrow and the price runs immediately down to $80 where you get stopped out. How much do you lose after closing the trade in this scenario? By my calculations and without taking slippage into account roughly $70.
So without slippage (lack of liquidity, adverse changes in IV, etc.) and assuming the worst price action you are risking 70/2000 or 3.5% of your total stack. If you're cool with risking 3.5% (a little more with slippage) on a single trade and you are confident you can actually get out near your stop then you're good.
Note that if you let this trade go to expiration your break even is $68.40 so while the first day a drop to $80 would cost you $70, this situation rapidly improves and at expiration as long as GSX is trading above $68.40 your trade profitable. If on expiration GSX is above $70 you keep the entire $160 and get your collateral back.

Bottom line
Max gain: $160
Max loss if stopped out: $70
Max loss as percentage of $2000 stack: 3.5%
reward:risk 2.29:1

 

[nwoptions]

F

second, idk what a bull put combo would be? A combo is a spread with calls and puts. A bull put spread only has puts. A combo would be if you sold the 60/70 combo or bot em’, creating a strangle. Or you could buy and sell em creating a risk reversal.

Sorry I didn't know a combo meant calls and puts. I meant a bull put spread. Just puts.

 

[lindq]

I'm interested in buying the September 18 70/60 bull put combo for GSX.

My stop loss price is $80. At this point, I will close the position.

Max return $160
Max loss $840.

I have $2000 to invest. Is it acceptable to trade an option with this amount?

Thanks

Your "Stop Loss" price is a fantasy. It assumes that you can exit your position without incurring substantial execution costs, spreads and delays.

Have you followed previous advice to include the costs of spreads in your calculations?

No? And why not?

Have you followed previous advice to trade a single option so you can experience the realities of price movements instead of just theorizing?

No? And why not?

Are people on this site wasting their time in providing you with assistance?

It does seem so.

 

[ironchef]

What probability does your own calculation says is your chance for max return?

If it is > 75%, you have positive expectancy otherwise you won't be profitable in the long run.

I hope you truly appreciate what I was trying to tell you: The expectancy of buying or selling a spread are equal. The only way you will come out ahead in the long run is if your opinions of the outcomes are different from the market and you are generally correct and the market is generally wrong.

Instead of screening for high probability trades, you need to compute and trade high expectancy trades. Learn to come up with your own opinion of a trade and you will survive.

Have you followed previous advice to trade a single option so you can experience the realities of price movements instead of just theorizing?

No? And why not?

Great advice for any newbie, including this one (me) who took it to heart.

 

[Amun Ra]

70/60s are too risky for my blood. I need more breathing room. I'd probably do the 45/40's Very little chance of a 50% drop in 1 month, less collateral required and you can buy more. I'd rather be nearly guaranteed $120 profit than a risky $160 profit. That's just me though.

 

[Axon]

Thanks Axon This post really helped clear things up for me.

Do you recommend that I use a limit order when closing out my trade prematurely if it hits my stop loss at $80? Or should I use a market order?

lindq is right that options stops placed with your broker can execute poorly. I use mental stops especially with spreads and close out with a manual limit order.

 

[nwoptions]

70/60s are too risky for my blood. I need more breathing room. I'd probably do the 45/40's Very little chance of a 50% drop in 1 month, less collateral required and you can buy more. I'd rather be nearly guaranteed $120 profit than a risky $160 profit. That's just me though.

Thanks for the input. When I looked for the 45/40s in IB it said N/A.

So a 5 point difference between both strike prices is better than 10?