NVDA Vertical Credit Spread

TrustyJules said:
Ok you are not at all getting the statistics of this. The chance is 18% that the stock would end in 3 months below 175. There is a 36% chance that the 175$ will be touched based on statistical analysis. These are elements to take into account when setting up a trade like you have. A 20% drop - certainly for a stock like NVDA - is not at all out of the question this can happen and its not a black swan event.

So taking your statement that you will bail +- two thirds of the way in, this means you could do a trade like this (with modified strikes if appropriate) 6 times a year as you are in the market for 2 months for each trade. Based on the current prices you might exit for as little as 0.20$ net cost every time you are successful and lets presume you are successful 5 times out of 6 so that would net you $10,900 however we must also presume that the one failure will materialise.

For the sake of argument lets say NVDA would drop to 160$ - halfway to your lower bound. Presuming you bail out at 1 month before the end then you would lose ca. $12,700 (likely value of the spread is $15,000 to buy back minus $2300 credit received). This means that after a whole year of doing this you are coming out with a loss of $1900. Now to be fair these calculations are just the ones I did in my head and they should be made more exactly for example to allow for the fact its a 2 months not three months trade. However, your statement that

is based on 1/5 chance. Make less sense than 4/5 chance it will stay above 175 strike.

Is the one that doesnt make sense, the statistics shouldnt give you a false sense of security. If you showed me 5 doors and told me to walk through one of them. 4 doors give a million dollars and one of the doors leading to certain death; you wouldnt get me to go through any of them. The challenge with all such spreads is how to avoid taking the one big loser - all I was saying was that your setup seemed decent. That as long as you could manage the downside risk and position size it was a valid position. The 18% chance that it goes wrong shouldnt be underrated though - this is a very real percentage and the losers in credit spreads tend to be much bigger than the winners.
More...
The spread is placed 6 times a year and 1 of them fail. My return would be 2380x5= 11900 and the 1 failed trade would stop out at 25% -5000. Total profit is 6900 -com.
 
Here is an update 7 days into the trade. Profit $355
20171120NVDADay7.jpg
 
Here's an update 10 days into the trade.
20171122NVDADay10.jpg

Subtract the last column, profit is $624.55 , doesn't appear to be much for all the hot shots trading onesies-twosies touting 45% return, remember this is 10 contracts. Representing 1 trade in a decent size portfolio.
 
lylec305 said:
If i'm down 20% I'm out and rolling into another trade
More...
20% of what? of the credit you received? Or 20% of the total risk (20 points x 10 contracts x 100 shares/contract = $20,000, so 20% of that would be $4000). Keep in mind that if you are bailing out when the mark-to-market value of your spread shows a loss of $4000 then your probabilities (18% probability of making money when you initiated the trade) are no longer valid since those probabilities are based on an assumption of holding to expiration (i.e. no stop-loss). I believe you would need to do a montecarlo analysis or something like that but my guess is that this trade would reach the point of -$4000 (at which point you'd be out) many more times than the 18% probability would suggest (again, because of the use of a stop loss). Remember that with a short put or a short put spread you tend to get double-whammied since a stock's move down (you are long delta) is usually accompanied by an increase in IV (which is detrimental for a short put spread in which you are short vega).
In any case good luck with your trade but as an exercise it is interesting to think of all potential scenarios like TrustyJules mentioned
 
TradingDemystified said:
20% of what? of the credit you received? Or 20% of the total risk (20 points x 10 contracts x 100 shares/contract = $20,000, so 20% of that would be $4000). Keep in mind that if you are bailing out when the mark-to-market value of your spread shows a loss of $4000 then your probabilities (18% probability of making money when you initiated the trade) are no longer valid since those probabilities are based on an assumption of holding to expiration (i.e. no stop-loss). I believe you would need to do a montecarlo analysis or something like that but my guess is that this trade would reach the point of -$4000 (at which point you'd be out) many more times than the 18% probability would suggest (again, because of the use of a stop loss). Remember that with a short put or a short put spread you tend to get double-whammied since a stock's move down (you are long delta) is usually accompanied by an increase in IV (which is detrimental for a short put spread in which you are short vega).
In any case good luck with your trade but as an exercise it is interesting to think of all potential scenarios like TrustyJules mentioned
More...
fyi the trade is profitable. You started off right; 20% of max credit, but you and TrustyJules went off on a tangent with with your assumptions, plus it was turkey day. Hmmm do you guys even deserve a reply...
 
Last edited:
What’s happening with the trade? NVDA is at $196 and your short strike is now / would be at 59% prob of touching. Will you wait? Did you close it earlier?
 
You must log in or register to reply here.
Back
Top