Question about a spread I got on

T

trader46

Ok so on the 02/02 I entered two options trades on underlying stock ESRX. From a technical standpoint I am bullish on ESRX and believe it will reach at least $90 by March.

Trade 1:

Bought 1 MAR10 90 Call for $2.00
That call is now worth $1.91

Trade 2:

Entered a bull put spread by selling the MAR10 90 and buying the MAR10 85. Net credit is $2.40, which I keep as long as ESRX is trading above $90 by expiration in March? Risk:Reward here is almost 1:1 which is where I think I feel comfortable, unless I'm doing something wrong.. most credit spreads I simulate on profit graphs tend to have negative risk to rewards even if they are "high probability" trades.

So instead of going the convential route of being short theta.. I am long theta here? Which is what is giving me a better R:R? Also the put that I am selling is ITM so that is also contributing to a better R:R but decreasing probability of the trade working out in my favour by increasing the breakeven and forcing me above $90 to achieve max profit?

I realise there is somebody else taking the "other side" of this trade so its a bit of a balancing act.. compromise here and there.. he (the other guy) has his share of risk and reward and so do I.

Thanks!
 
it's obvious you need to read up on options, that someone taking the other side of the trade is doing it for totally different reasons. They might win too if you win ... you both might lose ... it's much more complex than it might seem at first glance ...
 
Yep it's a long road yet..

Obviously an options strategy like a spread can involve multiple individuals. I mean some guys bought the put I've sold and I've also bought a put off another bloke.. both guys with completely different intentions, outlooks, and strategies. Sorry I'm still trying to figure this options stuff out. Just looking for low risk/reward trades that I can simulate and get my feet wet a little.

I'm running a long option strategy alongside a spread to compare the performance of both,
 
ESRX has only traded above 90 for small handful of days in its 10 year chart. The chart looks pretty bearish but thats just an opinion.

In your put spread, the day in question 2/2 the range was 85.43 to 86.54. So despite collecting premium the spread was already in the money and you should not expect to keep all or maybe even any of the premium. There is also NO time premium in the spread with the stock at in the range you sold the spread at since anywhere under 87.60 the spread will actually move higher rather than decay lower as you get closer to expiration, given the stock stays under 87.60.

You’re also long the 90 call which now that Feb is gone has the highest theta per day of any option on the board.
No offense but you would have to pray the stock goes to 90.40 just to break even .

The counter party on the trade is meaningless to anything you need to be concerned with.
 
you also need to realize that the original options you bought/sold were most likely immediately hedged off in some way by the mm, so there may be no one directly opposite you on a trade.

but i think you are on the right track to try some trades and see what works for you.



Quote from trader46:

Yep it's a long road yet..

Obviously an options strategy like a spread can involve multiple individuals. I mean some guys bought the put I've sold and I've also bought a put off another bloke.. both guys with completely different intentions, outlooks, and strategies. Sorry I'm still trying to figure this options stuff out. Just looking for low risk/reward trades that I can simulate and get my feet wet a little.

I'm running a long option strategy alongside a spread to compare the performance of both,
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...persackly!.....what he said....

Quote from xflat2186:

ESRX.......


The counter party on the trade is meaningless to anything you need to be concerned with.
More...
 
Quote from trader46:

I am bullish on ESRX and believe it will reach at least $90 by March.

Bought 1 MAR10 90 Call for $2.00
That call is now worth $1.91

If you expect ESRX to hit 90 by March expiration then this trade is a guaranteed loser since 92 is the break even. If it moves to 90 sooner, it might make some money (perhaps 90 by early March).

Entered a bull put spread by selling the MAR10 90 and buying the MAR10 85. Net credit is $2.40, which I keep as long as ESRX is trading above $90 by expiration in March?

BE on this spread is $87.60 at expiration (less if sooner) and profit increases to $2.40 at $90

Risk:Reward here is almost 1:1 which is where I think I feel comfortable, unless I'm doing something wrong.. most credit spreads I simulate on profit graphs tend to have negative risk to rewards even if they are "high probability" trades... Also the put that I am selling is ITM so that is also contributing to a better R:R but decreasing probability of the trade working out in my favour by increasing the breakeven and forcing me above $90 to achieve max profit?

OTM credit spreads have worse risk/reward ratios but higher probability of making the profit. ITM credit spreads have better risk/reward ratios but lower probability of making the profit. As mentioned, BE of $87.60 for the put spread. Spending another $2 for the call is what is forcing the BE up to $89.60

I realise there is somebody else taking the "other side" of this trade so its a bit of a balancing act.. compromise here and there.. he (the other guy) has his share of risk and reward and so do I.

Who is on the other side of the trade has nothing to do with the price of tea in China.
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If going this route (funding a long call with a credit put spread), I'd have looked at selling the 85/80p spread instead of the 90/85p spread. In return for maybe a buck less premium (raising your upside BE by a buck), your short strike would be 5 pts lower and your loss area might be 4 pts or so lower. IMO, better R/R.
 
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