I'm thinking that I might have made the mistake of looking at the option chain after hours expecting to be able to plan trades for the week ahead. Is it possible the list I'm looking at (ToS) is priced this way because it is after market, and thus, the low volatility is making the bid/ask spread huge (dollars wide)? It just doesn't seem right that I can sell a put at a certain strike price, and then I would have to pay more to buy the strike price that's lower to make a vertical. Before everyone writes me off to still needing to learn the basics, at the bottom I'll post a trade I plan on making Monday and the thought process behind it. If I'm way off, please point me in the right direction! Also, thanks for all the replies. I appreciate the input.
You are skipping steps. Learn the basics of how to price a call n put first. Then your spreads are just linear combinations of them and you will understand why you are seeing those prices.
Did you definitely read through the numbers I wrote, or maybe just assumed that once I wrote the bull put spread was a debit, figured I must be confused? In almost all of the videos I am watching, I am understanding them fully so I'm curious which steps I am missing. I believe I do know the basics of pricing options, including their intrinsic value as well as how extrinsic value comes into play.
You answered your own Q, wide spreads. You can get it for a credit if you sell and buy mid, but your risk/profit profile is still going to be "shitty" in your opinion. If you really think they're shitty, then you should be a taking the other side of the trade.
My advice is to read a few books and ditch the option gurus. If you lurk here for a week or two you'll notice the handful of ppl here on the options forum that actually know what they're talking about. Best info here from those dudes than anywhere else on the internet, I'll let you figure out the rest.
I thought about taking the other side of the trade too, but that risk/profit sucks too. I'm thinking once the market opens monday the numbers it will make sense again?
And yes, I have a few of the "bible of options" type books, but since I have a tendency towards paralysis of analysis I've been watching the tasty trade videos on youtube since they're direct and to the point, and I feel like I know enough to get going and actually practice. But I agree, I am going to read through the "must-reads".
I'll definitely be lurking here and learning. Do you happen to remember any specific members that I can learn a lot from? Maybe I can search their posts. Thanks
No, you absolutely are not. Your post contains too many errors to disentangle, but you *are* aware of risk(s) and return, and that is way good.
As far as videos go, the Options Industry Council probably still sponsors webinars through Interactive Brokers -- they're free and on the web. Russell Rhoads put a bunch of block-by-block videos together; they may still be there (or elsewhere on the web)...
http://www.cboe.com/blogs/author/russell-rhoads
Please, almighty all-knowing, at least tell me where my errors lie! Besides maybe my last paragraph, I am pretty sure everything I said is on point.
Thanks for the link though. I'll definitely check that out.
For example lets look at the same option chain, the 17 JUL 20... sell the 360/350 put spread and you receive 2.67 credit, which isn't too bad from a R:R perspective. Try to always collect at least a 3rd of the width of your strikes. So if its a 10 buck wide vertical you want at least 3 bucks in credit to make it "worth it".
It comes down to heuristics, and your own method. Everybody trades different, and usually matches their personality.
Edit: also learn as much as you can about synthetics. Most of the time, if you are making a directional bet (not volatility bet) you might as well trade the bull call spread instead of the bull put spread. Yes you want to sell premo when vol is high, but other factors are at play as well. If you are going to trade TSLA, AAPL options don't worry bout bid/asks
When I look at the option chain I see the 360/350 put spread as a credit of 2.10? I'm selling for 5.00 and buying the 350 strike at 2.90. I made a post recently with this exact question; I was having difficulty finding credit that gives 1/3 the width of the strike. It seems risking 8.90 (10 point width, 10.00-2.10) to make the 2.10 credit wouldn't work out in my favor often enough to be profitable considering how close those strikes are to the underlying (364) already. Maybe that would be a good risk/reward if my probability of profit were high, but with the strike that close to the underlying there's no way its worth it!
Why would you prefer a bull call spread over a bull put spread? I would go for that if imp vol is low in it's range, but correct me if I'm wrong, most of the professional's are sellers?
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My process in finding a trade for Monday went like this-
I scanned ToS to find optionable stocks that'd be liquid with high volume and also with a high IV percentile, figuring the options will be expensive and I can sell premium as the volatility (hopefully) reverts to the mean.
Anyway, after I sorted the list by volume, I found CVM which I noticed had an IV percentile of 73%. I also like what the chart looks like considering the price is right at the bottom of the channel. I then looked at the options list for options expiring AUG 21 20 since it's the closest to 45 DTE, which is what I aim for.
Now, from what I've been learning from tasty trade videos, strikes that are 1 standard deviation out are a good starting point. So, if I'm not mistaken, delta can also show me my probability of being in the money. So I tried to find the strike price that had as close to a .16 delta to aim for my 84% probability of success (1 SD for single options). Side note- I was going to make a thread about this. Why doesn't the delta always equal the probability OTM or ITM then?
Anyway, the strike price with a .13 delta is 7.5 and I can accept a 1.85 credit. If I don't decide to write naked puts, I can buy the 5 strike for 1.10 and accept .75 credit while risking 1.75 (2.5 spread minus .75 premium). Even though the probability OTM is 50% on the 7.5 strike, which normally would make me think this trade is horrible considering the risk/reward, I am now looking at delta for my probability and I think this is a good trade.
I also plan to follow the advice of those videos in managing winners and closing at 50% to increase win rate. If I am using spreads, I wouldn't manage losers, even if all the way to expiration for a loss considering I am managing my risk from the start and not trading too big for my account. I also want to give it time to become a winner.
Sorry for the huge wall of text, but I felt it was necessary to spill some thoughts out to see if everyone still thinks I'm at square one haha. I feel like I am understanding it, but by all means if I don't have a grasp of the fundamentals, please point out my errors! Thank you!
(So! There is an intermarket spread, a calendar spread, a strike spread, or a bid-ask spread. Yowser! If you're in energy, your intermarket spread might also be the "spark spread." Sheeesh.)
Can't do that.