Selling DITM verticals

Pekelo

Pekelo

I had to rewrite this post due to some confusion on my behalf.

While tinkering with verticals it occurred to me, what if I sell a very deep ITM vertical? So I checked it out, and the risk/reward seems to me too good to be true. Is there something I am missing?

If I got this right I would be selling a DITM vertical call if I expected the market to fall, but not sure when it was going to happen....

For example at the beginning of last week I could have sold a SPY 244/245 vertical that expired at the end of the week for 83 cents, max. loss at 17 cents. But because the market did fell below the BE price of 244.83 the position ended up in the money with maximum gain.
 
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Two items to consider: your probability of loss is very high, however, you are correct with the amount of loss (max risk). The position is profitable, if there is a major drop in price (not increase as you inferred). -- Market needs to drop 200 ES points to have a gain/not loss.
https://imgur.com/h234oKX
 
Yes, I realized my mistake and rewrote the OP.

An ITM Iron Condor (2 verticals) could be also used if I am sure of a bigger movement but uncertain about its direction. Using Ameritrade's backtesting tool:

On the first day of July I write 2 verticals when SPY was at 242.21

Calls: 239/240
Puts: 244/245

For a credit of $1.4. At the July expiration 3 weeks later SPY is at 246.6 and it looks like the position is up 40 cents. But shouldn't it show 1.4 as gains, since the stock price is outside of the breakeven point?
 
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Hi Pekelo.. if you are sure of a big move w/o directional bias, short a fly instead.. Low IV means good "gamma rent" while the short wings dampen vega exposure (somewhat). You get a big move, sell out the straddle, maybe put on a new straddle . If you get lucky and get another push, your fly risk graph will be "above the line" across all price points...
 
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