Some quick noob options questions

P

phubaba

Hey everyone,

I've learned a fair amount about options over the last year and I'm paper trading on TOS now. (been successful trading stocks).

So basically, this is my first tos options paper trade.

And I guess I was having difficulty finding a risk:reward that I liked, given implied vol is around 150%.

I'm bullish on uyg so I figured I would go with a vertical put spread, sell the atm put and buy an otm put.

I ended up with +10 x=17 @ 1.8: -10 x=19 @ 2.8. (This has a 1:1 risk to reward). I would have expected to bank 1000 dollars, but my net effect buying power was down 2000? Which makes no sense to me.

Also, was this the best trade I could have made, given this situation? If i'm bullish and implied vol is high. The greeks look good delta 133, gamma -3.02 theta 4 vega -.82.

Besides those questions, in general what type of risk:reward is reasonable? If you aren't getting that risk:reward, do you still make trades?

Any advice would be appreciated! Thanks.
 
Quote from phubaba:


I ended up with +10 x=17 @ 1.8: -10 x=19 @ 2.8. (This has a 1:1 risk to reward). I would have expected to bank 1000 dollars, but my net effect buying power was down 2000? Which makes no sense to me.

Your margin is the difference between the strikes (in this example, that's $200) per spread.

Thus, 10 spreads uses up $2,000 in buying power. But your broker should have used the cash ($1,000) generated to increase your bp. It's definitely a good idea to call your broker and ask what happened.

Also, was this the best trade I could have made, given this situation? If i'm bullish and implied vol is high. The greeks look good delta 133, gamma -3.02 theta 4 vega -.82.

There is no <i>best</i> trade. You must pick a trade that suits you, your comfort zone, and your ability to predict market direction.

Besides those questions, in general what type of risk:reward is reasonable? If you aren't getting that risk:reward, do you still make trades?

Risk/reward is not all there is to trading. Would you take a r/r of 1.0 if the probability of losing were 80%?

Would you take a risk/reward of 1.0 if the risk of loss were $10,000 per spread?

You want to consider probability of success in addition to r/r.

I still make trades when r/r is not as good as it could be. There are too many other factors to rely on only r/r.

Mark
http://blog.mdwoptions.com/options_for_rookies/
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thank you for your responses, your website is pretty good, I read through a fair amount of it. your risk seems a bit low for my tolerance but I Guess im younger and not playing with much money.
 
Quote from phubaba:

thank you for your responses, your website is pretty good, I read through a fair amount of it. your risk seems a bit low for my tolerance but I Guess im younger and not playing with much money.
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You are definitely younger!

To me the risk and reward potential of an option portfolio are part of discovering your comfort zone.

One thing I stress is that a comfort zone is personal, and no one call tell you where your boundaries lie.

One point: It's your money. Don't take lots of risk just because it's not (yet) a large amount. Now is a good time to develop good habits.

Best of luck.

Mark
 
Quote from dagnyt:

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Your cash balance is increased by the 1k received. Then the BP is reduced by the 2pts X 10 contracts spread you have (2K). Thats just the way TOS does it. Your max loss is of course only 1K.

If you were very bullish the way to do it is to sell the put spread to finance a call/or call spread obviously upping the risk but the reward as well.
 
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