spread trading

[metooxx]

Originally posted by Cdntrader



Impressive. Did you look at many other islands? Were the access solutions similar?

Looked all over; the main reasons for coming here were:

1) Connectivity;

2) Proximity to US;

3) Reasonable housing;

4) Tax advantages;

5) The island is made for pirates or in our case bandits.

The biggest negatives are:

1) Grocery shopping, prices are ridiculous and availability is spotty; a lot of people bulk shop in Miami, haven't tried it yet;

2) restaurants are inconsistent with typical Caribbean service.

 

[GATrader]

Let me pose this situation that seems to happen a lot. "Smart money" thinks that stock at $80 has topped off and will drop within next 2-3 weeks. They bid up the 75 puts which makes the skew steep so 75 strike is at 50% IV while strike 80 is at 45% IV. As a swing option trader, you would sell the 75 cal and buy the 80 call since the skew is favorable to selling the call spread. In effect, you are being paid to take the same bet the smart money is making. I say being paid since you are selling the call spread at a higher credit than what a flat IV would value the spread at. (i.e. a call spread theoretically worth lets say at $3 being sold at 3.5 due to the skew)

Any thoughts or counterpoints?

 

[dojibear]

I don't know about Learn 2 Spread, but I think spread strategies are very good, if you understand the risk management of trading. Spreads decrease your risk, however, at the same time, they slow down your gain.

One good spread strategie is the 'credit long synthetic underlier' : Long Call, Short Put, same strike, same month . This spread give you the SAME RISK PROFILE as going long stock, but you don't have to put up a cent! (except for commish), and sometime, you may even get some credit .

The problem is some brokers may want you to have cash as colateral for the put sale.

...as for making a living using spread... well, if one COULD make a living going long/short stocks, one could make a living doing crd long/short synthetic spreads, and at the same time, have the colateral cash in T-bills.


Cheers !!!

 

[rs7]

Originally posted by Don Bright


True spread trading, as it's done by the floor traders involves dozens of different strategies and individual instruments.

You need to be able to consistently keep a cash flow from "short" options, in my opinion, to make any money for the longer term.

Don

A man who knows of what he speaks!!!

The kinds of spreads that are typically done off the floor are in reality no more than synthetic long or short positions. For them to work, the market has to go your way. Might as well just trade the stocks (or ETFs).

But on the floor, with the rules as they are (way different than for customers), the "spreads" are a different animal, as Don implies. When I traded on the floor, probably my favorite "spread" was a "back spread". I started with a credit. I hoped for nothing to happen, or for something big to happen. In between I had some exposure. But the positions were not really put on with the objective of making money. They were put on to (1) Hedge other positions and stay within risk parameters set by OCC and our clearing firm and the exchange, and (2) To comply with exchange rules relating to % of positions at our designated posts. (I used OEX because that was easy).

Sometimes they were enormously successful. Most times they were incredibly dull. And every once in a while they were marginally costly (like paying for term insurance and not having an accident and collecting...part of the cost of doing business). But the bottom line is they were a good trade, they served their purposes, but to stay within the context of this thread, they couldn't ever, ever, ever be done by you or me as customers, prop traders, firm traders or any other kind of traders other than market makers. (which makes explaining what they even are totally useless).

So are spreads viable trades? Yup, but no more so than buying or selling the underlying issues. Or even the puts and calls alone. This is why you will not hear Don, or any of the other pros get enthusiastic about hearing how you (or I) may want to dabble in spreads.

I asked to have the ability to trade options just a few weeks ago where I am. I got the software and the account set up. I have yet to trade one contract. And I may never. And I know how. I could write a book. But this knowledge doesn't help me now.

Added to the obvious (to me) other obstacles, I now see how decimalization and multi market listings make option spread trading even more unattractive than I could have imagined.

Just my .02

RS7

 

[GATrader]

Rs7

I agree with some of the points you make about spread trading . However, there are some things that I don't quite agree with the points you gave.

Multi listing of spreads is good for the off floor trader since the spreads have narrowed dramatically. As an off the floor trader that should favor you . Just look as the QQQ options, very tight.

I traded on the floor for 6 years and the main game there is scalping vega or the bid/ask. You would lean on the paper, buy on the bid, sell on the ask and hedge. So yes, you can't do that off the floor because of the monopolistic rules the exchanges put up to prevent off floor market making. The game off the floor is taking directional bets like you said BUT you can't simply distill it into two position like you opined-long or short synthetics. I put on directional calendar spreads with good success.

Some people bring up the fact that there is no edge in option trading, there is- the hv vs. IV, the skew, the smile and most important the risk reward. In my opinion a lot more edge than buying 1000 shares of a stock becasue the SP ticked up twice !In addition there are a lot of asymetrical bets that market offers.

One has to be careful in making blanket statements like that. I am a daytrader trading around 1.5M shares per month. Once the SP stops making these 35 point swings I will be back to option trading doing my 5-10 contracts daily making 1/2 the $ but 5% of the stress. Now what mode of trading do you think my 'broker' would want me to do?
Good trading

 

[rs7]

Originally posted by GATrader
Rs7

I agree with some of the points you make about spread trading . However, there are some things that I don't quite agree with the points you gave.

Multi listing of spreads is good for the off floor trader since the spreads have narrowed dramatically.

GaTrader,
You make some valid points. Let me clarify a couple of things though which are of course only from my perspective so far.
First as for decimalization and multi exchange listings...yes, they do make the pricing fairer for off the floor customers. But my "problem" is that it seems the prices are too perfect! There seem to be no opportunities to take advantage of mis-pricing. Now keep in mind, I have only been looking at this now for less than 2 weeks, and I have not traded options seriously for a long time. But so far this is my perception.
Secondly, yes, there certainly is some benefit to using options as opposed to stocks due to volatility. But as you point out, too much volatility (which doesn' t seem to be abating) makes fills on positions tricky now. Or so it seems to me so far. I have been watching the price changes and they seem to be backing away pretty quickly. As I guess they have to. So it makes it difficult to execute. Also, the multiple strike prices seem to make things more "tight" which can work either way.
I hope you are right, and that I can get into it more. 'Cause as you say, it would certainly be a lot less stressful. This is why I have decided to at least try. I wanted to ease into trading by just putting on some simple positions. But so far, I haven't seen any opportunity. The strategies I had hoped to employ seem impossible now because the spreads (bid/offer) are so tight and prices so right. I wanted to do just boxes, butterflies, reversals, conversions, anything that would not eat into my buying power. So far, no go.....maybe I need to take more risk...I will be watching and waiting. I suppose I need to give more thought to taking a directional stance, like you have talked about, and just be able to use the option strategies to reduce my stress like you said.
Anyway, great post, it has made me reconsider my approach. Thank you and good trading to you as well.
RS7

 

[andrasnm]

First, I would refrain from buying any "program via an infomercial".
Send me a hundred dollar bill and I will spend 5-10 hours with you. I will guarantee you it will be money well spent.
Joking aside, I don't expect you do that but spend it on some TV advertised crap I guarantee you will be sorry.
Study spreads of futures. It has some potential. Actually a lot of
potential. Keep away from option because the bid/ask spread will kill you. enough talk about "spreads" I am off to make me a sandwich.

 

[Maverick74]

Originally posted by rs7


GaTrader,
You make some valid points. Let me clarify a couple of things though which are of course only from my perspective so far.
First as for decimalization and multi exchange listings...yes, they do make the pricing fairer for off the floor customers. But my "problem" is that it seems the prices are too perfect! There seem to be no opportunities to take advantage of mis-pricing. Now keep in mind, I have only been looking at this now for less than 2 weeks, and I have not traded options seriously for a long time. But so far this is my perception.
Secondly, yes, there certainly is some benefit to using options as opposed to stocks due to volatility. But as you point out, too much volatility (which doesn' t seem to be abating) makes fills on positions tricky now. Or so it seems to me so far. I have been watching the price changes and they seem to be backing away pretty quickly. As I guess they have to. So it makes it difficult to execute. Also, the multiple strike prices seem to make things more "tight" which can work either way.
I hope you are right, and that I can get into it more. 'Cause as you say, it would certainly be a lot less stressful. This is why I have decided to at least try. I wanted to ease into trading by just putting on some simple positions. But so far, I haven't seen any opportunity. The strategies I had hoped to employ seem impossible now because the spreads (bid/offer) are so tight and prices so right. I wanted to do just boxes, butterflies, reversals, conversions, anything that would not eat into my buying power. So far, no go.....maybe I need to take more risk...I will be watching and waiting. I suppose I need to give more thought to taking a directional stance, like you have talked about, and just be able to use the option strategies to reduce my stress like you said.
Anyway, great post, it has made me reconsider my approach. Thank you and good trading to you as well.
RS7

You can't trade conversions and reversals off the floor. No way. Same goes for boxes. And for butterflies, if you can show me how to put one on off the floor for a credit let me know, otherwise why bother. Having said that, there is plenty of vega to be traded in this market. And vega, unlike the underlying, is very cyclical. As far as market makers backing away, yeah they will back away. But not all the time. You have to be very patient and willing to build your positions over time not just in one order. With 30 to 100 pt moves in volatility you can make a very nice living. But you are going to have to speculate on the vol. Certainly not a risk free trade, but I would much rather bet on the vol then the underlying anyday.

 

[metooxx]

Originally posted by Maverick74


You can't trade conversions and reversals off the floor. No way. Same goes for boxes. And for butterflies, if you can show me how to put one on off the floor for a credit let me know, otherwise why bother. Having said that, there is plenty of vega to be traded in this market. And vega, unlike the underlying, is very cyclical. As far as market makers backing away, yeah they will back away. But not all the time. You have to be very patient and willing to build your positions over time not just in one order. With 30 to 100 pt moves in volatility you can make a very nice living. But you are going to have to speculate on the vol. Certainly not a risk free trade, but I would much rather bet on the vol then the underlying anyday.

Really ...

 

[rs7]

Originally posted by Maverick74


You can't trade conversions and reversals off the floor. No way. Same goes for boxes. And for butterflies, if you can show me how to put one on off the floor for a credit let me know, otherwise why bother.

That's true. But I didn't know it until I opened the option account. Years ago it Was possible. But since I had not really paid attention since I came off the floor, I didn't realize it. I stopped trading options in 1989. So I mistakenly thought I could still do what was possible then. I was just flat out wrong! Or it appears so at least so far. I will still keep looking though. See what happens. It doesn't cost me anything to just stay vigilant. (But I am not encouraged)

RS7