Spreads and expirations question

R

rickf

While I've done successful paper trades involving spreads, I've not done "real" spreads yet using real money.

I used range-limited stocks -- GE, BA, S, WTR -- and entered into the spread positions (bull put spread, butterfly) the week if not day or two before expiration. In all cases, I came out at expiration in the green. I did the same thing on paper using weekly XEO spreads (condor) and likewise ended up in the green.

So the question from a spreads newbie is to confirm that -- provided you do your proper homework and planning -- building high-probability spreads on range-limited underlyings close to options expiration isn't necessarily reckless or a "bad" practice.

Thx again!
 
If your trading approach works then noone can argue that your approach is wrong or reckless or whatever.
 
Oh, I agree, stick with what works.

But as always, there can be variance between paper-trading and real-trading, so I wanted to solicit a sanity check from those more seasoned than lowly me. :)
 
Yes, there's a huge difference between paper trading and live trading, but only you can test your system/approach in live trading and see the results. Just because your system is based on trading in expiration week or even on expiration Friday doesn't mean anything at all.
 
If you're doing spreads a day or two before expiration, slippage and commissions will greatly reduce your "real profit". It's also possible you're attracted to trades that appear to have a certainty of a small profit. From time to time, you'll have huge losses with those trades. Trade your idea with real money to better understand what I'm describing.
 
Rick, if you're doing things like options worth a nickel, or 10 cents, 95% of the time you'll win, then once in a while you'll have a meltdown that'll cost you big time.

If you want to do it, go for it, but don't put too much into one until you've experienced a meltdown so you can better prepare for it next time.
 
Quote from demoship:

Rick, if you're doing things like options worth a nickel, or 10 cents, 95% of the time you'll win, then once in a while you'll have a meltdown that'll cost you big time.

If you want to do it, go for it, but don't put too much into one until you've experienced a meltdown so you can better prepare for it next time.
More...

Demoship --- the very words I live (and trade) by, epecially when trying something new!
 
pro options traders use to comment that the most profitable trading resides on exp week and specifically on exp friday due to heavy gamma scalping. but the problem is pro traders usually get in and out of the trades with minimum transaction costs and do it very rapidly, using no more than two legs. i don't think trading short term combos on stocks or indexes might became profitable in the long run for a retail trader because the slippage and comms weigh will offset any eventual timing "edge" the trader has obtained. as said earlier, those trades you mentioned are most probably hi prob trades, but still, odds are dramatically against you and hence a "dramatic loss" is lurking out there to bring your P/L into the statistical mean.
 
Quote from rickf:

So the question from a spreads newbie is to confirm that -- provided you do your proper homework and planning -- building high-probability spreads on range-limited underlyings close to options expiration isn't necessarily reckless or a "bad" practice.
More...
Setting up too many of these spreads would be reckless.

You can do just about anything that you want with options as long as your timing and selection/direction are correct. But since very few, if any, consistently nail those criteria for successful option trading, you should also have a back up plan should something go awry, which it will. As far as I'm concerned, money management is as important as the positions you select.

Start small. Be hedged (spreads) until you gain enough experience to understand the possibilities and react to them as conditions change. Be disciplined. Don't let a bad trade get away from you. Close it ASAP before it hurts you big time. As you progress, learn what kind of adjustments can be made to positions give you a chance to salvage them... or as the case may often be, dig yourself a deeper hole :eek:

Good luck!
 
Here is an example of a meltdown: at the beginning of Apr this year, I didn't think SPX was going to break above 1470. I placed a credit spread -1470C/+1480C with 20 contracts. To my amazement, the loss now is more than $24,000! What is worse, the loss is too rapid to take action because I have a demanding profession.

Fortunately, this is a paper trade. What I learned is that credit spreads and iron condors all have EVIL adverse expectancy, risking too much margin and capital for very little gain when the same capital can be more wisely invested somewhere else or in some other strategies.

RS



Quote from demoship:

Rick, if you're doing things like options worth a nickel, or 10 cents, 95% of the time you'll win, then once in a while you'll have a meltdown that'll cost you big time.

If you want to do it, go for it, but don't put too much into one until you've experienced a meltdown so you can better prepare for it next time.
More...
 
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