NO EXPERT:
I agree with everything you have stated, and have actually stated the same things over the past several weeks, although you have stated them more eloquently.
HOWEVER, at the same time you have "somewhat and slightly" glossed over the main issue I was making. Which was that not all similarly gapped spreads are created equal, which many here disagree with. So I'll address a few of your points:
<<< If my catastrophy strategy is to buy the stock there is little sense to the spread (except see below). From a simplistic point of view, the long option would seem to be simply a cost for protection you don't intend to use. >>>
For myself, and many other spread traders, the reason for doing a spread is NOT to avoid buying a stock between the strikes. It is to avoid a "severe" drop below both strikes.
<<< If I am doing a stock that has a very high degree of stability, is not overvalued and is a stock that I would be happy to hold in a disaster at the strike then I might sell naked puts and avoid the long arm of a spread. >>>
Again I agree and have published all my naked puts in real time, under the thread of MY OPTION TRADES. With $17 TRLG being the most recent example.
<<< Put Master says there is no potential 'plan B' for the spread but that is not true..... If I am holding a spread I could, on the day before option expiration, sell the long arm of the spread and take the profit in my long option, let the short option expire naked and I will be put the stock just as if I had been naked short the whole time......Then I could hold the stock and wait for recovery..... In this case, just like in a naked short put position, the price of the stock is very important to my ability to use that strategy. I need enough money to buy the stock....BUT, of course, If I want to de-spread before expiration I will need enough cash to bear the increase in margin requirements for that last 24 hours. So the decision to spread or go naked short is a function of which of all of these possibilities you have most in the fore-front of your mind. >>>
This is the essense of the point I have been trying to make. That not all similarly gapped stocks should be viewed as being the same, or be treated as being equal.
That the price of the stock is an important consideration when considering a spread strategy.
Because if it is not considered, then THERE IS NO PLAN "B", as I stated.
And I used the $15 vs the $50 spreads in the $100,000 portfolio as my example. One being valued at $300,000 and the other at one million dollars.
In your 1st sentence you disagree that there is no plan "B", but then you agree that there is no plan "B" if you don't consider the price of your strikes.
Which again, is the point I am making. That not all similarly gapped spreads should be viewed as being the same, or be treated as being equal.
<<< Put-master is stressing what to do when there is a market wide disaster and he wants to hold his good stock and wait for recovery (which you can do with a spread also of course)... but most disasters are not market wide but stock wide. If the disaster is stock wide you may not WANT to hold the stock because that will open you not only to upside on the stock but also to further downside. >>>
I agree of course. I was just making the point and using the example, that we have had several severe market downturns that turned out to be temporary, which I discussed several weeks ago.
Remember the flash crash? Remember what occured in the market for a few weeks, when the S+P downgraded the USA debt? Down 300 - 500 points repeately. Intraday market swings of nearly 1,000 points,....
And over the past several weeks I've also listed several examples of when I think investors should use spreads instead of going naked,.... regardless of what the strike are.
So i am certainly not anti spread strategy, as I use it myself occasionally. I just don't want investors, particularly novice investors, to think that all similarly gapped spreads should be viewed as being the same, or be treated as being equal.
Because if you do,.... there is no plan "B" to fall back on.
Once a high priced stock falls between your strikes, you'd better close immediately, or you risk a total wipe out.
A lower priced spread gives you more "time" to make a decision, more "ability to maneuver", more "choices" to select from in terms of managing your risk, and is less stressful to manage.
