This is a Vertical Credit Spread I am about to trade..

[Con1991]

Okay so you want to sell an in the money bear call spread. At 10300 and 10400 for $100? That’s the exact width of the strikes, it says the cost will be ~$100 with a almost $10,000 margin requirement so that’s ummm. About a 1% return on capital. If you can find a buyer which doesn’t make much sense because the option is priced exactly as it should, I’m not sure who would exactly buy this as they are always paying a $100 premium. No chance of it being worth more and they always pay the premium. I think your missing something here.

No, the $10,000 you see is the credit being received for opening this deep in the money call credit spread. As the width of the strikes is equal to 100. There is no margin requirement for this particular spread in this case...

 

[BlueWaterSailor]

No, the $10,000 you see is the credit being received for opening this deep in the money call credit spread. As the width of the strikes is equal to 100. There is no margin requirement for this particular spread in this case...

Since it's risk-free and requires no margin, it would be odd if you didn't always have one (or a thousand, or even more) on a limit order. It's free money: sure, the chance of it filling or "coming home" once filled is low - but what does that matter? Even if you get it once a year, that's still $10k to the good.

So... what's the downside? Why not have some huge number of these out for sale every minute that the market is open?

 

[Con1991]

Since it's risk-free and requires no margin, it would be odd if you didn't always have one (or a thousand, or even more) on a limit order. It's free money: sure, the chance of it filling or "coming home" once filled is low - but what does that matter? Even if you get it once a year, that's still $10k to the good.

So... what's the downside? Why not have some huge number of these out for sale every minute that the market is open?

In this case, and for similar scenarios, the credit is used as collateral. The full credit is not profit unless the underlying price drops to the strike price. In other words, with these deep in the money credit spreads, the full profit is never realized.

As I stated in a previous example, I use mid price generally, and that only moves by a few points. So the most one would make on this spread position would be perhaps $200-500. A two or five point move. Which is 2-5% return on credit.

 

[Con1991]

Since it's risk-free and requires no margin, it would be odd if you didn't always have one (or a thousand, or even more) on a limit order. It's free money: sure, the chance of it filling or "coming home" once filled is low - but what does that matter? Even if you get it once a year, that's still $10k to the good.

So... what's the downside? Why not have some huge number of these out for sale every minute that the market is open?

And don't forget liquidity by the way..

 

[BlueWaterSailor]

In this case, and for similar scenarios, the credit is used as collateral. The full credit is not profit unless the underlying price drops to the strike price. In other words, with these deep in the money credit spreads, the full profit is never realized.

Well, sure. There's a tiny chance of that happening - but against zero risk, it's still free money (if you're risking nothing but getting a 0.001% chance of a win, just stack up the contracts!) And the collateral is not taken out of your account - it's drawn against the credit that you "received". So my question still stands: if there's no risk or margin/BPR impact, why not sell a few hundred or thousand of these?

As I stated in a previous example, I use mid price generally, and that only moves by a few points. So the most one would make on this spread position would be perhaps $200-500. A two or five point move. Which is 2-5% return on credit.

Sorry, I'm not clear on this. When you say that you use the mid - of course, the nat is going to be quite a bit lower than that. Are you just saying that you put out an offer to buy it back for, say, 95-98 as it moves around due to volatility?

 

[BlueWaterSailor]

And don't forget liquidity by the way..

Liquidity in what sense? If there's no risk, there's no decrease in liquidity.

P.S. Other than fees and comms, of course. TW wants their $2.60 for this trade, so I suppose that's something...

 

[Con1991]

Well, sure. There's a tiny chance of that happening - but against zero risk, it's still free money (if you're risking nothing but getting a 0.001% chance of a win, just stack up the contracts!) And the collateral is not taken out of your account - it's drawn against the credit that you "received". So my question still stands: if there's no risk or margin/BPR impact, why not sell a few hundred or thousand of these?



Sorry, I'm not clear on this. When you say that you use the mid - of course, the nat is going to be quite a bit lower than that. Are you just saying that you put out an offer to buy it back for, say, 95-98 as it moves around due to volatility?

Yes. I wait for the mid to decrease to a price lower than the credit I receive. I set up a limit order accordingly.

 

[Con1991]

Liquidity in what sense? If there's no risk, there's no decrease in liquidity.

There needs to be sufficient liquidity to open 1 thousand, 10 thousand, or even 100 thousand options contracts. Depending on the underlying instrument, this may range from realistic to improbable.

 

[BlueWaterSailor]

There needs to be sufficient liquidity to open 1 thousand, 10 thousand, or even 100 thousand options contracts. Depending on the underlying instrument, this may range from realistic to improbable.

Ah, not account liq then - "liquidity" as in "contracts available to be traded in a given ticker." I see.

I don't think that's an actual issue here, since it would only matter if they were going to get filled - and we know they're not. Also, we're not talking about FOK orders; if you're at the top of the queue when someone hits that 100.00 bid for 1 lot, you're the guy getting it. Having 10,000 orders out doesn't require 10,000 contracts to be available; it simply means that you'll never get filled on all of them.

If you really are getting fills on these, then I'll grant you that it's an interesting and worthwhile trade.

 

[rb7]

So I am a big fan of vertical credit spreads in options trading, mainly because they have limited risk. Of course, the reward is also limited, however I find they have a greater chance of success, over simple directional trading.

This current spread I am about to open (tomorrow as the market is closed now) is NDX. Volatility in this instrument is huge, and I usually trade the midpoint of the spread. Currently, the midpoint of this spread is 100. Since the width of the strikes is also 100, technically speaking, this trade is risk free. I have had these filled in the past. There is still a risk of assignment, however since NDX is cash-settled, this would only be at expiration.

Just wanted to show this is possible, depends on whether or not there is a counterparty to take your trade on the other side of course. But something like this can be very profitable.

What's the 'Confirm Paper Order' stands for?