Tips, Tricks & Nuances Of Making Strategies Work And When And How?

I'm puzzling about terminology and the difference in placement of the orders for Vertical Bull Call Spread and the BULL Spread.

Far as I can tell they are the same thing. BUUUUT ! I get confused in some of the literature, what they mean. In both, you buy the expensive option and sell the cheaper one.

Some references say to place the SOLD option below the current index and the bought more expensive option above the current index.

The standard literature only refers to running them out to expiration. But some people are using them to sell THETA closer to expiration.

I've heard mention that if you use them on stocks, you will get assigned the stock, if the sold side goes into the money. So far, I can't clarify that point, one way or another, without risking real money.

When they talk about the Vertical, apparently they mean it is either OTM or ITM, that part is not clear, but not bracketing the index. WHAT
IS IT? Appreciate clarifying comments here.
 
06-15-11 05:08 PM

Since everyone seems to be a seller of premium on these down moves, why not buy an SPX straddle and finance the theta with otm VIX call credit spreads?
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Note the date. I am sure that guy has done perfectly well in August :)
 
Got an old book from late 80's and early 90's before there was internet trading and one used discount brokers. Apparently the term Vertical spreads used back then today, is called credit spreads and iron condors. The debit spreads are called Bear and Bull Spreads.

That clears that up a bit. The debit spread is supposed to be only used when the premium is below $2.50 or you lose. I think that reference is going to expiration.

A new slant, in more modern times, now that there are WEEKLIES, is to use the bull or bear Spread to collect time decay, which apparently is more effective, if you pick the right congested, non volatile stock, or index.
 
PREMIUM VOLATILITY

Myself for premium ballooning, trying to get the highest price. I myself use the DMI indicator and the ten minute time frame chart. When the D fast line crosses over the ADX slower line, thats it. After that, the premium will start to deflate, even if the stock or index continues meandering higher.
I just read from somebody that in a long straddle, you watch the VEGA using Greeks. A rising VEGA means rising volatility. When it starts to drop, then the volatility, or buying pressure has gone out of it.
 
Debit spreads and butterflys

I've been struggling with visualizing the debit an buttefly spreads placement. Because of the following contribution on trading long straddles FORUM.
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ATM long flies if you're bullish. OTM long calendars if you're bearish. If you're right on direction you'll make very good ROC. If you refuse or can't accept a position that flips delta then go with verticals.

Bullish XYZ. Spot at $46.

Buy 45/50/55 fly or,
Bull 45/50 vertical

Bearish XYZ.

Bear 40/45 vertical or,
Bear 45/50 diagonal calendar or,
Buy 42/42 calendar
Buy 45/50 back-spread

You want to be short vol + long delta on bull moves as index vol correlates downstream to single names, put simply. You want to be long vol + short delta on bear moves for the index correlation.

You want to go into long straddles; then long flies; then single calls... you're fixated on the tool and not the job. The spread/combo is simply a tool. 90% of winning is being accurate on price (underlying) or vol. The advantage to vanilla options is that they're forgiving.

Long straddles are not forgiving. You see this large premium and can't wait to get shaken out of one leg profitably, but then you're sitting on a prayer OTM shot at 20 delta or less. You take a non-directional gamma trade and morph it into a hail mary. Odds are against the 20D generating enough deltas, and wtf are you exchanging something generating a few -deltas into a hail mary call? It's a cautionary tale -- it's textbook of what NOT to do. STOP BUYING THE F*CKING STRADDLES.

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I think I've been thinking of this wrongly? In reverse order. The concept that as strike numbers increase, they are OTM. On checking with Big Charts Option Chain, which has the stuff shaded different colors. It is apparent that the numbers go down as they rise in strike numbers, OTM.
Therefore in the example above with stock at $46. When Atticus says 50/55 Calls, He means that the debit spread is OTM if the stock is at $46. Since in a debit spread, the expensive option is bought and the cheaper option is sold, then the debit spread, sold strike would be 2 strikes OTM. That has been bothering me as a novice, trying to picture this. I've been thinking about it in the opposite direction. Yeeeesh! Glad I have that figured out right now, as I want to try it next week with real cash.

Likewise the butterfly would be one side would be bought 2 strikes ITM while the sold middle two in this example would be also slightly ITM, while the 50 c would be OTM one strike.

Sure hope I am visualizing this right now?
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This one is by A.J. Brown online.


In effect, the strategy is a form of low-price insurance against opening gaps that go against us.
In a very volatile market, where an underlying stock can significantly gap up or down at open, this strategy can make you as much as ten to twenty times your investment. That is even after unloading your long position for whatever you can get. This gain is when things turn sour for your long position. Talk about quickly turning lemons into lemonade!

If the stock doesn’t gap, and the price is trending horizontal, then you can keep your vertical debit spread in place. Or, if you’d rather, you can unwind them, losing only pennies. In effect, you are cashing in your ”insurance policy.”

If the stock gaps in the direction of you long position, you can unwind this trade making back what you can. The gains you make on your long position appreciation will more than cover the loss for using this strategy.

During the trading day, you can use a standard stop-loss strategy on your long position and reserve these out-of-the-money near-term vertical debit spreads for overnight insurance.

Out-of-the-money near-term vertical debit spreads are easy and generally require very little justification, if any, to your broker, to use.

Okay, here’s an example:
Lets say the ticker QQQQ is currently trading at about $31 bucks and is trending down. If I was in a long put position and I buy an OTM near-term $32-$33 bull call spread as an “insurance policy” now, I would pay and additional $0.28.

The next morning, if their was a stock gap up on open, I could easily double my money or more on the near-term vertical debit spread — turning $0.28 into close to $1.00, depending on how close we are to expiration.

Basically, I’m positioned to profit no matter which way the stock price swings. And if the stock continues in a horizontal channel, I can leave the vertical debit spread in place for a few days.

After a few days, if the stock hasn’t gapped up or down, we can sell our options back and recover 90-95% of our investment, possibly more.

With such little money at risk, you can afford to use this stratetgy multiple times until it works. Because not every case will produce a profit for you. But those that do will more than pay for your mediocre trades.
I’ve personally been using out-of-the-money near-term vertical debit spreads with good success. Almost daily I’ve been making 30-120% gains on small investments.

Not bad for such a simple little strategy.
 
Here is a tip, I picked up someplace. Haven't tried it, and not even sure if I understand it?

This is a CALENDAR trade: But it uses a butterfly in the front month and a wrangle on the back month. ( long wrangle, but I'm not even sure what a wrangle is )

It says, that this is the safest method of a premium earning strategy. Should you get a sudden price move.
 
Looking at the big company Earnings Calendar and I notice that mid July is going to see some violent moves in the market. So many earnings coming out mid July.
 
Quote from falconview:
Looking at the big company Earnings Calendar and I notice that mid July is going to see some violent moves in the market. So many earnings coming out mid July.
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right, but why do you think that these earnings are not priced in?
 
I don't know frankly. Care to explain?
I'm going to try web based paper trading with GOOG, C, and JPM this week. As they are pr-earnings. For my second time. Trying to learn and establish the ropes on such trades. Last week I learned how to open and close them in the TOS platform and as I'm down 32% on my account, thought I better not learn new things with cash. Can't afford to.
I lost heavily on my Long Straddles, and finally got out. Got two holdovers that are still losses, but hoping they will work there way out, this next two weeks.
Decided to concentrate on the debit spread.
Supposed to be a beginner type learning.

Been trying to make a list of stocks with over $2 billion capitalization over the weekend.

So far, I've got GOOG, MMM, AAPL, BA, CAT, C, GM, JPM, WMT, WMB, CLI, KIM, TD, RTN, GNTX, JW.A, CSCO, T VR, PEP, KMB, DUK, NEE, SHW, BEVA, ETP, SNP, TWC, EBITDA, TX, JCI, BVN, NYSE.PAA, NYSE.PCG

I've only screened the first half for suitability. Gives me 3 trading candidates for this week, to try.

We shall see what we shall see.
 
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