Vertical put credit spread risk rev combo

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droid17

Hi all :)

What do you guys thinks of selling a vertical put credit spread and using the credit to buy a long call. Kinda like vertical put credit spread risk rev combo?

I am looking into this because it gives unlimited upside potential with a limited risk and in some cases able to even keep part of the credit. In addition you are able to leverage more vs. a straight risk rev because you don't have to have the sold puts cash backed yet still able to define max loss.


Thanks,

Droid
 
That kinda of trade is what I call a financing trade. You are financing a long call with the credit for the short put spread. It is worthwhile if you can get it done at even or better for a credit.

Also you can kinda look at backspreads for this type of trade.
 
You're combining a mildly bullish position (the spread) with a bullish position (the call) while increasing your downside risk a bit, creating a blended position. Now all you need is an up move :)
 
Certainly safer that a RR. The vertical has minimal gammas, so they're not for the high-frequency minded. Taking the synthetic; you're in a long-gamma tree. One body-strike option removed from a long natural fly:

long 100 call
short 110 call
long 120 call

or (using your example) the natural:

long 100 put
short 110 put
long 120 call
 
what bet are you trying to make?

for it to be close to dollar-neutral, you're going to need a much bigger move in the stock for it to pay off, since the call that lines up to the collected-premium on the short put spread is likely going to be very OTM.

if you have a stock where you're expecting that kind of a move, there are better ways to play it than paying all the commissions doing it your way.

plus you're likely to not want to be long any of that vega if the stock makes that kind of a run, given that it seems you're betting a vol event that the market already knows about.

a naked short 80-100 delta put with a reasonable stop is probably a better way to make your bet... :p
 
Quote from nO0b:

what bet are you trying to make?

for it to be close to dollar-neutral, you're going to need a much bigger move in the stock for it to pay off, since the call that lines up to the collected-premium on the short put spread is likely going to be very OTM.

if you have a stock where you're expecting that kind of a move, there are better ways to play it than paying all the commissions doing it your way.

plus you're likely to not want to be long any of that vega if the stock makes that kind of a run, given that it seems you're betting a vol event that the market already knows about.

a naked short 80-100 delta put with a reasonable stop is probably a better way to make your bet... :p
More...

Where did he define the magnitude of the expected move? So you're recommending zero vega in an 80-100 delta short put?

Next...
 
Thanks for the thoughts so far all. This was all thinking out loud and hasn't been applied to anything specific yet. I was just trying to look at the advantages of and disadvantages of this type of move.

I originally like it because as a net/bullish strat as the full risk was defined and the upside was unlimited. If I was able to find an OTM call with some decent delta and get a small credit out of it if nothing happened looked like a winning move.

Thanks,

Droid
 
Hi atticus,

Could you explain what a "gamma tree" is? I understand at least in theory what gamma is and how gamma scalping is used to stay delta neutral, but I have not came across gamma tree yet.

Thanks,

Droid
 
Quote from atticus:

Where did he define the magnitude of the expected move? So you're recommending zero vega in an 80-100 delta short put?

Next...
More...

well, if we assume he's actually trying to *make* money, then maybe somewhere around the "maybe even keep some of the credit" part of the plan implies he's not looking to buy an ITM call anytime soon.

nowhere did he mention any opinion on vol, so reading between the lines has this guy making a pure delta bet on a stock, willing to pay more in commissions to he probably needs to.

I first asked him to clarify his bet, as unintended exposure to event vol swings is retarded, even if he's right on direction. So far, trading deep options are clearly his best choices.

Try and keep up...
 
Quote from nO0b:

well, if we assume he's actually trying to *make* money, then maybe somewhere around the "maybe even keep some of the credit" part of the plan implies he's not looking to buy an ITM call anytime soon.

nowhere did he mention any opinion on vol, so reading between the lines has this guy making a pure delta bet on a stock, willing to pay more in commissions to he probably needs to.

Try and keep up...
More...

You're contradicting yourself. Your advice is pointless and detrimental. If he's looking to trade 100 deltas then he should trade spot, not a short put. He's trying to finance a portion of the call with defined-risk. Perhaps you should take another hit of the pipe and take a nap.

Options are vol. So the assumption is that he's trading them for that specific trait. Makes sense since he's looking for alternatives to a risk-reversal.

Ya think, sport?
 
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