Vertical put credit spread risk rev combo

nO0b · Nov 23, 2009

Quote from atticus:

He's trying to finance a portion of the call with defined-risk.

no, he's not. you're just making sh1t up. he specifically said he's looking to put this on and would even like to be a net collector of premium.

are you sure you're even reading what he wrote? you should go edit your initial response to the OP and change your ludicrous 120 call to the 250 call. at least it would remotely look like what he's trying to put on.

Quote from atticus:

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? [/B]

another stupid reply. as well as telling a premium collector trying to get long to go buy the stock.

responding to any more of your pretzel logic is just a waste of time.

atticus · Nov 23, 2009

Quote from nO0b:

no, he's not. you're just making sh1t up.

What do you guys thinks of selling a vertical put credit spread and using the credit to buy a long call?

atticus · Nov 23, 2009

Quote from nO0b:

another stupid reply. as well as telling a premium collector trying to get long to go buy the stock.

responding to any more of your pretzel logic is just a waste of time.

My response was to you, hence the fact that I quoted you, not the OP. Yeah, selling the 100-delta put is pure fucking genius. Upside limited to the premium and identical downside, less the 1/8 he receives in extrinsic premium.

You told him to sell the "80-100 delta" put.

atticus · Nov 23, 2009

Quote from 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

Droid,

Are you looking to receive a net-credit on the entire position, or finance a portion of the call debit? I assumed the talk of a "risk-reversal" substitute meant that you're looking to choose risk-reversal strikes that are symmetric w.r.t. deltas to construct the vertical + long call, obviously at a net-debit.

droid17 · Nov 23, 2009

Hi atticus,

I didn't mean to open a can of worms

I was asking if in general it was a good strat to use that combination. Basically I was looking to have the benefits of the RR (the unlimited long potential) with a max predefined risk. Thus selling a bull put credit and using that to finance a long call. If I picked a call far enough out I could receive a small credit. In general though I was looking at calls at about a break even pt. Hope this clears things up and sorry to cause trouble!

Thanks,

Droid

atticus · Nov 23, 2009

Quote from droid17:

Hi atticus,

I didn't mean to open a can of worms I was asking if in general it was a good strat to use that combination. Basically I was looking to have the benefits of the RR (the unlimited long potential) with a max predefined risk. Thus selling a bull put credit and using that to finance a long call. If I picked a call far enough out I could receive a small credit. In general though I was looking at calls at about a break even pt. Hope this clears things up and sorry to cause trouble!

Thanks,

Droid

No worries.

Here's an example in BIDU. Short the 380/400 put spread and long the 480C. Down and out skew, so you receive a >$1 credit at ~equal-delta, slightly favoring the call. Assuming a price of $427 on spot. Trade risks $18.85, but at least it's floored.

spindr0 · Nov 23, 2009

Quote from nO0b:

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...

I think you're making this way more complex than it is.

If dollar neutral means there's a net credit for the entire position, the long call will not have to be "very" OTM. If the spread is ITM, the long call will be less than 2 strikes out.

Commissions are a distraction. They aren't a big factor if under a $ per contract. At a fee per trade place, they're a killer. But the question is about strategy not about who's silly enough to pay $10-$15 per trade.

I have no clue what the OP intended but I don't see it as a volatility play. I think it's a directional play and will need minimal movement to break even (the TP of the spread is likely to pay for most if not all of the OTM long call),

And an ITM naked short 80-100 put with a reasonable stop is not a better way to make the bet when one wants a risk managed floor under the position. Sure, save on commissions and get whacked with a gap. Sorry, no way.

droid17 · Nov 23, 2009

Thanks spin and atticus

Yes that is what I was trying to describe. Yes it was a directional play, not a vol play.

Droid

danshirley · Nov 26, 2009

e.g. MCD @ 64.45
Buy the Jan 65 call for 1.23, sell the Jan 65 put for 2.26 and buy the Jan 60 put for .56. Net = $44 credit.
................................P/L................................
.............Call only.............Call + put spread
55..........(123).......................(456)
60..........(123).......................(456)
65..........(123).........................44
70...........378.........................545
75...........876.......................1043
---------------------------------------------------------