Vertical spread risk/reward?

[trefoil]

Quote from spindr0:

Out of sight risk for a vertical spread? If the reward of a vertical is 100%, it means that the premium is 1/2 the difference of the strikes. It doesn't matter if it's a credit spread or the synthetic put spread. The margin and the reward are the same.

1 - You're right.
2 - Obvious fact now that you pointed it out, but on credit spreads, not something I ever thought about. Interesting, actually.

 

[spindr0]

Quote from nazzdack:

1) ?....a vertical debit spread with 100% potential maximum profit? I believe that would mean that you are initiating the spread with the "long" strike-price slightly in-the-money and the "short" strike-price slightly out-of-the-money so that the current market price is in between the strikes which would also tend to be your approximate breakeven price?

4) Out-of-the-money spreads have a smaller debit and greater profit potential if the market can move past the short-strike.

Small details... with higher IV and/or more time remaining, both legs could be ITM initially. And prior to exp, OTM spread can get there even if UL doesn't reach either strike. There's never an easy answer with these generic questions

 

[spindr0]

Quote from trefoil:

1 - You're right.
2 - Obvious fact now that you pointed it out, but on credit spreads, not something I ever thought about. Interesting, actually.

The only subtle advantage is that with credit spreads, no closing costs if options OTM at expiry.

 

[ramaTrade]

Quote from turkeyneck:

Is 100% potential maximum profit a reasonable risk/reward to shoot for? Or you should look for something higher than that?

Chance of making a profit sometime is more important than RR ratio. Deep OTM vertical spread might give you RR up to 20:1 but that does not mean much.

 

[Cache Landing]

Quote from trefoil:

I don't think normally people sell credit spreads with 100% profit potential, since the risk would be out of sight.
Of course this is the Internet, so anything is possible.

Absolutely an untrue statement. The long term expectancy of a credit spread strategy with 100% profit potential is better than the strat with 10% potential.

IOW, ATM credit spreads vs OTM credit spreads. The long term expectancy of the ATM spreads is better under every trading scenario I could dream up.

Also, risk of such a strategy is lower and much easier to contain.

 

[HowardCohodas]

Quote from spindr0:

The only subtle advantage is that with credit spreads, no closing costs if options OTM at expiry.

Trading costs eat up about 6.5% of my returns. I still look for ways to reduce it.

 

[trefoil]

Quote from Cache Landing:

Absolutely an untrue statement. The long term expectancy of a credit spread strategy with 100% profit potential is better than the strat with 10% potential.

IOW, ATM credit spreads vs OTM credit spreads. The long term expectancy of the ATM spreads is better under every trading scenario I could dream up.

Also, risk of such a strategy is lower and much easier to contain.

spindr0 already beat me up, gently, for this one. I understand the risk is smaller (now), but in options, as in everything else, low risk = less profit, except as these are options it also = less probability for profit.
Given that, I'm curious about your statement that ATM credit spreads have a better long term expectancy.

 

[spindr0]

Quote from HowardCohodas:

Trading costs eat up about 6.5% of my returns. I still look for ways to reduce it.

I find that if I make more profitable trades, my commission percentage decreases

 

[spindr0]

Quote from trefoil:

spindr0 already beat me up, gently, for this one. I understand the risk is smaller (now), but in options, as in everything else, low risk = less profit, except as these are options it also = less probability for profit. Given that, I'm curious about your statement that ATM credit spreads have a better long term expectancy.

I wasn't beating you up. I was auditioning for American Option Idol

I'm also curious about that statement.

 

[HowardCohodas]

Quote from spindr0:

I find that if I make more profitable trades, my commission percentage decreases

Whether it is profit per trade, percentage of profitable trades or commissions per trade, I am always working to improve my performance.