Vertical Spreads for Aggressive Growth
- Thread starter Cache Landing
- Start date
Yep. I think we're on the same page.
It's interesting.... When I hear discussions on this site about IV, they are usually something like, "such and such call isn't worth as much because IV dropped". I don't know that I have ever heard someone (until now) acknowledge the fact that the IV is changing as a result of the option's price changing and not the other way around. I guess it is somewhat inconsequential, but a good point nonetheless. Good chatter..... as my old accounting teacher used to say. I'd better get some sleep.
Cashe , how accurate your variables "predictions" (in your case : future price over x time period) are ?
They probably should be atleast 55/45 (positive to negative) , before retail even starts using options here. No magic/complex option strategy will help you to make money if accuracy ratio is below this number.
Do you run those stats ?
I know exactly what my are ( which in my case : future vols over x time).
They probably should be atleast 55/45 (positive to negative) , before retail even starts using options here. No magic/complex option strategy will help you to make money if accuracy ratio is below this number.
Do you run those stats ?
I know exactly what my are ( which in my case : future vols over x time).
Cache
I am in the same boat, trying to do some directional vertical spreads (mostly Debit) but facing the issue of the OTM options overvalued compared to the ITM options. I'm still a novice, and am trying to evaluate which type of trade suits me the best, and this is one of my favorites in terms the way feel about security of investment.
For example right now I have an EBAY OCT 40/37.5 spread which I bought for 0.95 when stock was at 41. Today the stock fell to 37.22 but the spread only appreciated to 1.25.
Waiting until OCT expiration might give any number of surpises, if the stock appreciates a little bit again, the spread loses the value.
Should take the $25 (approx 27%) profits even though the intrinsic value difference is $155 (approx 165%)? What would the normal approach to this? Should I wait until expiry or dissolve the spread? When would be the right time to do this? Any calculations behind it?
I'd also like to hear from others if there is a flaw in thinking in terms of intrinsic value for such a long time expiry. Also, any comparison to ratio spreads would also be useful as I tend to think I should have tried some of these.
-Ram
I am in the same boat, trying to do some directional vertical spreads (mostly Debit) but facing the issue of the OTM options overvalued compared to the ITM options. I'm still a novice, and am trying to evaluate which type of trade suits me the best, and this is one of my favorites in terms the way feel about security of investment.
For example right now I have an EBAY OCT 40/37.5 spread which I bought for 0.95 when stock was at 41. Today the stock fell to 37.22 but the spread only appreciated to 1.25.
Waiting until OCT expiration might give any number of surpises, if the stock appreciates a little bit again, the spread loses the value.
Should take the $25 (approx 27%) profits even though the intrinsic value difference is $155 (approx 165%)? What would the normal approach to this? Should I wait until expiry or dissolve the spread? When would be the right time to do this? Any calculations behind it?
I'd also like to hear from others if there is a flaw in thinking in terms of intrinsic value for such a long time expiry. Also, any comparison to ratio spreads would also be useful as I tend to think I should have tried some of these.
-Ram
OTM debit spreads are more aggressive: higher potential profit with higher risk.
A good rule of thumb in picking strikes is: when IV is in a high one year percentile sell the ATM, when IV is in a low percentile buy the ATM; ATM or the closer-to-the-money strike.
To play directionally it is better to use shorter term options: front or back month strikes. Longer term options are more exposed to IV, have higher slippage, lower delta.
I can't imagine any good reason to open an Oct put spread as yours.
If you don't do it yet, learn to draw your position's graph: position value vs. underlying price. Draw it for several moments in time between now and expiration, and for a couple of IV extreme values. This way you'll see how and when your position'll behave, and judge if this will fit your expectations regarding underlying price, IV and greeks' evolution over your time frame.
It seems that you haven't done enough options studying. Do it before risking more of your money!
A good rule of thumb in picking strikes is: when IV is in a high one year percentile sell the ATM, when IV is in a low percentile buy the ATM; ATM or the closer-to-the-money strike.
To play directionally it is better to use shorter term options: front or back month strikes. Longer term options are more exposed to IV, have higher slippage, lower delta.
I can't imagine any good reason to open an Oct put spread as yours.
If you don't do it yet, learn to draw your position's graph: position value vs. underlying price. Draw it for several moments in time between now and expiration, and for a couple of IV extreme values. This way you'll see how and when your position'll behave, and judge if this will fit your expectations regarding underlying price, IV and greeks' evolution over your time frame.
It seems that you haven't done enough options studying. Do it before risking more of your money!
Yes, but there is a little more to it than that.
ram...for what my 2cents are worth....agree totally with cnms2...your debt spreads should be MUCH shorter. I would close this OCT spread...re-look and re-think to see if a new shorter spread has a good r/r. Newer option's traders seem to like the longer time frame's (at least I did) thinking there is more TIME to be right....once you understand the greeks you realize that time is only one factor and other risks gamma and vega can be just as important and long time is NOT your friend. sorry to butt in Cache...
I agree. Vertical spreads are very difficult when playing longer term. Too hard to judge price movement, and you don't get nearly the bang for your buck in terms of time spent/opportunity cost.
For example, if I did a APR credit spread (let's say EBAY 40/42.5 bear call) I would get a credit of 0.65. That would be a return on risk of 35% in a little over a month (6 weeks) with a worthless expiration. On the other hand if I did an OCT credit spread (same EBAY strikes but different month) I would get $1.00 credit. That would be a return on risk of 67% over essentially an 8 month (32 weeks) time period. So with the APR position you are getting a little more than half the profit in about 1/5 the time. This way you can afford to be wrong occasionally without wasting half a year. It is also easier to forecast price movement over the next few weeks.
Longer term plays also promote the hold and hope mentality. You'll find yourself say things like, "I still have 3 months for it to turn around".