Vertical Spreads for Aggressive Growth
- Thread starter Cache Landing
- Start date
I'm actually not that familiar with RUT. As I trade many individual equities, I don't utilize too many indices at the same time. Of the indices, the S&P 500 is my favorite, but I made good money last year on DJX.
Looks like I've got a few worthless expirations. The one exception might be the GS 150/155 bear call. It is pushing the boundaries a little bit. I've got a stop order in so we'll see where we come out.
Well, my stop was hit so I'm out of the GS bear call @0.40
I`ve just got some good news from today`s webinar. IB is testing direct access to S&P500 options pit. No details disclosed yet, but there is some hope for better.
I am not familair with RUT neither, but i like the size and overall correlation with S&P, but if there was an access to S&P I wouldn`t need anything else at the moment.
No, just on the single leg. If we really start moving I might make something back on the long leg. I love the lottery tickets.
Well I got a couple worthless expirations.
Today's Action
BTC 1 GS MAR 150c @ 0.4
GS MAR 130/135p Expired Worthless
SPY MAR 122/126p Expired Worthless
Year to Date P/L
Account Value: $10,610.50
YTD Gross P/L: 750.00
YTD Commiss: 139.50
YTD Net P/L: 610.50
YTD % P/L: 6.1%
Today's Action
BTC 1 GS MAR 150c @ 0.4
GS MAR 130/135p Expired Worthless
SPY MAR 122/126p Expired Worthless
Year to Date P/L
Account Value: $10,610.50
YTD Gross P/L: 750.00
YTD Commiss: 139.50
YTD Net P/L: 610.50
YTD % P/L: 6.1%
Spent the majority of last week doing R/R analysis of various strategies involving vertical spreads. This analysis might cause me to adjust my allocation of funds as previously described.
The main question in my mind is one that has been addressed on this journal before; the idea that ATM credit spreads essentially have as riskarb puts it "the best r/r under one sigma". And as Momoney said, "The thing to bear in mind is that although your probability of success goes up the further OTM you are, your reward appears to go down at a FASTER rate than the gamma exposure goes up. So from that point of view, the best risk/reward really is ATM and it just gets worse from there."
I think this will always be a topic of debate. I have been trying to consider these questions not only pertaining to the statistical advantage of ATM, but also with regard to ease of execution and maintenace as this journal is more directed toward a slightly less experienced trader with a smaller bank roll. An ATM credit spread might have a better r/r but is also harder to adjust. ATM credit spreads might also require more diversification than OTM. Indeed the question is, what maintenance options does one have when an ATM credit spread is looking to expire ITM?
OTM/FOTM credit spreads can be adjusted when the underlying is approaching the short strike. The statistical probability of the underlying touching that point before expiration can be computed with a fair degree of accuracy. And it can then be stated that if that point is never touched, a worthless expiration will be the result. However, the risk management strategy for ATM spreads is much different. The probability of the short strike being ITM at some point before expiry is almost 100%. So an ATM position must be adjusted/exited after a certain amount of loss, and the probability of a certain amount of loss is difficult to calculate because it is so dependent on the time left to expiration.
So I'm looking for everyone's opinion on ATM credit spreads. If the underlying goes against you, are you inclined to exit the entire spread, reverse the position, or roll the position?
The main question in my mind is one that has been addressed on this journal before; the idea that ATM credit spreads essentially have as riskarb puts it "the best r/r under one sigma". And as Momoney said, "The thing to bear in mind is that although your probability of success goes up the further OTM you are, your reward appears to go down at a FASTER rate than the gamma exposure goes up. So from that point of view, the best risk/reward really is ATM and it just gets worse from there."
I think this will always be a topic of debate. I have been trying to consider these questions not only pertaining to the statistical advantage of ATM, but also with regard to ease of execution and maintenace as this journal is more directed toward a slightly less experienced trader with a smaller bank roll. An ATM credit spread might have a better r/r but is also harder to adjust. ATM credit spreads might also require more diversification than OTM. Indeed the question is, what maintenance options does one have when an ATM credit spread is looking to expire ITM?
OTM/FOTM credit spreads can be adjusted when the underlying is approaching the short strike. The statistical probability of the underlying touching that point before expiration can be computed with a fair degree of accuracy. And it can then be stated that if that point is never touched, a worthless expiration will be the result. However, the risk management strategy for ATM spreads is much different. The probability of the short strike being ITM at some point before expiry is almost 100%. So an ATM position must be adjusted/exited after a certain amount of loss, and the probability of a certain amount of loss is difficult to calculate because it is so dependent on the time left to expiration.
So I'm looking for everyone's opinion on ATM credit spreads. If the underlying goes against you, are you inclined to exit the entire spread, reverse the position, or roll the position?
I hedge my positions first then I convert them into verticals. Once converted, they are not being rolled - I rather use prego flies and open some more OTMs.
However - before conversions I tend to roll the position.
Answering your question - looks like ATM is also psychological barrier, but it does not really mean that you have to escape ASAP once your shorts are ITM (especially trading Europeans). The truth is - ATM adjustments need more attention (anytime I get closer to ATM, I get closer to daytrading style work which is not my favorite
).