That is a consideration, especially when dealing with an account that is significantly larger than the hypothetical $10,00 account on this journal.
Vertical Spreads for Aggressive Growth
- Thread starter Cache Landing
- Start date
That is a consideration, especially when dealing with an account that is significantly larger than the hypothetical $10,00 account on this journal.
as I've been learning the calendar spreads I certainly see the advantage of using ratio spreads on them...
It's not an issue of selling more contracts than are being bought. The opposite is the case. Buying more contracts than you are selling presents a more favorable situation. Much more limited risk with at least a chance for very high profits.
Since this is a hot topic (ratioed diagonal calendars) right now on coach's thread, I will make one comment concerning this strategy. It is being touted as a very low risk strategy. That is true under most circumstances. But in order for this strategy to work out well, there must be a Vega increase. If the index you're trading moves well past the short strike and there is no Vega increase, then you're in trouble. Just wanted to throw out a caution flag.
I'm not sure what you mean by Vega increase.
I call it "ratio(ed) (diagonal) spread" when you sell more near strike and buy less further strike (opposite to backspread). Hence the "unlimited" (large) risk. This is usually an OTM spread, so its probability of loss is smaller (the further OTM the smaller your risk, and the smaller your reward).
This is negatively affected by IV increase, and by the underlying price moving past the short strike, but it benefits from time passing (which is the usual reason to open a ratio spread).
Note: I know that optioncoach likes low risk / low reward options strategies like this one and like the deep OTM iron condors.
I call it "ratio(ed) (diagonal) spread" when you sell more near strike and buy less further strike (opposite to backspread). Hence the "unlimited" (large) risk. This is usually an OTM spread, so its probability of loss is smaller (the further OTM the smaller your risk, and the smaller your reward).
This is negatively affected by IV increase, and by the underlying price moving past the short strike, but it benefits from time passing (which is the usual reason to open a ratio spread).
Note: I know that optioncoach likes low risk / low reward options strategies like this one and like the deep OTM iron condors.
Quote from Cache Landing:
It's not an issue of selling more contracts than are being bought. The opposite is the case. Buying more contracts than you are selling presents a more favorable situation. Much more limited risk with at least a chance for very high profits.
Since this is a hot topic (ratio diagonal calendars) right now on coach's thread, I will make one comment concerning this strategy. It is being touted as a very low risk strategy. That is true under most circumstances. But in order for this strategy to work out well, there must be a Vega increase. If the index you're trading moves well past the short strike and there is no Vega increase, then you're in trouble. Just wanted to throw out a caution flag.
Sorry, I wasn't thinking when I typed that up really quick. I meant to say IV increase.
I'd assumed he was talking about a "ratioed calendar diagonal" in which he was selling a smaller number of front month options at a closer strike, and a larger number of back month options at a more distant strike. This is benefited by an increase in IV and the underlying price moving past the short strike (given that there is a sufficient ratio and a corresponding IV increase).