Vertical Spreads for Aggressive Growth

ChrisM · Mar 22, 2006

Quote from DonnaV:

as I've been learning the calendar spreads I certainly see the advantage of using ratio spreads on them...

You just need something when first series expires, as you`ll see advantage of this postion in few days thereafter. There are actually few standard adjustments covered by Cache and Coach which work very well with this scenario.

Cache Landing · Mar 22, 2006

Quote from Cache Landing:

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).

It should also be mentioned when doing a ratio diagonal like this on the call side, that historically when an index like SPX or OEX makes a bullish run, the IV on the calls drops, thus worstening an already bad situation. When the index falls fast there is usually a steep increase in IV. This would make a "ratio diagonal" on the put side more enticing, but because of put skew it is really hard to get a good ratio without dramatically increasing the required margin. This in turn increases the risk and defeats the purpose of the position. But if a good put ratio can be achieved then it could make a good, low risk, high potential position.

RichardRimes · Mar 22, 2006

Quote from ChrisM:

You just need something when first series expires, as you`ll see advantage of this postion in few days thereafter. There are actually few standard adjustments covered by Cache and Coach which work very well with this scenario.

Chris I'm not sure what you mean when you say "you just need something when first series expires"...and cnms2 ratio in my book means you can ratio the long or the short...and I'm understanding you have more long puts/calls than short ..so there is some protection...your never naked short puts/calls. There is still risk but I think the biggest problem esp for me is the large margin requirement.

cnms2 · Mar 22, 2006

From the options' bible a.k.a. "Options as a Strategic Investment" by Lawrence G. McMillan:

"A ratio call spread is a neutral strategy in which one buys a number of calls at a lower strike and sells more calls at a higher strike."
"... the reverse call spread, which is commonly known as a backspread. In this type of spread, one would sell a call at one striking price and then would buy several calls at a higher striking price."

To remember these easier think delta neutral.

Quote from DonnaV:

Chris I'm not sure what you mean when you say "you just need something when first series expires"...and cnms2 ratio in my book means you can ratio the long or the short...and I'm understanding you have more long puts/calls than short ..so there is some protection...your never naked short puts/calls. There is still risk but I think the biggest problem esp for me is the large margin requirement.

Cache Landing · Mar 22, 2006

Well, we bounced hard off of the 1295 mark on the SPX. I'll be looking to get in on some bull puts with any decent move down.

cnms2 · Mar 23, 2006

I actually think that SPX is in short and, maybe, intermediate down trend. We'll see... Just keep your targets close, and your stops closer!

Quote from Cache Landing:

Well, we bounced hard off of the 1295 mark on the SPX. I'll be looking to get in on some bull puts with any decent move down.

Cache Landing · Mar 23, 2006

Quote from cnms2:

I actually think that SPX is in short and, maybe, intermediate down trend. We'll see... Just keep your targets close, and your stops closer!

This one has been a hard one to forecast because of the uncertainty about the fed policy. I'm getting the feeling that a couple more interest rate hikes have already been priced into the market. If the fed stops raising rates though, we will see a really fast move upwards.

RichardRimes · Mar 23, 2006

Quote from cnms2:

From the options' bible a.k.a. "Options as a Strategic Investment" by Lawrence G. McMillan:

"A ratio call spread is a neutral strategy in which one buys a number of calls at a lower strike and sells more calls at a higher strike."

"... the reverse call spread, which is commonly known as a backspread. In this type of spread, one would sell a call at one striking price and then would buy several calls at a higher striking price."

To remember these easier think delta neutral.

your right...I'm constantly confusing them

ChrisM · Mar 23, 2006

Quote from DonnaV:

Chris I'm not sure what you mean when you say "you just need something when first series expires"...and cnms2 ratio in my book means you can ratio the long or the short...and I'm understanding you have more long puts/calls than short ..so there is some protection...your never naked short puts/calls. There is still risk but I think the biggest problem esp for me is the large margin requirement.

Diagonals can give you some profit, then you may convert them into flies, boxes, verticals at expiration fishing for some more, depending on how far OTM you are.

RichardRimes · Mar 23, 2006

Quote from ChrisM:

Diagonals can give you some profit, then you may convert them into flies, boxes, verticals at expiration fishing for some more, depending on how far OTM you are.

got it..thanks a lot Chris thats kinda what I've been thinking