Vertical Spreads for Aggressive Growth

[momoneythansens]

Good "leg in". Some random musings on whether your forecast could have been leveraged in a different manner for folks with different risk appetites.

What-if alternative scenario:

Bought ATM PUT rather than 1240 OTM PUT.

Gamma scalp by selling fat and juicy lower PUT on sell-off to complete a debit vertical for a "credit" with zero-risk,zero-margin on the entire risk profile. Go to sleep.

If underlying crashes/continues sell-off - further upside to be had from vertical.

If rally ensues, buy back the sold PUT on contracting IV for less than sold for to be left with free or credit ATM/NTM PUT. Again Zero-risk, zero margin on entire risk profile. Unlimited upside. Go to sleep. Hope for market crash

This is not a criticism of your excellent trade! (sheesh folks are getting touchy these days)

My personal view is that going with the flow to build a long gamma debit vertical seems to be preferable under current climates rather than building a dam by planting a credit spread in the sand with still the possibility of a loss (albeit tiny given your trade) if the water breaches that dam.

That's my brain dump for the day.

Quote from Cache Landing:

Thanks, that was part of the strategy this time because of my volty forecasts. There was however an element of luck in that trade. Since I was golfing during market hours when SPX bottomed out, it just happened that my sell @ 7.00 order was near the bottom. I was originally going to set it @ 10.00 but wasn't sure how fast SPX would drop. In the end I decided to try to get the unbalanced IC that I'm in right now at 1:1 r/r. $7.00 was that point.

 

[Cache Landing]

STC the HPQ bear puts. They weren't doing heir job and we are getting too close to expiry. Update blotter later.

 

[rallymode]

Quote from momoneythansens:


This is not a criticism of your excellent trade! (sheesh folks are getting touchy these days)

Tell me about it. I am scaling down my posts on coach's thread. If cache doesnt mind, i might hang out here more. Cache??

Momoney,

which strikes would you have chosen in your above example for the free vertical with the atm put starting point?

 

[Cache Landing]

Quote from momoneythansens:

Good "leg in". Some random musings on whether your forecast could have been leveraged in a different manner for folks with different risk appetites.

What-if alternative scenario:

Bought ATM PUT rather than 1240 OTM PUT.

Gamma scalp by selling fat and juicy lower PUT on sell-off to complete a debit vertical for a "credit" with zero-risk,zero-margin on the entire risk profile. Go to sleep.

If underlying crashes/continues sell-off - further upside to be had from vertical.

If rally ensues, buy back the sold PUT on contracting IV for less than sold for to be left with free or credit ATM/NTM PUT. Again Zero-risk, zero margin on entire risk profile. Unlimited upside. Go to sleep. Hope for market crash

This is not a criticism of your excellent trade! (sheesh folks are getting touchy these days)

My personal view is that going with the flow to build a long gamma debit vertical seems to be preferable under current climates rather than building a dam by planting a credit spread in the sand with still the possibility of a loss (albeit tiny given your trade) if the water breaches that dam.

That's my brain dump for the day.

All excellent points, and unlike many here I am not against the idea of debit verticals.

This particular trade was placed in light of the fact that I also opened some bear call spreads. If I teamed your suggested bear put up with the bear calls, then I pretty much double my exposure in the event of a rally. IMO a rally isn't out of the question, nor is a big drop, but not until the 14th. These credit spreads were opened with the intention of closing early next week.

Thanks for your input.

 

[Cache Landing]

Quote from rallymode:

Tell me about it. I am scaling down my posts on coach's thread. If cache doesnt mind, i might hang out here more. Cache??

Momoney,

which strikes would you have chosen in your above example for the free vertical with the atm put starting point?

Feel free. CTM advocates welcome.

 

[skanan]

Mo,

Could you please explain a bit more in detail. Is this the right way ?

Supposed SPX is 1260, buy 1260 ATM put, then buy stock to have delta = 0.
When SPX drops, sell OTM put to reduce the delta. Somehow, I don't see how am I going to benefit when the market drop further more.

BTW, your post made me read the
"Great old threads about Gamma scalping". It looks like I'm going to read it tonight instead of watching DVD.

Thanks,
-Nick

Quote from momoneythansens:

Good "leg in". Some random musings on whether your forecast could have been leveraged in a different manner for folks with different risk appetites.

What-if alternative scenario:

Bought ATM PUT rather than 1240 OTM PUT.

Gamma scalp by selling fat and juicy lower PUT on sell-off to complete a debit vertical for a "credit" with zero-risk,zero-margin on the entire risk profile. Go to sleep.

If underlying crashes/continues sell-off - further upside to be had from vertical.

If rally ensues, buy back the sold PUT on contracting IV for less than sold for to be left with free or credit ATM/NTM PUT. Again Zero-risk, zero margin on entire risk profile. Unlimited upside. Go to sleep. Hope for market crash

This is not a criticism of your excellent trade! (sheesh folks are getting touchy these days)

My personal view is that going with the flow to build a long gamma debit vertical seems to be preferable under current climates rather than building a dam by planting a credit spread in the sand with still the possibility of a loss (albeit tiny given your trade) if the water breaches that dam.

That's my brain dump for the day.

 

[Cache Landing]

Today's Action Cont.

STC 4 HPQ JUN 27.5/30 p @ 0.25

Profit/Loss

Acct. Value: $13,289.50

YTD Gross P/L: $3,810.00

YTD Commiss: $520.50

YTD Net P/L: $3,289.50

YTD % P/L: 32.90%

This afternoon HPQ bounced off the 200SMA a few times. I decided that I wasn't going to hold onto this failing trade anymore. Closed it out for a loss of 0.05 in the end.

 

[Cache Landing]

Quote from skanan:

Mo,

Could you please explain a bit more in detail. Is this the right way ?

Supposed SPX is 1260, buy 1260 ATM put, then buy stock to have delta = 0.
When SPX drops, sell OTM put to reduce the delta. Somehow, I don't see how am I going to benefit when the market drop further more.

BTW, your post made me read the
"Great old threads about Gamma scalping". It looks like I'm going to read it tonight instead of watching DVD.

Thanks,
-Nick

Something more like this...

SPX trades at 1260. You buy the 1260 put @ 12.50 and the market subsequently drops 10-points tomorrow accompanied by a 100bp increase in vols. You can now sell the 1255 put @ about 15.00 which puts you in a debit spread for a 2.50 credit. IOW, no lose situation. IF...

1) market drops further, you'll realize your max profit of $750/contract

2) market rallies, buy back the 1255 put for much less than you sold it for on contracting IV. If you can buy it back for less than the credit recieved from the spread that you legged into (in this case 2.50) then you have another no lose position. Only this time you've got unlimited profit potential because you're holding free NTM long calls.

3) Market stays still and you are still close to max profit @ expiry given that your spread is ITM.

The comparison that is being made is that in my trade I end up in a credit (unbalanced) IC and want the market to hold still. Mo is suggesting that since we are likely headed into an environment of increasing volatility, it might be beneficial to end up in a debit position to take advantage of the swings in either direction.

The assumption for either trade to work is that the initial directional forecast was correct, and the underlying did indeed drop.

 

[skanan]

Thanks Cache. Now I understand that.

How about something like this.

Buy ATM SPX call and put. If stock move down, sell put. If stocks move up sell call. If stocks does not move enough to sell anything, duh.

I'm temping since I like experimental but I'd better do this on spy one contract before I die from theta.

-Nick

 

[Cache Landing]

Quote from skanan:

Thanks Cache. Now I understand that.

How about something like this.

Buy ATM SPX call and put. If stock move down, sell put. If stocks move up sell call. If stocks does not move enough to sell anything, duh.

I'm temping since I like experimental but I'd better do this on spy one contract before I die from theta.

-Nick

In theory it works as long as the underlying moves big enough. Given my past experiences with long straddles I'm not really a fan unless I'm really thinking that vols are going to pick up. Even then I prefer directional trades such as debit verticals. I don't like to fight theta that much, and simple delta neutral strategies like long straddles (while trying to scalp gamma) aren't really my bag. Tons of effort for nickels and dimes.