Vertical Spreads for Aggressive Growth

[jychiu]

Thank you for the response.

Yes, do provide some writeup on the summary when you find time to do that. Thank you again in advance.

Quote from Cache Landing:
If you want a website to start with, I think that stockcharts.com has some cool tools. For sector analysis they have either their market summary or what they call "market carpet". It is an interesting little configuration that might help you in finding a market driver. But you will really need to take some time to learn the interrelations of the market. If you'd like, when I get some time, I will provide a small summary of the business cycle with a description of how it works.

 

[Cache Landing]

Quote from cdowis:

Of course, that is what I mean -- an adjustment.

For newbies:

Been studying the relationship between delta and gamma, and came up with an analogy which I find helpful:

Delta is speed and gamma (negative) is acceleration.

A low delta position, with high gamma is like a racehorse at the starting gate -- it's at standstill, but ready to blow out of the gate. High delta, low gamma is the racehorse running almost at full speed. As Tom Preston says, negative gamma "manufactures" bad deltas, and positive gamma makes good deltas.

Delta is the rate at which I am making or losing money. As the market moves a tick, for example, I am losing $1. Gamma tells me the rate at which I will be losing money after it moves several ticks -- now at $1, moves up and $1.10 per tic, now $1.20 per tic, etc.


Gamma and theta (time decay) are the two sides of the coin. You made money either thru gamma, with theta against you, or thru theta, with gamma (market movement) against you. There is another third side of the coin, volatility

Looks like someone studied physics a little bit. Indeed, the method for determining gamma as a function of delta, is the same as determining acceleration as a function of velocity.

I would just bring up one consideration that I think is often overlooked in trading. Your speed (or in vector terms velocity) acceleration analogy helps to point out the oversight.

When a dumb kid is racing his car and he is currently at 120mph, you might hear him say that he wants to go 20mph faster. You'll likely not hear him say that he wants to go 20% faster. He is viewing an increase in velocity in absolute terms rather than in relative terms.

So it is with many traders. They focus on the absolute value of credit recieved or gain achieved, rather than the value relative to the risk taken. If I told you I got a $2.50 credit on a vertical it might sound good until you find out that the spread was 50-points wide.

Many times when I ask someone which will make money faster, ITM calls or OTM calls, the quick response is that ITM calls will make money faster due to the higher deltas. Anyone who trades options knows that with a positive print OTM calls actually make money faster, ceteris paribus.

I bring up the consideration here in light of vertical spreads. In relative terms an OTM credit vertical becomes less appealing with a favourable move and more appealing with an adverse move. Just something to consider when deciding how to open/close a position.

 

[scienter]

Can someone tell me why their is more premium attached to ITM Oct SPY calls right now than puts?

For example, with the SPY at approx. 131.5 this afternoon, the 135 puts were selling at 3.6 (a .10 premium) and the 128 calls were at 4.6 (a 1.10 premium to the market). That's a difference of a buck!!

I checked the IV for each instrument as well...the calls were approx 14 and the puts at 12. Does this small difference in IV account for such a large pricing discrepancy between the two? Or is their something else going on here, that as a relatively new options trader I'm missing?

Thanks

 

[El OchoCinco]

Do not know the answer but the difference between 12 and 14 is not small. That is a 16% skew!

Quote from scienter:

Can someone tell me why their is more premium attached to ITM Oct SPY calls right now than puts?

For example, with the SPY at approx. 131.5 this afternoon, the 135 puts were selling at 3.6 (a .10 premium) and the 128 calls were at 4.6 (a 1.10 premium to the market). That's a difference of a buck!!

I checked the IV for each instrument as well...the calls were approx 14 and the puts at 12. Does this small difference in IV account for such a large pricing discrepancy between the two? Or is their something else going on here, that as a relatively new options trader I'm missing?

Thanks

 

[Cache Landing]

Quote from scienter:

Can someone tell me why their is more premium attached to ITM Oct SPY calls right now than puts?

For example, with the SPY at approx. 131.5 this afternoon, the 135 puts were selling at 3.6 (a .10 premium) and the 128 calls were at 4.6 (a 1.10 premium to the market). That's a difference of a buck!!

I checked the IV for each instrument as well...the calls were approx 14 and the puts at 12. Does this small difference in IV account for such a large pricing discrepancy between the two? Or is their something else going on here, that as a relatively new options trader I'm missing?

Thanks

This is the whole basis for the Ansbacher Index. Discussed on OC's thread a while back.

http://www.elitetrader.com/vb/showthread.php?s=&postid=1011828&highlight=ansbacher+index#post1011828

Essentially it shows a bias in market direction. Some people attempt to use this to predict market direction. The Ansbacher Index is actually a contrarian indicator.

 

[scienter]

Quote from optioncoach:

Do not know the answer but the difference between 12 and 14 is not small. That is a 16% skew!

Coach,

What would account for the difference in IV between the calls and the puts? Doesn't volatility take into account both the call and the put side in its calculation?

I'm going to be pissed if that call I bought as the market closed today loses the dollar premium over the weekend.

 

[tplast]

Quote from scienter:


What would account for the difference in IV between the calls and the puts? Doesn't volatility take into account both the call and the put side in its calculation?

IV is unique for each contract. And IV and price are not independent. You can enter IV into the model and get price or you can enter price and get IV. That's why it's called implied volatility - it is implied by the price.

IV goes up/down because of demand/supply.

 

[Cache Landing]

Quote from scienter:

Can someone tell me why their is more premium attached to ITM Oct SPY calls right now than puts?

For example, with the SPY at approx. 131.5 this afternoon, the 135 puts were selling at 3.6 (a .10 premium) and the 128 calls were at 4.6 (a 1.10 premium to the market). That's a difference of a buck!!

I checked the IV for each instrument as well...the calls were approx 14 and the puts at 12. Does this small difference in IV account for such a large pricing discrepancy between the two? Or is their something else going on here, that as a relatively new options trader I'm missing?

Thanks

According to a basic options pricing calculator, given the volatility that you stated, the correct pricing should have been

128 calls = 4.6
135 puts = 3.75

[edit] So essentially your calls were correctly priced and I wouldn't worry about it if I were you.

 

[tplast]

Quote from Cache Landing:

According to a basic options pricing calculator, given the volatility that you stated, the correct pricing should have been

128 calls = 4.6
135 puts = 3.75

[edit] So essentially your calls were correctly priced and I wouldn't worry about it if I were you.

But that only means that the calculator is correct

 

[Cache Landing]

Quote from tplast:

But that only means that the calculator is correct

Hey, we have to make assumptions somewhere.

[edit] What I meant was that market is unlikely to take $1.00 of his credit away from him over the weekend. They would have to have a big change of heart.