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Let's Trade Options

  • #19,481
  • Mar 16, 2024 8:48am Mar 16, 2024 8:48am
Advantages of vertical spreads over longs: The spreads will have a closer break even and will cost less. They will pay better than longs until the move in the underlying gets bigger. If the spreads cost 1/2 as much as the longs, you can put on twice as many of the spreads, in which case they will out perform the longs in anything other than an extreme move.

The cons: inclusion of any short options means there is a margin requirement. The 10-lot vert shown above eats $4k in margin.

Not gonna harp on this though, money. You do you.
"If The Fool persists in his Folly he will become wise." - William Blake
  • #19,482
  • Mar 16, 2024 12:38pm Mar 16, 2024 12:38pm
Quoting The Fool
{quote} when you wrote this SPY was around 514 on 3/14....Friday it did drop to <510. You didn't like the $510 puts trading at $3.25. I'll offer the following criticism with an example. Based on Friday closing price of ~$510, let's say you think SPY will fall another $5 in the next 2 weeks. Looking at the 3/28 $506 puts, They're trading at $2.90. Pretty steep. The 10-lot long puts/p/L is shown below @ 3/22. Net debit $2,900. Break even on 3/22 would be about $507.10. {image}
Actually, though, that isn't the way a straight PUT actually works: If I purchase 10 contracts of the Mar28 506 PUTS for $2900 and the price goes down to roughly $507.10 of 3/22, that isn't breakeven, that is actually a pretty good profit! Because at the stock price of ~$507, the Mar28 506 PUT will be trading at roughly $3.90. So if the stock price got to $506, the Mar28 506 PUT will trade at roughly $4.60, and if the stock price goes down to $504, the Mar28 506 PUT will be trading at roughly $5.40.

So the profit at the different levels with straight PUTs would be:
--at $507 profit is roughly $1000 ($3900-$2900 initial cost = $1000)
--at $506 profit is roughly $1700 ($4600-$2900 initial cost = $1600)
--at $504 profit is roughly $3500 ($5400-$2900 initial cost = $3500)

The profit at the different levels with a spread (by your graph) would be:
--at $508 profit is $305.29
--at $506 profit is $669.45
--at $504 profit is $1032.08

The cost of the spread may be half of the cost of the straight PUTs, but even if I bought twice the spreads listed (which would still put me at the cost of the straight PUTs), it still wouldn't give me near as much profit as the straight PUTs will. I can't see the upside of spending the same amount and making less money.
  • #19,483
  • Mar 16, 2024 12:45pm Mar 16, 2024 12:45pm
Quoting The Fool
What I have seen you do on your trades is you close pretty quick, usually leaving $$$ on the table. Don't take that as harsh criticism. I do the same thing, also. The tendency is to grab profit when you see it, nothing wrong with that. The tendency maybe is exacerbated when you have bigger size on, i.e, when you have more capital at risk. {image}
As far as getting out quick, I normally use my charts to tell me when most of the move is over, or when it is butting up against support/resistance. Sometimes I get out if I'm not gonna be around a computer to watch it. But I have zero concerns of leaving money on the table. Now, don't get me wrong, I have looked at trades where I've left a LOT of money on the table and I try to figure out what was indicating if it was still moving, and have tweaked some indicators a little, but sometimes, it just happens and I know it could just a easily move against me, too. I spent my early trading years trying to milk every penny out of every trade, and I wound up getting caught a few times waiting too late. Since I started trading higher numbers of contracts years ago, it makes it easier to get out when I am comfortable with the profit.
Kinda like buying a computer: once I buy one, I stop looking because I will invariably find a better computer a little cheaper a week after I buy one!
  • #19,484
  • Mar 16, 2024 1:50pm Mar 16, 2024 1:50pm
Quoting moneymaker2
{quote} Actually, though, that isn't the way a straight PUT actually works:
Fair enough and to each his own. Bear in mind what I modeled was an example put vs vert for a Mar22 date, a week out. The platform models do an ok job, but you have to understand how things might change with iv & the greeks. The models can be squirrely around expiries, too.

You can graph the value of any option, in hindsight, trade data from the exchanges. Back to the original trade idea - the Mar10 $510 puts, looks like that one went to a high of $5.50 on Friday.
Attached Image (click to enlarge)
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"If The Fool persists in his Folly he will become wise." - William Blake
  • #19,485
  • Mar 16, 2024 3:55pm Mar 16, 2024 3:55pm
coming week FOMC could be a good binary event imo. Inflation is not going down fast (or at all, depending on who you ask) and there is a sense that the Fed has little to no room to cut rates this year. Not what they have been saying and certainly not what the markets want to hear. If they sound the least bit hawkish Wednesday, indices will drop like a rock. If they modify their forecast and that shows up as less projected hikes in the dot plot, even more bearish for risk assets. I have trades set up to catch this potential market movement and will be getting into more on Mon-Tues.
"If The Fool persists in his Folly he will become wise." - William Blake
  • #19,486
  • Mar 16, 2024 6:57pm Mar 16, 2024 6:57pm
Quoting The Fool
{quote}Back to the original trade idea - the Mar10 $510 puts, looks like that one went to a high of $5.50 on Friday. {image}
The Mar28 510 PUT did trade as high as $5.50 yesterday, but I had the Mar21 510 PUT, which had a high of $4.50. I sold at $4.01 and was in and out in less than an hour for $900 profit, so I'm good with that.
  • #19,487
  • Mar 16, 2024 7:01pm Mar 16, 2024 7:01pm
Quoting The Fool
{quote}Bear in mind what I modeled was an example put vs vert for a Mar22 date, a week out. The platform models do an ok job, but you have to understand how things might change with iv & the greeks. The models can be squirrely around expiries, too. {image}
What we should do on a slow day is I'll find a PUT or CALL to buy with a specific strike/expiration date. So no money is on the line, I can "buy" my pick at the Ask price, and sell at the Bid price, and you can do a spread and see how they actually wind up in comparison; a "theory-to-practice" type trade.

That would be pretty cool to do.....
  • #19,488
  • Mar 16, 2024 9:07pm Mar 16, 2024 9:07pm
Quoting moneymaker2
{quote} What we should do on a slow day is I'll find a PUT or CALL to buy with a specific strike/expiration date. So no money is on the line, I can "buy" my pick at the Ask price, and sell at the Bid price, and you can do a spread and see how they actually wind up in comparison; a "theory-to-practice" type trade. That would be pretty cool to do.....
sounds good. I can put on an infinite number of trades in my play money account.
"If The Fool persists in his Folly he will become wise." - William Blake
  • #19,489
  • Edited 8:40pm Mar 18, 2024 8:18pm | Edited 8:40pm
Quoting moneymaker2
{quote} What we should do on a slow day is I'll find a PUT or CALL to buy with a specific strike/expiration date. So no money is on the line, I can "buy" my pick at the Ask price, and sell at the Bid price, and you can do a spread and see how they actually wind up in comparison; a "theory-to-practice" type trade. That would be pretty cool to do.....
TF,
Okay, I have a couple for you, one CALL and one PUT. I will list my trades at the Ask price to buy and the Bid price to close. Both have the same expiration date, so that makes it easier to compare. I'll attach a screenshot of the strike prices associated with that expiration date for us to use. You can show your spreads for each of them and when my trades are at the point I'm ready to get out, I'll tally up the profit and when yours are to the point you would get out, you tally up yours (you don't have to close your trade when I do, just run them as you would real trades). Since I always trade at least 10 contracts, base your spreads on 10 contracts. Since I am not too savvy on spreads, you may need to explain your graphs a little so everyone understands.

Sound like a plan?
  • #19,490
  • Mar 18, 2024 8:21pm Mar 18, 2024 8:21pm
For purpose of this theory-to-practice exercise, I am in the following:

Trade#1

AER Apr19 85 PUT at $1.75
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  • #19,491
  • Mar 18, 2024 8:22pm Mar 18, 2024 8:22pm
Trade #2

KNX Apr19 52.5 CALL at $2.10
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  • #19,492
  • Mar 18, 2024 8:30pm Mar 18, 2024 8:30pm
I am actually going to watch these in the morning to see about really getting in, though. But the after hours data would be the best, and easiest, to compare the two types of trading methodologies rather than trying to do it while the market is moving.
  • #19,493
  • Mar 18, 2024 9:38pm Mar 18, 2024 9:38pm
Quoting The Fool
{quote}sounds good. I can put on an infinite number of trades in my play money account.
I think the info from the two strike price charts will be enough for you to make your spread graphs, but if not, just let me know and I'll try to get you whatever you need.
  • #19,494
  • Edited 11:35pm Mar 18, 2024 11:17pm | Edited 11:35pm
For fair comparison, I will pick a vertical spread that has approx the same debit value as your long put or call trade. For AER: the Apr19 $80/$77.5 vertical puts will cost $20 - compare to $1.75 for the $85 puts, same date. So, I can trade about 82 units of the spread for roughly the same debit as your 10-lot. (1,750/20 = 87.5, but I am taking off 5x for comms, which add up on spreads.)
Attached Image (click to enlarge)
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re: AER - the chart looks bullish to me, so I'd not advise myself to take a contrarian position, But, I'll set a target whenever I enter a trade: the maxP for the vertical is about $18,500. I'd be happy with a third of that, which would come in on a drop to $79, depending on the date of course.

I don't like trading low-volume names like this - the bid/ask spread is 15c-25c wide, so you're already that much in the hole when you execute the trade. I don't know if I would fill that put vert at $20, but that's what ToS is showing atm.

I'll do the other one when I have a minute. I'll also do a comparison SPY trade. I don't trade SPY anymore, either, but at least it has minimal b/a spreads.

If you have any questions about the ToS P/L graph shown, just let me know.
"If The Fool persists in his Folly he will become wise." - William Blake
  • #19,495
  • Mar 18, 2024 11:36pm Mar 18, 2024 11:36pm
Quoting The Fool
For fair comparison, I will pick a vertical spread that has approx the same debit as your long put or call trade. For AER: the Apr19 $80/$77.5 vertical puts will cost $20 - compare to $1.75 for the $85 puts, same date. So, I can trade about 85 units of the spread for roughly the same debit as your 10-lot. {image}
But is that a good comparison, since I have a higher strike price? Lower strike prices are always cheaper, so naturally you can buy more units with a cheaper price. If I bought the same dollar amount of the $80 PUT, I could buy 35 contracts, and the same price at the $77.5 PUT would be 58 contracts. Plus, I don't think price will get as low as your spread Puts.

But if this is the trade you would take on this, we will go with it.
  • #19,496
  • Mar 18, 2024 11:43pm Mar 18, 2024 11:43pm
Quoting moneymaker2
{quote} But if this is the trade you would take on this, we will go with it.
Yep, that's the best I can do. Names with big b/a spreads are inefficient for spreading. The trade would start making money pretty quick, though, given the low debit. We'll see what happens.
"If The Fool persists in his Folly he will become wise." - William Blake
  • #19,497
  • Mar 18, 2024 11:59pm Mar 18, 2024 11:59pm
By my charts, I'm thinking about $83 would be the max drop short term, and if I'm reading your graph correctly, that would be roughly $2000 profit? Now, can you close the trade when you see what you consider the max drop or do you leave it open until expiration?
  • #19,498
  • Mar 19, 2024 12:10am Mar 19, 2024 12:10am
Also, if you did a spread using $85 and $82.5 strike prices, would that be a good trade? It seems like since it is closer to the "goal" of the drop to $83, that would be a good spread, but I don't know....
  • #19,499
  • Mar 19, 2024 7:45am Mar 19, 2024 7:45am
the 85/82.5 is 4x more expensive than the 80/77.5, so a 20-lot vs a 82 lot. The cheaper, larger trade outperforms, reaching $2k profit at about $83.10, compared to $80.20 for the 20-lot. The old adage in trading, "buy low, sell high" is amplified in spreading. The dominant reason to use spreads is to lower cost basis of trades. Lower cost means you can put on higher volume, comparatively, and that will translate to higher profits. The lower cost trades will have a quicker break-even, also.
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I trade vertical spreads regularly, but they're not the meat n taters of my trades. Usually, to really minimize trade costs, I am doing diagonal spreads, which require some margin. I use verticals commonly to hedge the tail risk of margined trades...
"If The Fool persists in his Folly he will become wise." - William Blake
  • #19,500
  • Mar 19, 2024 10:24am Mar 19, 2024 10:24am
Out of the following:

SCCO Apr19 100 PUT at $4.10 up from $2.95

Wouldn't split the Bid/Ask, so got out on the Bid. Wound up being the high so far, so that's good.

I got out because my indicator shows the move is pretty much expended and it was really close to the 5EMA support (which will probably repaint tonight to show it hit it), so no real need to hold any longer.
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