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Post by sp7015 on Mar 2, 2011 17:45:47 GMT -5
Which brokers will let you go short vertical spreads?
For instance I currently use scottrade and all they let me do is buy calls and buy puts.
No naked calls or naked puts
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Post by sp7015 on Mar 2, 2011 19:46:50 GMT -5
Which brokers will let you go short vertical spreads? For instance I currently use scottrade and all they let me do is buy calls and buy puts. No naked calls or naked puts Ok found tradeking to use. Looks promising. |
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Post by sp7015 on Mar 2, 2011 19:56:57 GMT -5
This is a good sticky. Another way to short options is to short a put spread.
I will use aapl march puts. At close today you sold the 325/320 put spread.
You sell the $325 put for $1.67. Net credit $167.
You buy the $320 put for $1.16. Net debit of $116.
Your risk of loss would be the diference between the $325 and $320 put which is $5. So your total risk would be $500.
But wait, you got a credit of $167. This makes the possible amount that could be lossed at $500-$167=$333.
Your margin requirement would be $333.
Total realized gain if appl closes above $325 would be $51 by risking $333 or having $333 tied up in the trade. That would be a 15% gain.
Now the benifit of doing the above keeps your margin requirement really low.
If you just sold the $325 put naked you would recieve $116 and have to have $$4330 cash reserves. If the stock droped to your strike price you would end up having to have $32,500 in cash reserves.
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Post by UKTom on Mar 4, 2011 3:50:50 GMT -5
Hi, a different way of looking at this is that your credit is not $167. It's $167 minus the cost of the protective Put, i.e. $51. If the closing price is $320.01, you've lost ($4.99 + $1.16) - $1.67 = $448 All other numbers need to be adjusted on this basis. Great post by the way. Tom twitter.com/nakedputz |
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Post by UKTom on Mar 4, 2011 4:01:09 GMT -5
Nice trade. The premiums were pretty good, you could have taken some of that premium and used it to buy a lower strike protective Put, saving you from a total stock price collapse (say in the event of an account scandal). This would also have reduced your cash requirements with your broker. Good trade, great post. Tom twitter.com/nakedputz |
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Post by papasloth on Mar 4, 2011 12:55:57 GMT -5
Vertical spreads are a great way to hedge your risk, and I've used them many times on my riskier plays.
Generally, though, I'm greedy and hate giving away theta. For the most part, I try to manage my risk by starting with smaller positions and staying away from setups where there is potential for a huge move, and by rolling over these positions when I am wrong or my timing is off. I'd rather manage my risk by having a lot of smaller positions than by having one big hedged position, because having lots of smaller positions doesn't affect the expected return overall, while a vertical spread does affect the expected return.
But, yes, the biggest advantage of a vertical spread is that it reduces your margin maintenance requirements on the position. This is particularly important when playing options that have excessive margin requirements. For example, shorting FAS or FAZ options at TD Ameritrade, where the maintenance requirements are 90% of the price of the underlying (FAS or FAZ) for short calls or 90% of the strike price for short puts, plus the current value of the option, minus the out-of-the-money amount. This can be several times as much as the maintenance requirement for a vertical call or put spread.
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Post by sp7015 on Mar 4, 2011 21:45:33 GMT -5
I have been doing research to learn more about options. How many people have bought calls and have had the stock move higher but there call not making any money? Probabley everyone. This is do to the relationship of option prices or premium one pays for the option. In general when a stock is at its top volatility is low so there is little options premium. When a stock is at its bottom volatility is high and their is more premium to option prices. This article I found explains it a little better www.investopedia.com/articles/optioninvestor/05/020205.aspHere is a handy chart from the article:  Uploaded with ImageShack.us |
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Post by dino on Mar 18, 2011 15:31:28 GMT -5
My short RCL puts experiment is officially a success!
On a side note, here's another example of the high maintenance requirements when shorting options...
I use TDA, and the maintenance requirement for selling to open 4 March 35 puts at a cost of .19 each ($76) was $1,071. Not kidding!
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Post by papasloth on Mar 18, 2011 15:46:24 GMT -5
Well, you're pledging to buy 400 shares at 35/share if it gets down to that. If that should happen, it would cost you $14,000 to buy the stock and the margin requirements would be $4200. So, viewed from that perspective, $1071 is very small.
You really have to view margin requirements on options in terms of the number of shares of the underlying stock for them to make any kind of sense.
Congratulations on your successful options play! Welcome to the dark side!
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Post by dino on Apr 21, 2011 12:29:24 GMT -5
Posted this in another thread - thought I'd post it here as well... FYI... I always wondered how the "open interest" for options was calculated. Considering some people write or sell options and others just "buy", what's considered "open" then? Well, here's a nice concise explanation I found useful. Just thought I'd pass it along... What Does Open Interest Mean?1. The total number of options and/or futures contracts that are not closed or delivered on a particular day. Investopedia explains Open Interest1. A common misconception is that open interest is the same thing as volume of options and futures trades. This is not correct, as demonstrated in the following example:  -On January 1, A buys an option, which leaves an open interest and also creates trading volume of 1. -On January 2, C and D create trading volume of 5 and there are also five more options left open. -On January 3, A takes an offsetting position, open interest is reduced by 1 and trading volume is 1. -On January 4, E simply replaces C and open interest does not change, trading volume increases by 5. www.investopedia.com/terms/o/openinterest.asp |
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Post by tendermyshares on May 15, 2011 19:21:17 GMT -5
Can't ... think ... brain ... too ... loaded ... up .... on .... ice ....cream.
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Post by abdogman on Jun 24, 2011 8:45:34 GMT -5
Thanks Dino ....EXALT!
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Post by sloop on Sept 1, 2011 22:18:16 GMT -5
Thank you
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Post by dino on Oct 10, 2011 10:33:32 GMT -5
Ok, another experiment... Just sold a weekly TZA vertical put spread. This is different from naked shorting options as you basically cap your losses and reduce your margin requirements (as discussed earlier in this thread). Bought 2 $40 puts and sold 2 $41 puts. Net credit of $.40 each. Max gain is $80, max loss is $120 (minus commissions). I need TZA to close above $41 on Friday so both expire worthless and I keep the $80! :-) A friend of mine told me a very simple philosophy on stock price movements that made sense and I wanted to try a vertical spread against it. Here is his philosophy... Basically, a stock price can: 1. Go up a lot 2. Go up a little 3. Stay the same 4. Go down a little 5. Go down a lot Selling OTM vertical spreads cover 4/5 (80%) of those scenarios. What you will lose on are the "big" moves. That's where capping your losses come into play with the spread. So in the case of my experiment, the only way I lose is if TZA makes an even bigger move down this week (the pps was roughly $42.50 when the order filled). From a starting pps of $42.50, if the pps: 1. Goes up a lot - I win  2. Goes up a little - I win  3. Stay the same - I win  4. Goes down a little (but closes above $41 on expiration day) - I win ;D 5. Goes down a lot (and closes below $41 on expiration day) - I lose.  |
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Post by brosin on Oct 10, 2011 12:53:40 GMT -5
Thanks for posting this Dino - helps me visualize the situation for you to lay it out like that. Spreads are still a little over my head as to how best to structure a play.
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Post by dino on Oct 14, 2011 15:05:47 GMT -5
Ok, another experiment... Just sold a weekly TZA vertical put spread. This is different from naked shorting options as you basically cap your losses and reduce your margin requirements (as discussed earlier in this thread). Bought 2 $40 puts and sold 2 $41 puts. Net credit of $.40 each. Max gain is $80, max loss is $120 (minus commissions). I need TZA to close above $41 on Friday so both expire worthless and I keep the $80! :-) A friend of mine told me a very simple philosophy on stock price movements that made sense and I wanted to try a vertical spread against it. Here is his philosophy... Basically, a stock price can: 1. Go up a lot 2. Go up a little 3. Stay the same 4. Go down a little 5. Go down a lot Selling OTM vertical spreads cover 4/5 (80%) of those scenarios. What you will lose on are the "big" moves. That's where capping your losses come into play with the spread. So in the case of my experiment, the only way I lose is if TZA makes an even bigger move down this week (the pps was roughly $42.50 when the order filled). From a starting pps of $42.50, if the pps: 1. Goes up a lot - I win 2. Goes up a little - I win 3. Stay the same - I win 4. Goes down a little (but closes above $41 on expiration day) - I win ;D 5. Goes down a lot (and closes below $41 on expiration day) - I lose. #5 it is...  |
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