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>Short 790 call. If it goes out at 805, I lose $15 on the 790 call.
>Long 800 call. If it goes out at 805, I gain $5 on the 800 call.
>Net, I lose (or give up) $10.
>However, I got $9 for it earlier, so
>Net Net I give up $1 only.
Mechanically all is correct above, However, I don't think in the real
options world that it's possible to place an initial trade of
short 790 / long 800 vertical call/put spread for a net credit of $
9/contract.
Thanks,
Marshall M. Liu
-----Original Message-----
From: Gitanshu Buch [mailto:OnWingsOfEagles@xxxxxxxxxxxxx]
Sent: Thursday, August 17, 2000 3:17 PM
To: metastock@xxxxxxxxxxxxx
Subject: RE: What options to sell?
>So you start with an ATR to estimate breakout or containment; what period
of
>time would you be considering?
atr (14) for options > 2 weeks from expiry.
14 and shorter for options <2 weeks from expiry
> Sell the 790, buy the 800; is the risk
>figured just on point spread at initiation?
Sold for $9. Max it gets intrinsic (the point spread of 800-790 you refer
to) = $10.
Hence max loss = risk = $1.
>And your saying that the maximum risk is if at expiration
At or before expiration, unless the option is American style. If it is
American style and the short leg gets exercized against you, the risk
profile (and the trade) changes dramatically.
>you have only losses from the short & it
>ends just below where the benefit of the long would begin, right?
Short 790 call. If it goes out at 805, I lose $15 on the 790 call.
Long 800 call. If it goes out at 805, I gain $5 on the 800 call.
Net, I lose (or give up) $10.
However, I got $9 for it earlier, so
Net Net I give up $1 only.
>Worst that can happen? OEX goes out at 799 or higher, I lose $100. But if
>OEX does get to the initial breakeven point of 791 for the long puts, I
>still make $800. That is an 8:1 trade.
You're talking now about puts,
rather than calls?
Still talking about calls. See data above.
My no-profit no-loss price is 799 on the 790-800 call spread since I
received $9 for it.
I lose upto $1 above 799 but that is all I lose.
>Did you mean to switch here in the example or did you
>mean to talk about a credit put spread above?
No switch, same call spread example.
>Do you use OptionVue to model these relationships?
No I use a homegrown spreadsheet calculator. Metastock also has an option
module which could be used to see what the position looks like. It uses B-S
as its model base for volatility etc calculations.
The above 790-800 call spread (or the butterfly etc) are simple risk-reward
calculations without regard to volatility since we were talking about
finding an appropriate trading vehicle for taking advantage of our price
direction picking skills (as opposed to volatility direction or price +
volatility direction or "price + volatility + interest rate within a
specific time" direction).
>Would you use butterflies on QQQ options?
Sure if the setups existed I'd use butterflies in anything.
>I guess they would need to be done in considerable multiples, which may
make them too
>much in commissions.
Depends also on the distance between the strikes, implied volatility and
underlying's volatility. "Size doesn't always matter" if these things happen
to fall in place.
2 low cost providers that I'm aware of are Timberhill and Cybercorp.
I'm sure others exist.
Gitanshu
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