|
PureBytes Links
Trading Reference Links
|
Some observations on the exchange between Michael & Guy, for public
consumption: Preface it by saying that this is NOT an attempt to stir
controversy.
The net takeaway for folks like Guy and others reading this would be that
there are many roads to Rome, maybe exploring the ones not discussed so far
also hold promise.
>Vertical or diagonal spreads may be possible, but they, too,
>severely limit your profits.
True. but look at any spread as risk/reward so even if the reward is
limited, it is often the only desirable way to take a position.
For e.g.: One wants to short the market, lets use OEX as the poor target.
Lets say the OEX went out at 805.
One could buy puts - and stand to risk 100% of the premium even though OEX
went down. Lets say we bought a 2 strike out put (the 795) since ATR = 12,
so one can reasonably expect our strike zone to be penetrated if our
direction call is correct.
We pay - lets say - $400 for the put, with a week to go.
If OEX gets to 791, we break even. Below that, its profit.
For e.g.:
If I could sell a credit spread where my max risk is 1 point and max profit
is 9 points, AND I have made a directional bet - lets say I sell the 790-800
call spread for a credit of $900.
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.
Question then becomes, how many multiples of $100 can I bet without wiping
me out?
Why won't I take the 8:1 shot if I'm really good at direction?
The $100 risk here is definitely better than the $400 risk in the long put,
with price going out at the same 791 level, the former breaks even and the
latter returns 8 times my risk.
Now: I could also buy the 790-800 put spread - probably pay $300 for the
privilege. Nets $600 at 791. Better than long puts, but still inferior to
the credit spread.
For e.g. - lets look at other debit spreads - say a butterfly:
Each butterfly starts out as 2 spreads:
A credit and a debit.
The net cost of the butterfly is always less than the cost of the single
debit component. The beauty of b'flies is that they retain value almost all
the way into expiration day, giving me plenty of time to adjust, and the
friction is typically minimal.
Now I may really want to be bearish - say the OEX. But the put spread for 10
underlying handles from - say - 800 to 790 - may be $300, giving me a max
profit of 7 for a risk of 3 or a r/r of 2.3:1.
Same objective is achieved if I'm long the 780-790-800 put fly for less than
half the cost - typically for 1.875. This dramatically increases my r/r from
2.3:1 to over 5:1 within the same price zone - a 2-fold+ increase.
The assumption is that the underlying will go out where the fly is the
richest - at the central strike.
This is exactly the same strike where the long put spread would be
max-profitable. So any trading adjustments one would make to keep the point
of max profitability in the crosshairs -- one would still make.
Why won't I take the shot?
-----------
I have no clue re Guy's trading strategy, fortitude, and account balances
that can be margined in order to do all this maneuvering. So what Michael
says specific to Guy - remains the best exchange on options we've seen here
and I don't mean to interfere.
I also want to state that I don't know Michael, and I'm sure he means well
AND understands and knows all of the above but for some reason hasn't stated
these as viable alternatives - so this is NOT a rap on him. I say this
specifically because we're on Metastock list.
The reason I write all of the above is that in options trading, unlike in
most other instruments, the first move one makes need not be the last for
the same goal to be achieved. That in options trading, one often has the
ability to open a door when another shuts. That there is no one "right" way
to trade options - and by that I include the methods being described above -
where different traders will choose 3 different methods to achieve the same
goal - and yet maybe all methods will lose money.
It benefits the trader to evaluate the various alternatives available to
achieve the same objective with an open mind, and with practice and
experience in various conditions of price & volatility one discovers what
works when - and usually, why.
Gitanshu
|