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Ray - terrific
analysis of these spreads......but one thing you forgot to mention regarding
risk/reward ratio.....
the closer to the
market your strikes are set, the LOWER the probability of winning
is.
In other words,
in your analysis, the backtestable win rate (% wins) is not factored into the
risk/reward computation.......
<FONT color=#0000ff
size=2>
Have you
backtested Bull Call or Bear Put credit spreads ?
<FONT color=#0000ff
size=2>
One thing you
should mention: the best time to put these spreads on is right AFTER a violent
market movement when premiums are high...
if you put em on
when the market is a bit quiet (like now !), watch out !
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size=2>
<BLOCKQUOTE
style="PADDING-LEFT: 5px; MARGIN-LEFT: 5px; BORDER-LEFT: #0000ff 2px solid">
<FONT face=Tahoma
size=2>-----Original Message-----From: Ray Raffurty
[mailto:r.raffurty@xxxxxxxx]Sent: Sunday, April 21, 2002 3:34
AMTo: realtraders@xxxxxxxxxxxxxxxSubject: Re: [RT]
trading question
Hi Marc,
There are numerous ways to play this, depending
on your risk tolerance. One way is with Bull Call Credit Spreads, sell a
call option and simultaneously buy a higher strike call option. The
chart below shows some possible trades using QQQ calls.
border=0>
Since your time frame is May -June, there
are four combinations that look interesting. Each of them has a Net
Credit greater than or equal to the Max. Risk and require less than a 2 point
downward move to Break Even (Calculated by subtracting the
Break Even value from the close of 34.46). They are May 32-33
spread, May 33-34 spread, June 32-33 spread and June 33-34 spread. The
May 32-33 spread has the best risk reward ratio (Net Credit divided
by Maximum Risk) of 2.333 to 1, however it requires a move down of 1.76
to break even by May 17.
border=0>
The June 33-34 spread is the most conservative of
the four, since it requires a downward move of only 0.96 points by June 21 to
break even, and offers a 1.86 to 1 risk reward ratio.
border=0>
If you move further down the chart to say the
June 38-39 spread you will see that the break even point would require an
UPWARD move of 3.64 points before you would begin to lose money, however the
risk reward ratio is negative. Also note the margin requirements
increase.
border=0>
These trades limit your potential losses if
you are wrong, but also limit your potential gains if you are very
right. By the way, what are you basing your predictions on?
Good luck and good trading,
Ray Raffurty
<BLOCKQUOTE
style="PADDING-RIGHT: 0px; PADDING-LEFT: 5px; MARGIN-LEFT: 5px; BORDER-LEFT: #000000 2px solid; MARGIN-RIGHT: 0px">
----- Original Message -----
<DIV
style="BACKGROUND: #e4e4e4; FONT: 10pt arial; font-color: black">From:
Marc Lawrence
To: <A
title=realtraders@xxxxxxxxxxxxxxx
href="mailto:realtraders@xxxxxxxxxxxxxxx";>realtraders@xxxxxxxxxxxxxxx
Sent: Friday, April 19, 2002 8:13
PM
Subject: [RT] trading question
Hello all,It looks like the market will have a
little run intoMay- June area and then it looks like we may be in
fora fall. Additionally there a preponderance ofoverbought
sectors- sentiment indicators also showmore bullishness.My
question is this. How would traders on the listlook to profit on
shorting the market indices S&P andNasdaq? There are
many vehicles QQQ, futures, rydex shortfunds. There are also a
number of option strategiesthat could be employed here. I am
specificallyinterested in stimulating discussion on whichstrategies
have the best possible risk-reward forplacing such a directional
bet. I know it's a broad question but I am interested
inhow traders on this list would approach this.Thanks in
advance,Marc__________________________________________________Do
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