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The win percentage actually depends on the choice of strikes for the spread,
and can be determined in advance (more or less) by using a probability
calculator. Far out-of-the-money credit spreads will have great probability
of profit, but will yield only very little premium.
OTOH, one might be able to sell a vertical, deep-in-the-money spread for a
large amount of premium, such as $8,500, and still have the position risk
limited to $10,000; but though the trader cannot lose more than $1,500 on
the trade, the probability of profit is only very small - the market would
need to make a large move for him or her to avoid the loss. Besides, there
is the risk of early assignment on the short leg.
So that win percentage depends on one's preferences. Usually it's best to
strike a happy balance.
Best regards,
Michael Suesserott
> -----Ursprungliche Nachricht-----
> Von: M. Simms [mailto:prosys@xxxxxxxxxxxxxxxx]
> Gesendet: Thursday, September 26, 2002 18:10
> An: realtraders@xxxxxxxxxxxxxxx
> Betreff: RE: [RT] Interesting Puts
>
>
> Keep in mind, Vic Niederhoffer bankrupted his hedge fund in 1997 when his
> naked S&P put options went thru the roof in one nasty day. With naked
> options as Vic has taught us, the risk is unlimited.
>
> With credit spreads as Ira has so well explained, there are two problems:
> 1) increase cost of initiating the position relative to naked-only options
> 2) very expensive to unwind the complete position.....
> although you can unwind the short side of the position and keep the long
> side exposed which is normally not a good idea if the market's move begins
> to reverse.
>
> Credit spreads have an "automatic" stop loss built in which is nice, but
> usually the risk/reward ratio is poor for them....usually 4:1 meaning you
> can "win" $2500 on the position at the risk of $10,000.
>
> More important: Why are these strategies fairly reliable ?
> High win percentage....
> some gurus saying 90+% for the best combination of strikes......
> my experience shows that 75% is more like it.
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