Options spreads?

Question

Hey all. I am full in to the options game and i am beginning to implement bear-call spreads and bull-put spreads. I just wanted to get some trader feedback..people who implement these strategies and tips for the future...thank you very much

Answer 1

I found Arnold's answer a little problematic.

His first sentence is for a bull put spread but the rest of the post is for a bear call spread.

I have no idea why he would believe "Both call strikes should be lower than the current stock price so as to ensure a profit even if the stock doesn't move at all." There is no reason you cannot use out of the money strikes if you wish.

I also don't quite understnd why he is giving you he definition. I assume if you are already trading them you know what they are.

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The first thing that struck me on reading your question is that it appears you are only looking at credit spreads. I think credit spreads are no better or worse than debit spread. (In my own trading I tend to use debit spreads more than credit spreads, but that does not mean I think they are better. I guess I think it is easier to control the I amount I am putting at risk if I have to pay out the amount at risk when I open the position.)

What is more important is using a volatility forecast in choosing the spread. If you think implied volatility is too high (higher than your forecast) you want your short leg strike price to be nearer the strike price than your long leg. If you think implied volatility is too low (lower than your forecast) you want to your long leg strike price to be nearer to the stock price than the short leg. If you do not have a volatility forecast ou probably should be simply taking a position (long or short) in the stock instead of trading options on it.

Far too many people trade options without understanding the importance of implied volatility. For example, yesterday I sold May $15 strike put options on BSX. Last night BSX announced earnings. Today BSX stock is down, but the price of the put options I sold is down also. Implied volatility collapsed after the earnings were announced causing option prices to go down.

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A second suggestion I will make is to look at using diagonal spreads instead of vertical spreads. By buying an option with a later expiration date for your long leg you decrease the amount of time decay it experiences plus, if things work out well, your short leg will expire and you can sell at least one more short leg using the same long leg. For example, the BSX puts I mentioned selling in the previous paragraph were the third short leg I sold using the same long leg. (My April $15 strike puts had just expired. A month earlier I was assigned on my March $15 puts but the stock was close enough to the strike price that I was able to sell it the same day for a modest profit.)

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My third suggestion is to avoid taking too much risk due to overconfidence. I have seen far too many option traders use a strategy for months, or even years, successfully and decide they have found a winning system. They kept increasing the size of their positions to increase their profits until one day some "rare event" occurs which causes them massive losses. It is not that difficult to have over a years worth of profits wiped out in a single day.

Answer 2

A bull put spread is an intermediate strategy that can be profitable for stocks that are either rangebound or falling. The concept is to protect the downside of a Naked Call by buying a higher strike call to insure the one you sold. Both call strikes should be lower than the current stock price so as to ensure a profit even if the stock doesn't move at all.

1) Sell lower strike calls.
2) Buy the same number of higer strike calls with the same expiration date.
In: Try to ensure that the trend is downward or rangebound and identify a resistance area.
Out: If rises above you stop loss, buy back that short call or exit entire position.

Bear calls are a bearish or neutral to bearish out look.

IM me if you want more...
superrupe05 - Yahoo

Answer 3

Hi,
these are basic credit spreads. They can be put on aggressively for large credit / low probability, or conservatively for low credit / high probabilty. In either case a strict set of rules should be applied to manage the trade. Delta of the short strikes needs to be monitored and the trade needs to be adjusted in some fashion as the short strike is seriously threatened. We have a yahoo group and discuss these trades and other strategies regularly. good trading to you, marko