Archive for the ‘option spread trading’ Category
can i buy the underlying shares as the first leg of the option trade.
is this a bad idea or does it not make a difference
how long out should butterfly option trades
1-3 months or more
is it a bad bet or bad trading to trade a butterfly spread for more than one month?
<<<can i buy the underlying shares as the first leg of the option trade.>>>
Sure. A lot of spreads use positions include positions in the underlying security.
By definition a butterfly spread does not include shares of the underlying security, so technically it will not be a butterfly spread is you substitute shares for options, but you can accomplish the same purpose. For example, a spread consisting of
Long 300 shares
Short 6 calls with a $5 strike
Long 3 calls with a $10 strike
would be managed pretty much like a butterfly spread with shares being treated as a $0 strike price call position.
<<<is this a bad idea or does it not make a difference>>>
If you want a zero dollar strike in a butterfly you are likely dealing with potentially very volatile stocks which makes butterflies more dangerous. As long as you understand that, it is not a bad idea. I actually kind of like the idea of not paying any extrinsic value and not having any expiration date on one long leg of a spread.
<<<how long out should butterfly option trades
1-3 months or more>>>
In my opinion three months of less is reasonable as long as you are willing to adjust your position as the situation changes. That is only my opinion, and I have not traded that many butterflies in my life.
<<<is it a bad bet or bad trading to trade a butterfly spread for more than one month?>>>
I would not say it is inherently good or bad.
Opening butterflies for multiple months at once would not be a strategy I would recommend. However, opening a butterfly with different strike prices for a different month as a method of bringing your overall position back toward being delta-neutral seems like a very reasonable thing to do. Just be careful that you do not grow the size of the total position too much.
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I want to comment on one of the other answers you received because it appears to have a very narrow view of butterfly spreads. He is only talking about long (debit) ATM call butterflies. Butterfly spreads can also be short (credit) instead of long. They can be ITM or OTM instead of ATM. Instead of calls they can be puts or iron (both calls and puts).
I agree with his thought that you should believe implied volatility is either too high or too low before you consider a butterfly spread, but that is true for any options trade, not just butterflies..
http://www.sjoptions.com presents Credit Spreads vs San Jose Options’ methods. Here are two ways to manage a directional play, but see which is safer and which can yield more.
Duration : 0:9:45
It seems like it’s a credit spread that doesn’t change in value regardless od the stock’s move. Is it just like a interest free loan? Do you or have you ever actually used one?
A box spread, like a conversion spread or a reverse conversion spread, is an arbitrage position. Excluding pin risk, it creates a risk-free, albeit small, return.
A box spread can be either a credit or a debit spread.
If you create it for a credit, the initial credit plus the interest received on that credit should be enough to pay the cost of closing the spread (the difference between the two strikes) at expiry.
If you create it for a debit, the initial debit plus the interest on the debit amount should be less than the credit you receive when closing the spread (the difference between the two strikes) at expiry.
For all practical purposes you can forget about looking for arbitrage positions in listed options. The only way to create one with a positive return is to leg into it, which defeats the whole purpose of an arbitrage position.
The closest I have every come to creating an arbitrage spread is a split-strike conversion, which is not really an arbitrage spread.
I do know of one option day-trader who sometimes uses box spreads and conversions to protect his positions when he has to hold them overnight.
Most online trading sites like Ameritrade etc, as well as exchanges like CBOE etc allow users to enter multi-legged Options like Bull Call Spreads (Buy lower Call Option and Sell Higher Call Option ). Many even quote the whole spread strategy. The Order is sent down to the exchange as a single atomic orders ( i.e. all legs of the Spread have to be executed or the order is cancelled ). Many exchanges also list Spreads via special symbols to allow exchange traded spreads. The market maker will take the other side of the spread. At expiration, the OCC (Option Clearing ), picks a random entity to exersise the options.
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Duration : 0:5:11
My online broker :Scottrade" told me that i have to own the shares in order to do a "credit spread". I was looking to start trading the SPY and do a credit spread but if i have to own the stock (around$90) i need a lot of money to start. Is my broker telling the truth?
Your broker is being "safe". In any options trading, you do not have to own the stock. At E*Trade, they give you levels. If you’re a level 1 or 2, you need to own the stock before doing a credit spread, at level 3, you do not need to own the stock.
Owning the stock helps to limit your loss and Scottrade does not want to be liable if you default and cannot cover your spread, so they make you buy the stock, but if you have a margin account and a high level option account, you don’t have to, they’ll let you transact the trade, but if you fall below the "margin call" they may execute it to stop the losses. There’s a margin call, and E*Trade doesn’t tell you on the account, but if you talk to them in person, they’ll let you know that there is one, it just doesn’t show up on the website because you haven’t crossed the mark.
For example, if you sold 10 contracts, and you do not have enough cash to cover. There is no "margin" because you don’t have to borrow anything to cover those options, but once it goes pass the mark, BAM! the margin comes in right away.. it’s dangerous to sell naked options… but they’ll let you do it, if you have the experience.
I am new to trading spreads. I know how they work, but
Is there an optimal spread amount (between strike prices) for selling put credit spreads? I know you collect more premium when the spread is wider, though it takes more money to open. I’ve heard it’s better to keep the prices close together (within maybe $5 of each other). But in this case, you collect less premium. Is a wider spread riskier and/or more profitable?
<<<Is there an optimal spread amount (between strike prices) for selling put credit spreads?>>>
No.
<<<I know you collect more premium when the spread is wider, though it takes more money to open.>>>
True.
<<<I’ve heard it’s better to keep the prices close together (within maybe $5 of each other).>>>
First, I suggest you think in terms of percentages instead of dollars. A $90 – $100 spread is a lower percentage than a $40 – $50 spread.
Assuming you are talking about out of the money credit spreads, it depends upon your risk profile. Most traders do prefer to keep the prices fairly close together.
<<<But in this case, you collect less premium.>>>
True.
<<<Is a wider spread riskier and/or more profitable?>>>
Yes. You have more delta, gamma and vega risk. You also have move dollars per contract at risk. In return for taking a higher risk you have a chance to make a higher profit it the spread works well.
http://www.sjoptions.com
See the difference between a Bull Put Spread and a Bear Call Spread. Learn a new twist on the Iron Condor spread. Trading Options instructional videos and education.
Duration : 0:7:44
I am trying to learn more about option trading. I know how to use calls and puts and have made money doing this. But I now want to get involved in straddles, spreads and selling options. So if I am using a straddle how do I unwind from the negative side of the straddle when the stock is moving away from that side? How do I use a spread and how do I sell a seccessful option?
You sell the negative side when the underlying stock has settled into one direction.
For more detailed information on how to make properly use of Straddles, please visit http://www.optiontradingpedia.com/free_long_straddle.htm (I wrote that page.
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http://www.moneyshow.com/video/details.asp?wkspid=BFF12C7722D548A7B546D6813B7BD55D&scode=013355 Thinkorswim’s Don Kaufman demonstrates why he favors trading option spreads rather than just buying a put or call.
Duration : 0:5:51