Comments on: Option Trade: DIA Vertical Call Spread for Credit

By: Joe

Joe — Fri, 01 May 2009 00:56:09 +0000

Alex,
I ran your numbers for DIA. I assumed (WAG) a volatility of 50% for DIA for the calulator (Target Volatility). By the way, our trades are similar in style but, it looks like your probability numbers are a little better than mine. (in your case, 73.3% chance you will achieve max profit)
++++++++

*** Position #1 ***
   Sell 6 Calls : Strike 82.00 Days 15 at $1.86
   Option Volatility = 32.19%

*** Position #2 ***
   Buy 6 Calls : Strike 83.00 Days 15 at $1.38
   Option Volatility = 31.07%

Credit of $2.88
Max Profit $2.88
Max Risk $-3.12
Upside Breakeven $82.47
Downside Breakeven $82.47

Probability retain Target of 0.00% Max Profit : 96.72%

Probability retain 25% Max Profit : 87.57%
Probability retain 50% Max Profit : 79.03%
Probability retain 75% Max Profit : 75.82%
Probability retain 99% Max Profit : 73.30%

Try this calulator, it is pretty cool. Joe

http://www.volatilitytrading.net/option_position_calculator.htm

By: Alex Fotopoulos

Alex Fotopoulos — Fri, 01 May 2009 00:38:41 +0000

I’m with you now. I was mistakenly calling your long 7.50 put a loss when it would actually broke even at $6.50.
The difference then is that the underlying stock in my trade doesn’t have to change in price and even gives me a cushion before I don’t take a full profit. Your underlying stock has to move up some to give you any profit and has to go up $1.00 to give you a full profit.
I agree that yours exposes you to less dollar risk and do you agree that mine exposes me to less probability risk? I could’ve done a lower dollar risk with a call spread on DIA of 80/81, but the probability wouldn’t have been as good for me to take a full profit on it. I prefer higher probability trades.

By: Joe

Joe — Fri, 01 May 2009 00:17:09 +0000

Alex,

If FAZ = 8.00 then my 7.5 Put that I bought expires worthless, I make $1000 for the premium, I lose $1000 on the 9 Put I sold. BREAKEVEN

If FAZ = 6.50 then I make $1000 on my 7.5 Put that I bought, I make $1000 for the premium, I lose $2500 on the 9 Put I sold. LOSS = $500

If FAZ = 3.00 then I make $4500 on my 7.5 Put that I bought, I make $1000 for the premium, I lose $6000 on the 9 Put I sold. LOSS = $500

If FAZ = 10.00 then 7.5 Put that I bought expires worthless, I make $1000 for the premium, the 9 Put I sold expires worthless. PROFIT = $1000

Since this trade is a Bullish bias, I want FAZ to trade above 8.00 and preferably over 9.00. Anything over $9.00 and I don’t care, I made my max profit of $1000.

By: Alex Fotopoulos

Alex Fotopoulos — Thu, 30 Apr 2009 19:58:20 +0000

Joe, You have to do a lot worse to offend me. Please explain how your max loss is $500. If FAZ goes down to $6.55 you lose $500 on the short put and you lose all of your $950 on your long put too. That’s $145 per option x 10 which is a $1,450 loss plus $20 commissions.
If FAZ stays at $8.02, you lose as much on the short as you do on the long so you break even. In my trade if DIA stays flat I take a full profit and I have ~$0.75 cushion if it goes up to break even.
Please correct my logic.

By: joe

joe — Thu, 30 Apr 2009 18:18:17 +0000

Bull Put Credit Spread on FAZ (currently $ 8.02) …..I just did a FAZ trade today where I — Buy 10 May 7.5 FAZ Put @ .95 and — Sell 10 May 9 FAZ Put @ 1.95 (Sold Spread for a Credit of $1000 – 20$ commission) Max Profit = $1000, Max Loss = $500

2:1 Risk reward (instead of a $268/$340 = .78 : 1, no disrespect Alex…)

By: mule65

mule65 — Thu, 30 Apr 2009 17:46:39 +0000

Joe, Can you provide a leveraged ETF example that’s less risky than Alex’s trade? Thanks.

By: Alex Fotopoulos

Alex Fotopoulos — Thu, 30 Apr 2009 14:57:12 +0000

Joe, It’s not a good trade if I was sitting at even money, but my theory that tilted it to the good side was that the call I was selling was out of the money. If I was selling at-the-money I could’ve done better, but the probablility of option assignment on my short call would’ve been higher. I understand your point and don’t enter into many call spreads and even just started with put spreads recently, so I certainly have a lot of room to learn. I almost went with the next strike higher for $0.39, but opted for the higher return, higher risk. We’ll see how this plays out and I’ll learn more as I do with each trade.
I alway appreciate constructive comments. I’ve learned more from y’all than any of you from me most likely.

By: Joe

Joe — Thu, 30 Apr 2009 12:20:04 +0000

Thanks for your blog, it is helpful. I have a question though. If your max reward is 268 and max loss is 340, then your risk/reward is less than 1 which isn’t a good trade (from what I’ve read) Not criticizing just curious. I trade covered calls and naked puts on the 2X and 3X ETF’s and seem to have better risk rewards.