Hy every body. I now was reading the whole thread about credit spreads and I am missing a few things !
A : Where and when do you implement this strategie in the market ? Can somebody show a chart at which moment he is going to do that and make some notice on the chart why here at this moment and not there ?
B : Are there maybe some preparation in advance possible for this strategie ?
D : What do I do if the trade goes against me ? What are the correction strategies for those credit spreads ?
Regards
DanPickUp
--------------------------------------------------------------------------------------------------------------------------------------------------------
To Pavan
Deep in the money put acts the same like a future. Every move the future makes is nearly equal to the move the deep in the money put makes. Your question does not make any sense to me ? Trade the future or trade the deep itm put. If you talk about a very speciell situation which has occurred : please show a chart and explain the problem .
Regards
DanPickUp
hi DanPickUp. Here are my views on the points that u have raised.
Sorry I couldn't pose a chart here.. but feel free to post the chart if you have something specific in mind and we can discuss it. So read on..
A : Where and when do you implement this strategie in the market ?
SPREADs are directional strategy. But they are extremely flexible. It in can be created for all type of market condition. It all depends on
- What is your directional call (bullish or bearish)
- which option type (CALL or PUT) you selects
- Which strike price is sold and which one is bought.
If you are bullish, buy lower strike, and sell higher strike. CALL or PUT - doesnt matter at all. The bullish spread with CALL will be a debit spread (where u need to pay the net difference to open the position). A bullish spread created with PUTs will be a credit spread (where u receive the net premium today)
I have given an example of bearish spread in the initial post of this thread.
What about you creating a bullish spread with 4300 /4400 PUT if you have bullish view on the market, and posting here for discussion?
Or creating a bearish spread with 4700 / 4600 CALLs ?
A : Can somebody show a chart at which moment he is going to do that ?
Charts job in option trading is limited to the extent of giving the view on market and possible support / resistance levels. After that it is upto the selection of right strategy, right strike prices and creating a profitable trade which has acceptable reward/risk ratio for trader.
Strategys risk graph will be more useful then chart in analysing the spread.
B : Are there maybe some preparation in advance possible for this strategie ?
The preparation for strategy is everything. When I was just beginning with this, I used to plan the strategy as mentioned in my initial post about planning Spread trade. One needs to look at all those factors like Breakeven, max profit, max loss, Stoploss points etc. With experience it gets easier and now I can do the calculation on the fly and evaluate multiple spreads against each other. With practice, it starts getting easier.
B : With other words : Can I start with a simple call or put buy and if the market moves a certain distance I sell one of those options or is this completly the wrong way ?
Nobody stops you from doing this. You can very well do this i.e. create 1 leg of spread now and another leg later / tomorrow etc. (Called legging-in option position) You need to keep in mind that till the time second leg is not created, u carry all the risk (time decay, getting direction wrong, volatility drop etc) and reward (no loosing leg if market moves in your favour) that comes with Simple Buy/Sell option strategy.
This approach can be good as well as bad ,depending on how u are approaching it. If you know what u are doing and have planed your approach in advance then it is great. Else if u have just bought the option and when it goes against u then trying to safeguard it by converting it in spread.. then it is wrong approach.
My suggestion to beginners is that leave legging-in for later stage. Start with proper approach and take limited risk right from start.
C : If it is the wrong way, what kind of options do I choose to implement the trade in the market ( compare to the chart you show ) ? Do I take atm, itm or otm options and last :
Please refer to this post
http://www.traderji.com/options/31874-linkons-breakout-system.html#post348923
where I have described about selecting ITM/OTM options to create spread.
Options trading spoils us by giving so many choices.. If we know what we want then more choices you have better it is, but if we dont know what we want, then we feel uncomfortable with too choices.
D : What I do if the trade goes against me ? What are the correction strategies ?
If you have done proper trade planning, then this question is irrelevant. You already know your game plan if this trade goes in loss. You would have already planned your Loss exits in advance. If not then, my suggestion is close the trade and take loss. It is easier to finding new profitable opportunity rather then putting constraints around you (2 options strike, 1 loosing trade ) and trying to save a loosing trade. Options trading does give u many choice but it is not worth the effort. It is easier to accept the loss as loosing trade and move on.
In my view, adjustments should be done to
1) reduce the risk of a trade or
2) to protect profit
Not to turn a loss into profit.
Happy Trading.