Option spreads

Does anybody trade option spreads?

I did a spread where I bought 5 of the April '16 115 NFLX call and sold 5 of the Nov '15 125 NFLX call.

Things seem to be moving along ok and I WAS looking forward to being called out. That was till I figured that if I were, my 115 calls would be exercised to satisfy the 125 short call position. If that's what would happen, I would get the difference between the $115 from exercise the calls - the $125 I would be selling those shares for so $10 x 500 = $5000, but the position cost over $8K so I would be taking a loss to satisfy the short calls. Obviously, when I figured that out I unwound the entire trade making a little bit buying back the calls and a bit more selling the calls. I thought that part of the idea was capture the entire money from the short calls expiring while also making money on the long calls. Did I misunderstand how this is supposed to work? Is there a better way to work it?

Any suggestions, insights, opinions are welcomed!

Thanks!

I am not sure if I am the correct person or qualified to answer your question. It appears you were doing some type of calendar spread If I have the terminology correct. First, I no longer trade spreads but did spend 4 or 5 months in 2014 learning to sell premium and test the waters a bit. Most of my focus was on selling vertical spreads as a defined risk trade. Sell the near term option 25 to 45 days out and then buy 1 or 2 strikes out in the same expiration month. I also did a few iron condors (basically two verticals at the same time hoping price remained in the middle). If no one provides any feedback then I would suggest taking some time to visit Tasty Trades website. Those guys do a real good job explaining spread concepts, how to defend your trade, what to look for, etc. You have to get beyond the fact that they are targeting younger folks. Some of the videos have a "School House Rock" feel (for those that understand what I am talking about - might be dating myself). As an aside, I did not quite because the concepts didn't work. TT's style is a lot of work and did not mesh well with GW trading style.

NCT

Thanks, NCT! I'll check them out.

I'm a GW student but I like the idea of hedging.

Thanks!

One point of clarification. The only reason I said TT doesn't mesh well with GW is that TT doesn't believe in seeing a directional change. Most of their trades are based on statistics (directionless). They do not generally believe in being able to seeing a directional change (i.e, random walk). Still good stuff though and the two main guys are former OEX market makers. Also, since TT is playing stats they believe the more observations the better. Most of the people that follow them make 100 trades or more in a month. The 4 to 5 months I tested selling premium I made 45 trades per months on average. I like the old 5 to 10 thought process :-)

All of that said, anyone that is trading GW style and that is attempting to learn (i.e, practicing) trading naked might be able to pick up a few pointers from learning to short (sell) premium. This is the same general thought process as GW selling naked. If you are not qualified to sell naked but have been practicing and want to test the waters you can sell vertical call and put spreads. Same impact as selling naked but you buy the other side thereby defining your risk. You will qualify to sell spreads long before qualifying to sell naked.

NCT

Thanks for the clarification! I'll definitely take a look!

NCT,

Your comment sparked my interest in TT, and I've spent quite a bit of time watching their videos over the last few days. I see what you are saying about them playing the probabilities in their trade and not really being technicians. It's an interesting idea. But it seems like aspects of their approach could be married with GW's approach to improve chances. Maybe that's too much work. The idea being that one could use the signals GW teaches and the probabilities that TT emphasizes to improve the chance of success. What do you think? Maybe I'm too early in my TT exploration and the two methods are too opposite each other.

The other thing: I'm not sure what to make of TT. Are they selling snake oil? Or as I read elsewhere: are they profiting by selling shovels and wheelbarrows to those participating in the Gold Rush? Regardless, I think I'll continue watching some of their videos. The way they teach some things is quite helpful.

Thanks.


NCTrader Wrote:
-------------------------------------------------------
> One point of clarification. The only reason I
> said TT doesn't mesh well with GW is that TT
> doesn't believe in seeing a directional change.
> Most of their trades are based on statistics
> (directionless). They do not generally believe in
> being able to seeing a directional change (i.e,
> random walk). Still good stuff though and the two
> main guys are former OEX market makers. Also,
> since TT is playing stats they believe the more
> observations the better. Most of the people that
> follow them make 100 trades or more in a month.
> The 4 to 5 months I tested selling premium I made
> 45 trades per months on average. I like the old 5
> to 10 thought process :-)
>
> All of that said, anyone that is trading GW style
> and that is attempting to learn (i.e, practicing)
> trading naked might be able to pick up a few
> pointers from learning to short (sell) premium.
> This is the same general thought process as GW
> selling naked. If you are not qualified to sell
> naked but have been practicing and want to test
> the waters you can sell vertical call and put
> spreads. Same impact as selling naked but you buy
> the other side thereby defining your risk. You
> will qualify to sell spreads long before
> qualifying to sell naked.
>
> NCT

Cannot really comment on TT's motives. It was easy for me to accept their hypothesis as I work in a quantitative field where we analyze statistical probabilities. I get what they are saying. I tried to take their self proclaimed motive at face value - to educate the younger generation on how to trade. Could be a ploy to increase bottom line and make money. Since the founder is the same guy that created and eventually sold Thinkorswim for $650M I would like to think his motives are relatively genuine. I will say this. From a trading platform standpoint TOS is the most fluid and easiest to use with respect to entering, analyzing/managing, and exiting trades. Those guys know a lot about options.

To your point about combining the two styles, yes, it can work. In one of these threads I commented about selling Put verticals as an interim step before selling naked. That's where I got the idea. Most folks will qualify to trade complex spreads before selling naked. For those that are tight on funds, there used to be TT education available. If you watched the tutorials, took the quizzes and passed, you would then automatically qualify for some spread trading (defined risk) with TDA. As a bonus you also received a negotiated rate on your commission which was a lot better than someone signing up off the street (maybe 1.50 per contract w/out any flat fees) That is the only way you can make money doing that much trading. You have to have low commissions.

My long winded way of saying... imagine this... stock near Weekly interim support... you know a bounce is coming.. a bounce on weekly can be 1 to 3 candles (1 to 3 weeks)... your smaller charts are all going sideways, turning together... near BBBs and/or other MAs... you know a trade is coming... you get a FP/HRFP to the upside on the 233 and/or Daily.. you know you have a trade... now... sell the Put vertical as taught by TT. From a probability perspective you have a better chance of the Put vertical working than you do the Call trade to the upside. Why? The Call has to go up to make up spread and be profitable In a relatively short amount of time or you lose money. On the other hand the Put vertical simply requires that the stock remain flat or go up. Time decay is working for you. The stock can continue along the Weekly support, but not break, and you still win. If you sell the correct spread as taught then you have an even higher chance of being right. Nothing works 100% of the time but selling options vs. buying will always give you a better probability of success. The downside is that you limit your gains to the amount of premium received. That is why they say selling premium is not sexy but those that do it consistently well can make a quiet fortune. For inspiration Google "Karen the Supertrader". Private individual using TOS to manage a few hundred million. Her success came from learning to sell premium.

NCT