Vertical Debit Spreads 101
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- Опубліковано 9 лип 2024
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I know this is five years old, but I have watched so many from this series and it's all gold. I may not use all these strategies but I've learned so much, even on strategies I already used. 100% gold
Best debit spreads explanation! Thanks
Mike, I truly like how you incorporate the concept of getting back the extrinsic value you paid via the short (credit) wing! Gives me just that much more 'edge' -- thanks!
this is still such an amazing series! I learned all about options trading from you guys
Very straight forward and comprehensive! I must say as well that Mike totally rock these lessons, very fluent explanation from beginning to the end, this shows he really knew his sh... Well done sirs!
Thank you! Glad you enjoyed it!
Why not collect the gain on the short option when the spread goes against you then resell the same option before closing the trade out. I saw this after I took 1.0$ loss on 2.15 debit spread buying the short back I could have made $290, then resell the same option at same price on the short side! Resulting in a net gain of 190$ when I close out the spread for $1.15!
Thank you, Mike..
very clear and concise explanation. Thanks!
Lots to unpack in small video. Great information and very helpful. Keep it up!!
what a great explanation! you rock man! thank you so much!
I love how mike's hair is always so put together in all his videos.
Yeah he doesn't care anymore these days smh
Two key things missing from this video. If you are doing a debit spread the expiration should be over 3 months to avoid too much decay. Also it is best to open a debit call spread after the stock has been dropping for a while to get the least premium. If a stock moved hard to the downside you might find that calls you bought when the price was well above the bottom go profitable when the stock simply levels out. Debit long term expiration/credit shorter term expiration.
Best explanation I finally freaking got it! Thank you!!
Thanks Mike !!
Another great explanation. Answers so many questions I was wondering about including when to employ this strategy.
The video is very informative and shows value in the way it teaches is the ins and outs of options. The only way for investors to make money is to employ their own strategy and work out the number themselves.
Well done mike the whiteboard!
My question for you is: how can I mix my backtested win% to the POP from options calculation?
hmm that's a tough one - POP is forward looking so it's hard to take historical data and sprinkle it with a future POP. We typically backtest using options that give us a pretty static POP, and then compare that to our actual win rate, average P/L etc. So to answer your question, you may be better off thinking of strategies that give you a certain POP and then backtesting those.
Thank you, 🙏
How do we exit these calls like spread butterfly iron.condors? Seems comicated as buy price does not say in tos
Thanks Mike
if the underlying rises to long leg before expiration can you close it for max profit immediately?
You guys ROCK!! 🚀💰
YOU rock!
Nice explanation man
Thanx maikeee
Hi Mike, Great video. I'm in a debit call spread with a max profit of 3.5. In the short term the trade goes against me and the short side becomes more valuable than the max profit. The trade is now turning around and heading in my favor. I buy back the short and let the call gain back the loses and make a nice profit on it. Is there anything wrong with this way of thinking?
Hi Mike, at 10:50 you said when you sell a Put you want the shares to go down in price. Actually, when you sell a Put you expect the price to stay the same or rise. Did I get something wrong?
That section is in reference to a long put spread, which is a bearish trade. The long option will have a higher delta than the short, so you'd want the spread to go fully ITM to reach max profit at expiration, meaning you want the stock price to go down.
You are correct in saying that when you SELL a put, you want the stock price to rise or stay the same.
Nice job.
5;25 more we pay higher pop
8:50 intrinsic drives price at expiration
profit
If the price goes above the calls you sold at 105, wouldn't you be assigned the shares? Or does the fact that you have the long call cancel that out?
you COULD be assigned IF extrinsic value is extremely low, which means you're at expiration or you're so far ITM that you're near max profit anyways, but even if you are assigned, the long call offsets the risk in the short shares completely as long as you own it, so the risk doesn't change.
Hi Mike, I just came across your video and wanted to say thanks. I have got a 1 lot of long put position on SPY that has taken some losses. If I add a short put at a lower strike now I would make it a debit spread, right? I understand the premium collected from the short put will help reduce the loss,..but what if it takes 10 lots of short put to fully erase the loss. Am I still hedging my position sufficiently? and if not, can I simply open the 10 lots and then aim to close them early so I can make back the profit while minimizing the downside risk?
Glad you enjoyed it!
That's correct - selling a further OTM put against your long creates a debit spread, and reduces the cost basis on your long option that you bought. If you sell 10 puts against your 1 long, that could erase the loss IF the options stay OTM. The problem is that if they don't, you now have 900 long shares of naked exposure. If the stock tanks, you'll take on significant risk. It's a very risky over-hedge, but totally up to you!
tastytrade hi mike that is exactly what I expected to hear. What happens if I sell 10 sequentially.. say if I open 1 short close early then open another one, and then rinse and repeat so I maintain a 1:1 hedge in my vertical. Would that help?
Glad to help! That would ensure that you don't have downside risk, yes. As long as you keep it 1:1 and don't sell a put above your long put, you maintain risk equal to the debit paid for the long, less the credit received from any short you sell against it. Be sure to account for debits you pay back to close the short if you do so.
@@tastyliveshow Mike. This is a game changer. Now I leave my long positions as they are and mirror them with 1:1 short positions. Instead of waiting for the spread to profit, I aim to close the short puts early then reopen them, rinse and repeat. Although it's a slow process but little by little I begin to convert these long puts into free positions. thank you!
Geez I read that as mike and his water board, lol
If the POP for the put debit spread is 54% of making 1 cent, then is there only a 46% chance of losing 1 cent? Since you can calculate the P50, then why can't you calculate P25, P75, P100?
Do you get out once the top strike price is reached? is that the max profit?
That is when max profit would be reached at expiration when all extrinsic value has evaporated - you can close the trade at any time prior to that though
when should one book profit in spreads?30% of max profit? is there any statistical study like you guys did for iron condor?
We like to stick with 50% for these - up to you though!
"the most you can lose is the amount you paid for the spread"
my early assignment begs to differ
Risk doesn't change at all - your buying power does. As long as you hold the long option with the short, you can actually make more money with stock + long option, and in some cases a losing trade can turn into a winning one if the counter-party burned a ton of extrinsic value when exercising which would be a mistake on their part.
The risk in spreads getting assigned is when you hold a spread THROUGH expiration and the stock slides ITM and your short is exercised and your long is not - then you're just long or short stock on Monday. How do we prevent this? Just close/roll the trade - no closing commissions at tastyworks
How do you get approved for options on tastyworks? It says that I’m unable to do vertical debit spreads yet
Shoot an email to support@tastyworks.com and they can check it out!
very nice explanation mike,can you also guide whether we shall let the spreads expire automatically at expiry or shall we square the spread at atm .which one is advisable.
We typically close trades prior to expiration to secure some % of profit, but also to avoid assignment fees. An ITM vertical spread will still be exercised by the broker, resulting in assignment fees on each leg. It's usually less expensive to just close the trade - tastyworks.com has no closing commissions for equity option trades.
Mike, I know you can't "represent a Trading Platform"...I wish to move from the newbie TD Ameritrade site to the more "Option Friendly" site "ThinkorSwim" site; more sophisticated, but better in the long run sir. Can you offer anyone's site to learn how to do debit spread on this site I wonder? Cheers. Also, what do you think of Chuck Hughes' methods please?
Hi Mike, what do you think of David Jaffee?
Great video! I like how you were able to set the put debit spread. Are put debit spreads a better vehicle for the set up then call debit spreads? If I have 100 free trades could I profit 25$ on this type of set up repeatedly?
Thanks for tuning in!
Not necessarily - put and call debit spreads are generally 50/50 shots that we use in low IV environments or to get a taste of larger priced underlyings that we can't afford to trade with naked options.
It's hard to say if you could be consistently profitable - it would take a lot of directionally correct trades, which is something we try to avoid, as we don't know where the market is going!
So do you have to let it expire to make profit?
You do not - you can sell out of debit spreads at any time.
Great explanation to listen to over and over and over again...until this sinks in for newbies like me who have only dealt; luckily with mostly wins on Puts/Calls only. Only by luck!
Is there a site where one can learn to use this strategy from experts who use the platform of
TD Ameritrades : "Think of Swim" for Debit trades....anyone please??
why can't you close a debit spread for more than the width of the strikes? (ie. intrinsic + extrinsic)
Because the counter-party would be buying it for more than it would be worth at expiration if it's still completely ITM. Basically a full risk trade.
@@tastyliveshow ah got it. thank you
what is max gain? difference between strikes diveded by price paid = MAX NET RETURN
Difference between strikes - debit paid = max profit.
Is buying ITM debit spreads a good idea? For example the stock price is let’s say $100
I buy a call at $50 and sell a call at $90 ? How does this work ? Why is it always we like to buy itm and sell otm?
It's the same trade as selling a 90/50 put spread, except the ITM calls will be much less liquid, which is why we go with the put spread in this example instead, as they'd be much more liquid.
I don't understand why you don't like buying otm/otm debit spreads. If you are convinced a stock will rise, and buy a long term spread with a pop of 0.10, you can still double your money if that pop goes to 0.2, even if stock doesn't reach the first strike price, assuming some time left to expiration
Then why I lost money when my price target was hit?
If the stock blows through $105, can I not simply sell the CALL option, take the profit and let the PUT option expire?
What section are you referring to? The call spread and put spread examples are separate in this video.
Isn't the breakeven slightly above $100 because the buy premium is more than sell premium?
Close - it's because the buy (long put) EXTRINSIC value premium is LESS than the 95 short put.
If the stock is at 100, and I buy a long put at 107, I know the option has $7.00 of intrinsic value. If it's trading for $8.20, that means it has $1.20 of extrinsic value.
If I then sell a put for $1.45 that is out of the money, all of that premium is extrinsic. Consider the $1.45 I'm collecting vs the $1.20 in extrinsic I'm paying for in the long, and you have a SURPLUS of extrinsic value of $0.25. That is why the breakeven is $0.25 better than the stock price in this example.
So for example if I buy a vertical spread I pay 100 dollars for the spread my max! Profit is 200 I decide to sell at 200 do I keep the 100 I also invest it making a 300 dollar profit. Or do I lose the 100 I paid for the spread. Please let me know I have called TD and I have got 2 different answers some say yes some say no please help thanks.. 🙏🏽
If you bought a vertical spread for $1.00 and your max profit is $2.00, that would mean you have a 3 point wide spread. If you sell it for $3.00, then yes you would profit $2.00 and get back your $1.00 you paid at entry.
However, if you sold it for $2.00 like you said, you would only profit $1.00 as you paid $1.00 on entry and only sold it for $2.00.
I hope this helps!
Thank you very much I will try it again.
So if the other leg closes then what?
Can you rephrase or shoot an example to support@tastytrade.com?
Can we sell a call without holding underlying stock ?
Yes you can, if you have the permission to do so from the broker. www.tastyworks.com is what we use these days!
You need margin account for it.
wow im lost lol
great info ---you should try a different hair style--bangs perhaps
LOL
If the stock drops Doesn't he has to sell the stocks at expiration with the 105 he sold ? If buyer want it ? Too much risk.
Can you rephrase or send an example to support@tastytrade.com?
Max profit would be 10.00 not 5
for the 10point spread, you paid $5, so the max profit is $5
His forehead