The Surprising Importance of Strike Selection in Vertical Spreads | Selecting an Option Strategy

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Selecting an Option Strategy | 3-28-24
Characteristics and Risks of Standardized Options. bit.ly/2v9tH6D
In their effort to generate profits from rising stock values, some traders will turn to an options strategy known as a “Vertical Spread.” But even the same vertical spread strategy can be carefully tailored to create a very different set of reward-and-risk scenarios, based on the trader’s personal stock outlook and preferences. In this video, we use an example thinkorswim PaperMoney trade to compare and contrast the potential pros and cons of an in-the-money vertical spread versus and out-of-the-money vertical spread.
Many traders have a library of options strategies at their fingertips and know them well. But how do option traders decide which strategies to use? Long or short? Bullish or bearish? In this interactive weekly broadcast, your education coach will talk you through the market considerations that may provide clarity and structure to your options selections. See side-by-side comparisons of both similar and contrasting strategies, and review the pros and cons of employing each in the current market environment. Whether live or archived, it’s always time well-spent!
1023-3KVR
Options involve risks and are not suitable for all investors. Before trading, read the Options Disclosure Document. bit.ly/2v9tH6D
Scripts are for educational purposes only, are not a recommendation, and are not guaranteed for time or accuracy:
Links related to our discussions:
Building an Option Traders Watchlist Session: ru-vid.com...
Market Maker Move link: tos.mx/8BCCvcX
NEW SCHWAB COACHING CALENDAR: schwab.com/sch...
Selecting an Option Strategy Playlist: tinyurl.com/yx...
TRADER TALKS WEBCASTS FROM SCHWAB COACHING on RU-vid: : / @tradertalkswebcasts
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Опубликовано:

6 окт 2024

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Комментарии : 14

@MorselOfBread 4 месяца назад

Thank you!

@tradertalkswebcasts 4 месяца назад

You're welcome! ^CM

@mdc2utube 5 месяцев назад

Very good video - thank you.

@tradertalkswebcasts 5 месяцев назад

Glad you liked it! ^CM

@arnisdaddy7905 6 месяцев назад

Wondering why you didn't put on BOTH trades (ITM and OTM) just to see how they work out?

@tradertalkswebcasts 6 месяцев назад

Good question! I've actually done just that in a couple webcasts in recent weeks. In this case, I just opted to keep it "cleaner" by going with one. But in any case, thanks for watching! ^CM

@HarryLewinASR 6 месяцев назад

Love PM. I'll buy both spreads and a call for good measure.

@tradertalkswebcasts 6 месяцев назад

Good luck! And thanks for watching! ^CM

@2023Red 6 месяцев назад

As a second comment, and thank you for responding to the first, I looked more into PNC. It has excellent fundamentals with an okay dividend. I would not mind owning it and could use ITM short put to buy it on the cheap such as Cash Secured Put. I noticed you seem to like selling near the 30 delta point. From past years, I know you are keen on dividends. And selling covered calls near the ATM delta. Now, staying on topic which is importance of strikes, I like the 30 delta placement for vertical spreads. It gives it a relatively high probability success value. But I wonder about wider verticals. Instead of 155/150, perhaps 155/135. Similar success value and higher credit value, more than twice for the same risk. It is an alternative to offset the risk of the trade going wrong. Your opinion matters! Robert

@tradertalkswebcasts 6 месяцев назад

Thanks for the comments, Robert! But I do need to make a couple clarifications: First, please note that my examples are not intended to demonstrate what I personally "like" or am "keen" on. The trades I demonstrate are always for educational purposes, only. Now, I also need highlight that while a wider spread does allow the trader to retain a larger credit, it also has a substantially larger risk than a narrower spread (Theo Max Loss = Spread width - credit.) I hope this helps, and thanks for watching, Robert! ^CM

@arnisdaddy7905 6 месяцев назад

To me the highest probability in your example is the current price action will retrace to the previous point of resistance and that becomes the new point of support before price action continues to new highs. Probably will go through the move within a few days then will shoot toward your profit goal. This would make Cameron's example very profitable. I might wait until the price did retrace down to the new line of support before putting on the trade.

@tradertalkswebcasts 6 месяцев назад

That could certainly happen. As always, time will tell. But in any event, thanks for the comments, and thanks for watching! ^CM

@2023Red 6 месяцев назад

Cameron. Just an opinion on risk reward relative the strike width. In your example here, selling the 1.55 and buying the 1.50, you have a 5 wide vertical. With a 1.40 credit. In your opinion, is there some rule of thumb to give you an idea of whether this trade is worth making? I am not really into verticals as much as cash secured calls or puts. But in your example, I try to use 50%. In other words, 50% of a 5 wide is 2.50 min credit. Not worth the risk in your example. So could you respond to the basic issue of is there some rule of thumb to assess the risk to reward ratio on any vertical? Thanks Robert

@tradertalkswebcasts 6 месяцев назад

Great question! In brief, as you gain more experience with vertical spreads, you'll begin to notice that reward-to-risk remains essentially constant across trades with similar probabilities. For example, trades that meet your 50% requirement will almost always be found at or very near the at-the-money strikes. As a result, traders may develop more of a preference for specific Deltas than for specific R:R, since consistent Deltas will generally lead to consistent R:R scenarios. I hope this helps, and thanks for watching! ^CM