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Max Profit of Vertical Spread
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Created: by Pete Schweaty Attachments:2

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Max Profit of Vertical Spread

  #11 (permalink)
Elite Member
Georgia, US
 
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Pete Schweaty View Post
Thanks. I have just started trading spreads. Live and learn.

That's the name of the game--and as learning happens with both profits and losses, learning with a profit as you're doing here is a good thing!

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  #12 (permalink)
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San Marcos, CA
 
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josh View Post
Your spread is only 1 strike wide, and as such your aggregate delta is just over 2. With a delta this low, you should not expect much profit, even though the underlying is knocking it out of the park. This is one of the downsides of vertical spreads--only as it nears expiration does it really pay off.

@josh,

So the lesson for next time would be to select the nearer expiration to get the time decay and perhaps increase the spread to 2-3 strikes to increase net delta? I haven't figured out how the delta/theta work to generate the profits.

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  #13 (permalink)
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ddnut View Post
@josh,

So the lesson for next time would be to select the nearer expiration to get the time decay and perhaps increase the spread to 2-3 strikes to increase net delta? I haven't figured out how the delta/theta work to generate the profits.

I would not say there is anything wrong with the trade Peter has posted ( if someone has a bullish bias). If Pete has placed the trade 2 days before he posted on the forum, there was a 100 point move which is a small move for DJX, not much to expect. BUT as this is a vega negative trade, notice that on those days VIX (volatility) has been going up, quite the opposite you would expect when price is increasing. This probably have offset the gain from the price increase. As delta is positive, any price increase will increase your profits, as vega is negative any volatility increase (VIX going up) will decrease your profits and vice versa.

The book recommended by Bermudan Option is a must to read, it very well explains the greeks.

In addition a great website that explains the basics: Options Strategies | Learn To Trade Options - The Options Playbook

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  #14 (permalink)
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I agree it was a good trade - $22 profit for $58 of risk is a nice return for a few days work. Still it would be nice to be able to get more when the instrument makes a quick 7 point move (assuming that the trade was entered around $159.) But in exchange for limited risk, we have to accept limited return as well.

It is interesting to note that an increase in volatility actually works against you once the trade is in the money.

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  #15 (permalink)
Trading for Fun
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ddnut View Post
I agree it was a good trade - $22 profit for $58 of risk is a nice return for a few days work. Still it would be nice to be able to get more when the instrument makes a quick 7 point move (assuming that the trade was entered around $159.) But in exchange for limited risk, we have to accept limited return as well.

It is interesting to note that an increase in volatility actually works against you once the trade is in the money.

Yeah. I closed it out for 0.79 on Friday. I picked up the book everyone was talking about. Its a good read so far, very detailed.

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  #16 (permalink)
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ddnut View Post

It is interesting to note that an increase in volatility actually works against you once the trade is in the money.

For vertical spreads yes but in most cases this effect will be minimal. Your main foe will always be delta here (and theta later on kicking in).

I have attached a chart from TOS for a simple vertical spread on AAPL showing the effect of volatility. White line is current position P&L, color lines are the P&Ls when raising volatility by 5% in 4 steps.

As you start to become in the money for the spread vol will work against you and with you when you start to lose money. Again under normal circumstances when price is going up volatility is going down which will further help you. Should you be in the money high up in the curve and price collapsing with volatility rocketing up, well that could hurt in addition to the a potential delta issue.

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Max Profit of Vertical Spread-screen-shot-2014-01-06-9.58.12-am.png  
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  #17 (permalink)
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options

hallo ist hier jemand der german spricht und optionen handelt bzw. verkauft ??????????????

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  #18 (permalink)
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Barolo View Post
hallo ist hier jemand der german spricht und optionen handelt bzw. verkauft ??????????????


versuchen, mit Google Translate, um mit uns zu kommunizieren. Das ist, wie ich schrieb diese Antwort

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  #19 (permalink)
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Bermudan Option View Post
versuchen, mit Google Translate, um mit uns zu kommunizieren. Das ist, wie ich schrieb diese Antwort


du kannst deutsch? give it a demo account for options .......... do it actually with $ 5,000 capital useful options to trade ... which broker can you recommend me

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  #20 (permalink)
Elliott Wave Trader
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I agree with must of the above replies, especially with not going too far out with a spread. However I think spreads are fantastic, especially for swing trades, since the market does have a tendency to go into range conditions with little or no warning. Time is what burns most option traders, rather than direction.

Sent from my SCH-I535 using Tapatalk

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