NexusFi: Find Your Edge


Home Menu

 





Max Profit of Vertical Spread


Discussion in Options

Updated
      Top Posters
    1. looks_one Pete Schweaty with 6 posts (0 thanks)
    2. looks_two Tradelog with 3 posts (3 thanks)
    3. looks_3 josh with 2 posts (1 thanks)
    4. looks_4 Barolo with 2 posts (0 thanks)
      Best Posters
    1. looks_one Tradelog with 1 thanks per post
    2. looks_two Bermudan Option with 1 thanks per post
    3. looks_3 gfmatt with 1 thanks per post
    4. looks_4 josh with 0.5 thanks per post
    1. trending_up 7,188 views
    2. thumb_up 7 thanks given
    3. group 7 followers
    1. forum 20 posts
    2. attach_file 2 attachments




 
Search this Thread

Max Profit of Vertical Spread

  #11 (permalink)
 
josh's Avatar
 josh 
Georgia, US
Legendary Market Wizard
 
Experience: None
Platform: SC
Broker: Denali+Rithmic
Trading: ES, NQ, YM
Posts: 6,216 since Jan 2011
Thanks Given: 6,752
Thanks Received: 18,136


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!

Reply With Quote

Can you help answer these questions
from other members on NexusFi?
Deepmoney LLM
Elite Quantitative GenAI/LLM
ZombieSqueeze
Platforms and Indicators
New Micros: Ultra 10-Year & Ultra T-Bond -- Live Now
Treasury Notes and Bonds
Better Renko Gaps
The Elite Circle
My NT8 Volume Profile Split by Asian/Euro/Open
NinjaTrader
 
Best Threads (Most Thanked)
in the last 7 days on NexusFi
Get funded firms 2023/2024 - Any recommendations or word …
61 thanks
Funded Trader platforms
39 thanks
NexusFi site changelog and issues/problem reporting
26 thanks
GFIs1 1 DAX trade per day journal
18 thanks
The Program
18 thanks
  #12 (permalink)
 ddnut 
San Marcos, CA
 
Experience: Intermediate
Platform: NinjaTrader
Trading: 6E, ES
Posts: 54 since Nov 2010
Thanks Given: 125
Thanks Received: 33


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.

Reply With Quote
  #13 (permalink)
 Tradelog 
Budapest Hungary
 
Experience: Intermediate
Platform: TOS, Interactive Brokers
Trading: Options
Posts: 13 since May 2012
Thanks Given: 3
Thanks Received: 9



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

Reply With Quote
Thanked by:
  #14 (permalink)
 ddnut 
San Marcos, CA
 
Experience: Intermediate
Platform: NinjaTrader
Trading: 6E, ES
Posts: 54 since Nov 2010
Thanks Given: 125
Thanks Received: 33

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.

Reply With Quote
  #15 (permalink)
Pete Schweaty
Baltimore MD
 
Posts: 54 since Jun 2013
Thanks Given: 12
Thanks Received: 13


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.

Reply With Quote
  #16 (permalink)
 Tradelog 
Budapest Hungary
 
Experience: Intermediate
Platform: TOS, Interactive Brokers
Trading: Options
Posts: 13 since May 2012
Thanks Given: 3
Thanks Received: 9


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.

Attached Thumbnails
Click image for larger version

Name:	Screen Shot 2014-01-06 at 9.58.12 AM.png
Views:	222
Size:	69.4 KB
ID:	132726  
Reply With Quote
Thanked by:
  #17 (permalink)
 Barolo 
mülheim an der Ruhr germany
 
Experience: Intermediate
Platform: NinjaTrader 8
Broker: CQG
Trading: All Futures
Posts: 123 since May 2013
Thanks Given: 8
Thanks Received: 4

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

Reply With Quote
  #18 (permalink)
 
Bermudan Option's Avatar
 Bermudan Option 
Chicago, Illinois
1% better Daily
 
Experience: Beginner
Platform: TradingView
Broker: ThinkOrSwim
Trading: Forex, Stock & Options
Posts: 673 since May 2011
Thanks Given: 838
Thanks Received: 471


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

Visit my NexusFi Trade Journal Reply With Quote
  #19 (permalink)
 Barolo 
mülheim an der Ruhr germany
 
Experience: Intermediate
Platform: NinjaTrader 8
Broker: CQG
Trading: All Futures
Posts: 123 since May 2013
Thanks Given: 8
Thanks Received: 4


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

Reply With Quote
  #20 (permalink)
 
deefster's Avatar
 deefster 
Denver
 
Experience: Intermediate
Platform: TOS, TDA StrategyDesk
Broker: TD Ameritrade
Trading: equities,options
Posts: 14 since Dec 2009
Thanks Given: 10
Thanks Received: 9


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

Reply With Quote




Last Updated on January 17, 2014


© 2024 NexusFi™, s.a., All Rights Reserved.
Av Ricardo J. Alfaro, Century Tower, Panama City, Panama, Ph: +507 833-9432 (Panama and Intl), +1 888-312-3001 (USA and Canada)
All information is for educational use only and is not investment advice. There is a substantial risk of loss in trading commodity futures, stocks, options and foreign exchange products. Past performance is not indicative of future results.
About Us - Contact Us - Site Rules, Acceptable Use, and Terms and Conditions - Privacy Policy - Downloads - Top
no new posts