DionysusToast
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I potentially have quite an interesting set of recurring circumstances to trade using backspreads but I would like the input of those a bit more savvy on options.
For those that don't know - a backspread is a directional trade. You are both the seller and buyer of calls or puts (e.g. for a long, you'd sell and buy puts). The buying & selling effectively make it almost a free trade, or a trade with a slight credit.
If the market goes against you - you don't lose anything. If the underlying moves with you a significant amount, your gains are limitless. The losing area is when the underlying moves with you just a little.
So - here I am with knowledge of when an underlying can only stay where it is or go down. 90% of the time it will stay where it is. 10% of the time it will drop significantly. Of course, perhaps a backspread is not the best option trade as I'm not taking advantage of the fact that a move against does not lose me $$$. There won't be a move against. Anyway - that's a secondary issue.
Here's what I'm struggling with. Let's say for various reasons that the underlying is $48 and that is where it will stay in 90% of cases and in 10% it's likely to suffer a significant loss. The strike prices in this case are $40, $45, $50, $55 etc.
What I am struggling to get my head around is which strike prices to use and whether I somehow end up 'eating' the distance from my $48 stock to the next strike price down if the stock falls, OR if the very fact I place the trade when the underlying is $48, means my profits start to accumulate as soon as it starts falling away fromn the $48.
I'm not even sure if my question makes sense to be honest.
Cheers
DT
I potentially have quite an interesting set of recurring circumstances to trade using backspreads but I would like the input of those a bit more savvy on options.
For those that don't know - a backspread is a directional trade. You are both the seller and buyer of calls or puts (e.g. for a long, you'd sell and buy puts). The buying & selling effectively make it almost a free trade, or a trade with a slight credit.
If the market goes against you - you don't lose anything. If the underlying moves with you a significant amount, your gains are limitless. The losing area is when the underlying moves with you just a little.
So - here I am with knowledge of when an underlying can only stay where it is or go down. 90% of the time it will stay where it is. 10% of the time it will drop significantly. Of course, perhaps a backspread is not the best option trade as I'm not taking advantage of the fact that a move against does not lose me $$$. There won't be a move against. Anyway - that's a secondary issue.
Here's what I'm struggling with. Let's say for various reasons that the underlying is $48 and that is where it will stay in 90% of cases and in 10% it's likely to suffer a significant loss. The strike prices in this case are $40, $45, $50, $55 etc.
What I am struggling to get my head around is which strike prices to use and whether I somehow end up 'eating' the distance from my $48 stock to the next strike price down if the stock falls, OR if the very fact I place the trade when the underlying is $48, means my profits start to accumulate as soon as it starts falling away fromn the $48.
I'm not even sure if my question makes sense to be honest.
Cheers
DT
