ITM Spreads

[VielGeld]

Hey, new guy here. I've gotten into options about 6m ago and been lovin' it since.

Now, I've started looking into spreads, and the idea of buying an in-the-money spread is attractive since it's a nice probability of making some guaranteed income. Only thing I don't like about it is that your losses are higher than ATM or OTM spreads if the underlying heavily moves against you, but I figure having loose stops should be sufficient.

So, a couple Q's:

- What are the best stocks/ETFs/Indexes/etc. for ITM spreads? I'm thinking low-volatility and doing lots of research to find bargains.
- Is it possible to do weekly options on ITM spreads? The ask is pretty much always above $1 (assuming 1 strike interval), so I haven't noticed any chances of making money there. I'm guessing I might have to turn to monthly expirations? If so, I'm not it's worth it.
- Any other considerations from the experts here that I should take into account?

Thanks!

 

[Martinghoul]

Hmmm, I can't say this makes a lot of sense to me... Especially the "nice probability of making some guaranteed income" bit, which is an oxymoron, innit?

 

[VielGeld]

This is the way I see it -- the stock's going for 30 with 1 strike intervals and has low volatility or at least low price movement (maybe because it has a lot of outstanding shares). Then say you notice you can nab a bull call spread for .25c at the 23-24 strikes and it expires within the week.

If your research is sound, and you find the company has solid fundamentals while the market is in an uptrend... Wouldn't you take it? I see that as a gimme, really.

(Note that this isn't really the case since I've noticed you have to look at least 3w to 1m out if you want to get any money on an ITM spread)

 

[QuestOptions]

Hey, new guy here. I've gotten into options about 6m ago and been lovin' it since.

Now, I've started looking into spreads, and the idea of buying an in-the-money spread is attractive since it's a nice probability of making some guaranteed income. Only thing I don't like about it is that your losses are higher than ATM or OTM spreads if the underlying heavily moves against you, but I figure having loose stops should be sufficient.

So, a couple Q's:

- What are the best stocks/ETFs/Indexes/etc. for ITM spreads? I'm thinking low-volatility and doing lots of research to find bargains.
- Is it possible to do weekly options on ITM spreads? The ask is pretty much always above $1 (assuming 1 strike interval), so I haven't noticed any chances of making money there. I'm guessing I might have to turn to monthly expirations? If so, I'm not it's worth it.
- Any other considerations from the experts here that I should take into account?

Thanks!

Like Maringhoul said there is no such thing as a sure winner.
Higher probability just means you are risking more to make less.

In my experience i have found that stops are not very effective in options trading. Options are not linear and movements in volatility can effect the value of an option just as much as movements in the underlying. That doesn't mean you shouldn't have a line in the sand in respect to cutting losses.

The option premium for an option is it's extrinsic value plus it's intrinsic value. At expiration an option is only left with intrinsic value.

intrinsic value: what the option would be valued at if today was expiration.

extrinsic value: the probability, supply and demand element of the option value.

for example:
days to expiration: 30 Underlying: 100 IV%: 30
95 call option value: $6.50 ($5 intrinsic + $1.50 extrinsic)
100 call option value: $3.49($0 intrinsic + $3.49 extrinsic)
105 call option value: $1.61($0 intrinsic + $1.61 extrinsic)

as we get closer to expiration the option will reach it's intrinsic value.

Volatility plays a major factor in the value:
for example:
days to expiration: 30 Underlying: 100 Option: 95 call

Option value @ 10% IV :$5.12 ($5 intrinsic + 0.12 extrinsic)
Option value @ 20% IV: $5.64 ($5 intrinsic + 0.64 extrinsic)
Option value @ 30% IV: $6.50 ($5 intrinsic + 1.50 extrinsic)
Option value @ 40% IV: $7.48 ($5 intrinsic + 2.48 extrinsic)

I can add more to this once get some feedback from you.

 

[QuestOptions]

another thing you can do is to look at the synthetic equivalent of your position.

lets say xyz is trading at 100

the trader buys the 95 call and sells the 100 call (bull call spread)
95call = + 6.06
100call= -2.90

the spread value is 3.16. So the trader is risking 3.16 to possibly make 1.84.

lets look at this on the put side:
the trader buys the otm 95 put and sells the atm 100 put.
the 95 put= +1.06
100 put= -2.90

the overall spread is a credit of 1.84.....this is the same as the profit potential of the 95c/100c spread.

So by selling the put spread your profit potential is 1.84 and your risk is
(5- 1.84)= $3.16

In many markets otm strikes offer greater liquidity than itm strikes. So if you are really in love with the strategy you might find better luck by selling the put spread. They are synthetically the same position.

 

[VielGeld]

Yes, I've been looking into Credit Spreads too, and they vaguely seemed more appealing, so your breaking-down of the elements is much appreciated. Open interest, liquidity, and opportunities for purchase are definitely not factors in the ITM Spread's favor.

I thought this strategy would be a good one. Seems I have much more to learn.

 

[QuestOptions]

Yes, I've been looking into Credit Spreads too, and they vaguely seemed more appealing, so your breaking-down of the elements is much appreciated. Open interest, liquidity, and opportunities for purchase are definitely not factors in the ITM Spread's favor.

I thought this strategy would be a good one. Seems I have much more to learn.

I think if you understand the nature of how options move it will be helpful.
Examine how a single option(long call, short call, long put, short put) moves against
1) time to expiration
2)different implied volatility levels
3)movements in the underlying

once you feel comfortable with that
look at single options at varies strikes
( itm long call, otm long call, atm long call)
(itm long put, otm long put, atm long call)
(itm short call, otm short call, atm short call)
(itm short put, otm short put, atm short put)

see how all these options move against:
1)time to expiration
2)various implied volatility levels
3)price fluctuations of underlying asset.

understanding this will give you a great advantage when you are trying to construct strategies. Strategies for the most part are just a combo of different calls and puts...

 

[Martinghoul]

As QO suggests (and I second), you, basically, need to play with the various parameters of your strategies. I have suggested this before, but the best way to do all this is to write a simple option pricer in Excel and then add scenario analysis features to it. It's very simple to do and will provide a LOT of useful insights.

 

[tripleogstar]

what a foolish thing to say that you can make guaranteed income from ITM call spreads, why don't we all do it and become billionaires. dumb ass. First of all , not all ppl are as dumb as you and what market maker would sell you an ITM call spread for less than fair value? In equities the value of an ITM call spread will not have fair value of the maximum p/l (e.g a 100 point ITM call spread will not be worth 100 before expiry) this is due to the cost of carry. Just do your homework coz you sound like a bit of a prick saying such nonsense on here

 

[VielGeld]

[...] coz you sound like a bit of a prick[...]

Erm... Same to you?

In any case, I only meant guaranteed in the sense that the income is fixed and known right at the outset like it were a credit spread. The fact it is ITM and using weekly expirations means the probabilities are in your favour.

There is the fact that you stand to actually increase your risk because ITM spread are large-debit (at least .75-.85c for 1 interval and that's just 2-3 strikes ITM), so you lose much more if it blows against you (this last week would have been a good example if you were bullish).

That said, I've been looking into credit spreads since QO mentioned them and I think they're more appealing since time value and volatility now work in your favour on top of being as OTM as you like.

 

[DailyTA]

You don't have a high probability of making money... You just have a higher probability that some money will be left in the end. I don't like ITM spreads because it doesn't offer good return on risk. My directional trades are long slightly OTM on higher beta stocks with liquid options. My market-neutral / contrarian trades are .20 to .30 Delta OTM Short spreads on low beta stocks and index etfs (SPY,IWM). Tweet me with any other questions: @DailyTA_com



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Hey, new guy here. I've gotten into options about 6m ago and been lovin' it since.

Now, I've started looking into spreads, and the idea of buying an in-the-money spread is attractive since it's a nice probability of making some guaranteed income. Only thing I don't like about it is that your losses are higher than ATM or OTM spreads if the underlying heavily moves against you, but I figure having loose stops should be sufficient.

So, a couple Q's:

- What are the best stocks/ETFs/Indexes/etc. for ITM spreads? I'm thinking low-volatility and doing lots of research to find bargains.
- Is it possible to do weekly options on ITM spreads? The ask is pretty much always above $1 (assuming 1 strike interval), so I haven't noticed any chances of making money there. I'm guessing I might have to turn to monthly expirations? If so, I'm not it's worth it.
- Any other considerations from the experts here that I should take into account?

Thanks!

 

[xx765]

with a lot of underlying, say an total return index, an ITM spread is just the same as the OTM spread (put-call parity), only harder to trade as ITMs are quoted wider than the OTMs on the same strike.

where put-call parity doesnt apply, it's only tricker to trade ITMs.

All in all, not a good idea.