Thank you for the response, please, refer the attached .pdf file. (they said it is richman vehicle, only few people knows and 4th level advanced option strategy).
I don’t have any knowledge on option trading. I thought of taking advice from option experts.
Contrary to what the pdf claims, the options credit spread is very well known, not just by a privileged few but by anyone who can look it up on google and surf to investoppedia, wikipedia, etc. It’s a decent relatively conservative option strategy. But like other option strategies, it’s nt a slam dunk. The pdf gushes about how you make money as soon as you enter the trade. Well, yes, you do – on paper. It doesn’t become cash until you close the positions and the journey from open to close is where the risk is. As with all other option strategies, your result will depend on the movements of the underlying stock.
Frankly, I’m not at all impressed with the pdf. They’re selling options education. That’s fine. It’s vital if you want to trade options. But if you want to go that way, I’d search for an outfit that talks about education, not nonsense about getting in on secrets known only to the rich etc. etc. etc. The CBOE web site is a good place to start. You may also find good material on the web site of an on-line broker with a strong options emphasis. Bernie Schafer talks a lot about options but it’s hard to evaluate the merits of what he actually offers because his sales efforts are so over the top. Whatever you do, know that option trading, like anything else, requires effort and entails risk. Stay away from anybody who tries to bury those realities.
No, you can’t earn 20% / month without being very likely to lose your entire portfolio. I follow several the best options traders funds. Risk management is paramount. Most options funds lose everything. The firms that survive over 5-10 year periods are earning (generally) 12% to 17% (after fees) PER YEAR, or 16% to 21% pre fees PER YEAR, and these are the top 10% of pro’s.
If you move forward, don’t put more than 1-2% of your money into options until you’ve studied it and practiced for 3 years. That’s my advice. I’ve seen a lot of people lose everything. Even traders ‘from Ivy leagues’ and top investment banks who have been at it a decade who were known as the ‘best traders at their firm.’ It’s happened to friends of friends (one guy lost $6MM in the tech bubble, for example).
As the former head of options trading for EF Hutton and Co. in Beverly Hills, CA back in the 80’s I can tell you in no uncertain terms the answer is “NO”. Since you’re new to options you should avoid them completely. The only options trading I do, if you can call it that are the purchase of LEAPS every 4-5 years or during the bottoming process of a bear market.
Last night while listening to Sirius I heard an ad for a “free book on the stock market by a former Wall St. Insider” This is the type of thing you hear after a prolonged bull run and a reflection of investor exuberance. The only people who make money on these things are the authors.
I cannot speak based on any real-life experience but I can tell you that I cannot (and probably never will be able to) trade options.
To understand the basics one needs a pretty advance level of mathematical understanding. I think before a person could begin to think about investing in options one should first understand the Black-Sholes (or Black-Sholes-Merton) formula for pricing the option. Then before investing in an option one would have to have a reason to think that this particular equity in this particular situation will not follow the assumed log-normal distribution. Remember, that the Nobel Prize was awarded for this not too long ago.
It is my belief that some people can do this. Many who do this probably specialize in certain situations like buy-outs where the expected future price of equities will not follow the usual distribution. For the most part they are mathematical geniuses or have a department of mathematical geniuses working for them. For sure, the person you buy the option from will understand the math. Me, I’m still not sure I understand the log-normal distribution.
Edit: Thinking about what I wrote, I have to ask myself what makes me think I can invest in stocks. Hmmm. I do have the help of some pretty smart people (at P123) and, properly done, a simulation is a perfectly valid statistical tool. Besides, if it is truly an efficient market, then what I do should not cause me to perform worse than the market either: I’ll be out some time and the cost of commissions.
The biggest problem with credit spreads like this in my experience (I have dabbled, as a retail investor mind you) is risk control… sure you pick up 10-20% a month on capital at risk for a few months, but then every once in awhile you get caught by a big move, and when that happens it can wipe out the majority of your capital. Can you make a net profit off this strategy? Maybe - I suspect from an efficiency perspective it comes out neutral (minus fees) - in other words the expectation would be that you double your money and then lose all your cap at risk every N months, and to profit you have to somehow identify cases where implied volatility is overpriced relative to true volatility and sell those credit spreads to tilt expectation in your favor. If you can somehow pull that off as a retail investor then kudos to you, but certainly your net return would not be 10-20% a month. Also if you hope to run this type of strategy for any extended period of time you can’t risk 100% of your capital on every trade.
Thank you for the responses with knowledge. I definitely stay away from option trading and option education.
How come US has trade training university/institue with false promise / mis-leading objective such as financial freedom in few years time even for novice (without any regulation)
tradestation gives credit of 125% towards trading fees if enrolled courses with the above said training institute. ie., $1000 course fees; the tradestation will credit $1250 towards trading fees.
I will learn portfolio123 to become good investor rather than option trader.
Keep in mind it is not an all or nothing proposition. Good options traders I know often use a combination of these with other strategies that tend to profit when these do not.
Dwpeters said it exactly write. There are no free lunches. However, options writers are generally money makers, until they are not. If you have a large enough bankroll, you can risk $10,000 every week to write put spreads and collect a decent living. The trick is to not think about it and do it all the time. When you start to get emotionally involved, you will get run over.
Agreed with most of the previous comments…these strategies work until they don’t.
The credit spread you describe is directionally biased - you asked how this strategy can fall apart, and it loses money when the underlying stock moves through the short strike toward the long strike. In your example, if the stock goes below $80 and toward $75 (or lower), this strategy will be a loser. It should be easy to envision a scenario where this would happen.
I would encourage you to do a break even analysis and plug in the numbers to a calculator to view a chart of the profit and loss. There are many free tools online that allow you to graph the P&L, which will help you understand the risks.