Target Higher Yields and Limited Risk with Vertical Option Credit Spreads


Aug

11

2017

Target Higher Yields and Limited Risk with Vertical Option Credit Spreads

Part of our Seminar Series, Michael Gross describes selling put options or selling call options as part of a vertical credit spread. Also learn how selling this kind of option credit spread in commodities such as corn or crude oil can be a high percentage option trading strategy that can also serve as a diversified income strategy.
  1. Chris Aubrecht Says:
    August 25, 2017 at 1:39 am

    Hi Mr. Gross — appreciate the video as always.

    How frequently do you actually find worthwhile vertical spreads as opposed to markets that are better positioned for naked or strangles? Do you generally find at least one market per month…12 possibilities a year…8…6?!

    I ask because I very, very rarely find that that the risk/reward is worth it when I compare it to simply selling naked or strangling the market, with the ability to adjust those positions and get equivalent net premium with a good deal more distance.

    Also, on the potential for a slightly better ROI with verticals, I haven’t really found that to be the case either, because, as you mentioned, what you gain by what appears to be up-front better ROI, you often sacrifice in that you have to hold until/near expiration. With the strangles/nakeds, while the ROI looks to be worse up front, as you know, many times you can exit out of an initial 4 month option sale in 3 months, 2 months, sometimes even within 1 month, for a good portion of the initial premium. That makes ROI explode!

    I can see the theoretical benefit of the vertical, but usually the “protection window” doesn’t really make me feel very protected because it is several times what I’d ever risk on a position in the first place!

    Curious as to your thoughts about that and, ballpark figure, what percentage of your overall trades are vertical spreads each year!

    Thanks so much!

    -Chris

    • Michael Gross Says:
      August 30, 2017 at 2:24 pm

      Hello Chris,

      Thank you for a very astute question.

      Some of this is proprietary and not something I really want to discuss in a public forum. However, I can give you a general answer. I don’t want to “cop out” on our question. But it really does depend on volatility. When markets are experiencing low or moderate volatility, its harder to write credit spreads. When volatility jumps, or when historical volatility remains leftover in a market – that is the time to write spreads. You’re difficulty in finding viable spreads over the last 6 months or so is not surprising. Many commodities have had lower to moderate volatility. As you have found, however, there are other ways to make money in these markets.

      That being said, James and I both feel that the tide is turning as we head into fall. We’ve seen signs that volatility in markets such as energies and grains (this summer) is on the rise. This could open the door for a better spreading environment this fall and winter.

      In the meantime, selling options is about taking what the market gives you. If the naked and strangles are what it wants to give, you’re doing the right thing by taking it!

      Best of luck to you.

      Michael

  2. I really learn a lot about trading options on your lessons. Thank you

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