What do you mean by 2-3% ? What premium does it work out to ... I've been targeting 30 cents minimum on spreads. Rather low ...
Net $0.30 on $10 spread is 3%. See below.
At a guess I would think ROIC, no? c210's are prices around $6, which makes them 2.8% return
No, this was for spreads not CCs or CSPs. I rarely get even 1% on those anymore. Even then, I was only close enough to ATM on those when I was doing straddles/strangles.
@ReddyLeaf and I trade IC similar by opening one side at a time. If we stay flat *after* Monday/Tuesday chatter, I may consider an IC that is .10 delta or less like this.
Let me see if I can exemplify , correct if I am wrong please. Take a 4/6 +p177.5/-p182.5 spread which is -.34 and .60 , .26 net credit to open. For 1 contract, that's (.26 * 100 share) / $500 margin = .052. Add the other side with a 4/6 -c235/+c240 spread for .66 and -.40, thats .26 net credit to open. The beauty is that for the same margin of $500, you now have a 10.4% return if both sides expire. The key is to manage the IC such that when one side is going ITM, close the winner early for pennies, assume the ITM side will persist, get out at 50%.
Yes,
@intelligator explained it perfectly. However, for myself, I prefer $10 spreads for the easy mental math, though I sometimes go $15 or even $20. There are reasons/benefits to wider or narrower spreads that I’m slowly starting to understand (I won’t reiterate because
@adiggs has several informative posts on the subject). What I will say, is that I prefer to open spreads as close to expiry as possible and with the long leg below $0.30-$0.50. Reason: The farther OTM (long) legs decay faster than the nearer (short) legs, which is the opposite of what we option sellers want. This behavior has less financial impacts at 2-3 DTE. Adiggs explained that the long leg is buying “insurance“. Since this insurance decays away, just like the profit (short) side, I try to minimize the cost (and loss) of this insurance.
So a typical example for me would be, on up mornings, ideally before the MMD, enter BCS side: sell -c235s at $0.68, buy +c245s at $0.26 = $0.42 net / $10 risk = 4.2% return on risk. Then, after the MMD enter the BPS side: sell -p185s at $0.83, buy +p175s at $0.26 = another $0.57, for a total of $0.99 (9.9%). These examples used Friday’s closing prices from the MaxPain website. If opened on 2DTE, then one could expect about 30-50% daily premium decay if the SP and IV remain approximately constant. One side decays more than the other if the SP doesn’t stay constant, and IV usually stays constant late in the week (except for event weeks). I really like those odds.
The trader can adjust the IC midpoint up/down (depending on belief the SP will rise or fall), widen the central distance, and/or widen the spread legs, all to fit trader’s preference and risk tolerance. Furthermore, the entire trade can be closed early (say 50%, 75%, 90% of max premium), or just one side closed (winning or not) at a time. For example, last Thursday I opened -p180s/+p190s to pair with previously opened -c205/+c215s. After waking up Friday morning to see the rising SP, I closed everything when we broke the $200 call wall (which I didn’t expect). I made very little (less than $0.05) on the call side, but by closing early I didn’t lose the entire $10 spread. Scary, but this is the risk with spreads. Could have left the put side to gain the entire $0.80 premium, but it automatically closed at $0.10 because I wanted to live my life Friday instead of watching the SP.
Another aspect to my personal trading of spreads: I have some short- and long-term CCs open, so I am more worried about SP rise than SP drop. Therefore, I sell the BPS side closer to the SP than I do the BCS side. Profits go into buying back those longer term CCs. Once I close all of those, I will probably reduce risks farther and widen the IC spread to even lower premiums..
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