OK I entered my first bear call spread today after much angst with IAB which is really not intuitive at all yeesh, TD Ameritrade (did some small BPS there last week which really should be more profitable if you ask me. Oct 29 830/770 actually LOST money today lol.) much easier to figure out and switch around but I currently have almost 8 figures of margin in this account so I figured I should put it to work.
OCT 29 1300 / 1400 Bear Call x 100 contracts at 0.67 each.
Max profit is 6560. Max loss is just shy of a million (yeah that set me back a bit just looking at it. I mean damn.)
IAB claims the chance of 100% profit is 100%.
It claims the chance of a max loss is 0.000001%.
Please correct me if I am wrong, but I classify this as a extremely low risk, low reward trade. Please let me know if I did something stupid. It is currently in the green by 2K. My margin was barely affected. Because I have a lot of TSLA in this account? Is this the kind of trade you go with 1000 contracts on? But a ten million black swan.... thought the idea was to sleep at night.
Thanks!
NOT-ADVICE of course.
Yep -that looks like a low risk, low reward trade, to me.
Outside of the size of the trade ($1M is larger than 'small' and keep my attention
), that also looks like a great place to start to me. The size of the trade may qualify as "small" to you, where its overwhelmingly big to others- big enough to get your attention, and small enough that a full loss is annoying and a learning experience, but not much more. You make your own decisions about what is small. You might find that 10 contracts is a better sized "small" position for you, but in this particular trade, that only turns into $670 in collected premium and that might be too small to get and keep your attention.
One thing that I've learned by hanging out with Tesla owners the last decade is that there is ALWAYS somebody that is better off than you are, and somebody that is less well off. So I try to stick to % over absolute positions sizes / results. Or as I've described it in other contexts - for each of us there is a $$ amount below which the $$ is noise, and above which it might be worth some research time.
An example - if you're checking out at the grocery store and see a pack of gum there at the checkout, and decide that you want the gum, then that's the end of it. See gum, want gum, get gum. It doesn't matter if it's $1, $1.50, or $5. See / want / get.
Awhile back when Ludicrous Model S first came out there were people that traded in their Model S to get the new one. Some of those trade ins were < 6 month old cars, drawing many observations from the peanut gallery about people having money to burn. Except that for somebody with $10M (or some number - you decide) in the portfolio and modest claims on that portfolio, $150k for a car that they want may well be in that See/Want/Get category. As freaky as that might seem to others.
Back to your setup - a very large number of small gains can add up to a lot of money. It also means that a particularly bad move towards your spread can turn into a really big loss. If you're earning 1% per position / week, then 50 weeks with 1 loss that is managed down to the 10% range is a great year (+50%, -10%, net 40% -- no compounding). 50 weeks of 1% gains with 1 week of 100% loss is not great at all (50% - 100% = -50%, and that's if the loss is at the end of the year - assumes constant position sizes rather than compounding; compounding will make it particularly disastrous. And the timing on that loss can make it worse.