Exactly. To me, this is "safe". To everyone else on this board, it's a gamble. I can manage the expected moves of the SP with very little problem. I can get in and get out and make informed decisions. What gets me is the unexpected moves, which could turn that 1% gain into a huge loss. That's what I think of as gambling, risking losses that large for gains that small. And again, I'm still selling ICs; just not at 2% ROIC.
I think that the point people are missing is that in this approach you don't use anything like all of the cash.
Making some #s up (I'm interested in learning better what real numbers are for you - standardizing to some total position is a good idea, IMHO):
- Given $1M in cash and a desire to earn $20k/week (2%), instead of using the $1M to sell 100x$100 wide spreads (very low premium that is very far OTM), one would instead use $80k invested at 25% return.
1/4th of $80k is that $20k target or 2% overall, but only has $80k in the pot.
For a max loss week that's $80k and there's still $920k remaining to continue, and in 4 weeks the $80k loss will have been earned back.
So the win rate is critical. If these are winning 9/10 then that's generating 10*$20k - $80k per 10 trades, or $120k total : $12k/week.
Then again the win rate is critical whatever the approach. Using that same $1M and 2% full positions, 1 max loss in 50 is enough to use up all of the gains. For weekly trades 1 max loss wipes out the year. And if it happens early in the year then there isn't enough of a pot remaining to get started again. Clearly managing these positions to << max loss is non-optional
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With the $80k positions there are no black swans that can do very much to you.
OptionAlpha targets trades that have a 70% success rate. However, they say to only put 1-2% into any one trade. Since we are very concentrated in one stock, and all the trades are almost identical weekly trades, a 70% success rate will quickly wipe you out with a string of "bad luck." I will be curious to see how the Pastor is doing if we have 5-10% down/week for 6 weeks straight. Not trying to pick on him at all. I'm just trying to learn more, like I did debating $50 vs $200 spreads previously (where I thought I was right, until Hertz week and Adiggs convinced me otherwise).
I provided my view on the wide spreads - you convinced yourself
One underappreciated benefit (I think) of the wide spreads is that they limit how many total spreads can be opened. 100x vs 50x spreads - the 100x will be losing money ~2x as fast as there are twice as many opportunities. I know its important to me!
i wish there is a way to download this thread into a PDF so i can easily copy/paste/print info that i need
searching through 500+ pages is a maxpain
trying to know more about the benefit of 100-300 spreads... especially about the part where the "-p is closed out earlier if it's threatened" and "+p can stay longer"
my $50 spreads are working beautifully and there is always time to react (due to far -p OTM) but maybe there is a better strategy
it is important to be educated on all the tricks of the trade!
Here's the way I see it, along with some thought exercises to try out some of the numbers for yourself.
The wider the spread, the more like a short put the spread behaves -- at least for some distance ITM. It doesn't behave like a short put at all prices of course. In a sense a short put is a +0p/-<strike>p. Of course it isn't actually but you could do up some math for a $400 wide spread - say on the $1000 strike. That'd be a 600/1000 - the premium received won't be far off of the 1000 strike premium, and you've got a window - $50 to $100? where that spread behaves and can be managed pretty much the same as a short put.
That's only valuable if one is comfortable with short puts of course
Thus the put spread is a form of leverage on cash secured puts - if nothing else these are available in retirement accounts where margin backed puts are not.
The second benefit to me is that wide spreads reduced the number of positions I can take. I could limit my # of positions as well, voluntarily, except that I've proven to my satisfaction that I'm not good at that. Maybe a closer to the money / small positions would work though - I know with certainty that I wouldn't be all in on that!
The reason I like them is that as long as the share price stays in the vicinity of the -p when it goes ITM (say <$50 on a $200 wide spread) then you've got room to maneuver (simple rolls) to gain time and a win. You also have a split roll availabe, where you turn the 1x $200 wide into 2x$100 wide spreads; or even 4x$50 wide spreads.
On a $50 wide spread you can only go ~$10 or 15 or so ITM and still have good roll options. Once you're $25 ITM then you're probably taking the loss as any rolls are going to have some cost to them (debit for the roll, or a worse -p strike).
I guess for me - do I prefer some room for management, or do I prefer a pattern with higher earnings and "take the loss" as the primary management choice. I've been going for the room to maneuver, but I'm finding the conversation about which to use and how, is awesome / vital / beneficial to us all. It might change my own approach, it might not - either way I'm getting smarter in something that is important to me.
A thought about risk: risk is really two components - likelihood of event, and impact of the event.
We all optimize this in our own way, and its on a continuum.
I'm doing the low likelihood of event / high impact of the event approach.
@PastorDave is on the higher likelihood / lower impact of the event end.
