yes agreed. have you figured this out? ive been going strictly naked on all my calls/put. i have undefined risk and looking to resolve this moving forward. any ideas
I like your videos, I think they would be better if they were more visual for beginners. It might help more if you used the trade sheet on tasty trades trade tab so I can see just what you are talking about. For advanced traders this is fine, but for a novice such as myself, I get lost because they are no prices to look at. Is this the same for an inverse options, such as VXX or VIXY? Thanks
i agree with this comment. this is all theoretical , but it would be nice to show us a trade in action, how to execute it, calculate the option price etc.
this is genius ,,,,you know the risk off top and you collect the premium or take some profit along the way...I love it.selling puts is a real good thing,,,thank you
Why is it that no one tells people about collateral? Like , it’s important. But no one explains it so that people watching will understand that they’re risking their collateral.
Can you explain a little about what to do if assignment occurs? e.g. Spot goes ITM on the short put, assignment occurs, do you wait & hope for spot to go ITM on the long put so you can exercise (sell the shares)? What about if the spot stays flat or goes way up before the long put expires?
If I'm assigned on the short put, I'd hope for the stock to skyrocket and for me to lose the full value on the long put - OR, for the stock to continue to plummet and sell out of the long put at some point and just ride the shares back up if I became bullish - assignment is literally not on my radar, and I welcome it in most cases. Risk doesn't change in a spread as long as you own the option that defines your risk, just the buying power changes.
Sorry I missed this! Yes this is the main concern for holding spreads through expiration - if only ONE option ends up ITM, you WILL have shares of stock on Monday - this is why we close spreads at expiration rather than hold them through expiration.
Is it just me or is the max loss much much higher than the credit received? And I'm talking 25 Delta Puts. This is why it doesn't seem too worth it to me. One loss can wipe out 5 or more winners. The only worth it part is the small reduction in buying power. Or am I missing something here? Is there a way to keep max loss not so out of proportion with the max profit potential while still trying to sell one at 30% chance of in the money? Because the only way I've found to not have them super disproportionate is to sell close to the underlying price. Hope to get an answer back. Thanks!
When selling OTM options, the max profit is usually lower than the max risk, because you're moving strikes further from the stock price and giving yourself more room. You can certainly get closer to a 1:1 risk reward ratio with ATM spreads, but you reach losses much faster if the stock goes against you since your strikes are closer. That is the tradeoff!
There is risk of assignment on any short option that is ITM, but it is pretty rare. I view assignment risk through extrinsic value remaining in the option. When you exercise an option, you turn it into stock, which has no extrinsic value. Therefore if I have an option that has $1.50 in extrinsic value and I exercise it, I literally burn that $150. Even if a short option is assigned, as long as I have the protective long option my risk doesn't change, just the buying power does, since I'm now long or short shares of stock depending on whether the short option was a put or a call. The riskiest situation with spreads is if the stock price is between the strikes AT expiration and the trade is held through expiration. If the short option is ITM and the long option is not, the long option will expire worthless and the short option will turn into shares of stock. If this isn't desired, the trade should be monitored going into expiration day and either rolled or closed.
What happened if you want the shares and the stock goes down pass your put can you sell to close your long put and use your own money to create a cash secured put?
13:21seconds you stated spend the Commissions to get in and spend Commissions to get out but with spreads you pressumably already closed your position. Am I correct? If so what do you mean by spend to close the put buy?
Thank you for the video. I think I am confused on the credit/profit part of the option. If you receive the credit right away upon selling the option, and the max profit is the amount of credit received, why do we have to wait to get to 50%? Don’t we get 100% of the credit upon the initial sell?
You get the credit when the trade opens and when you close it at 50% you close for a debit. So if you get out of the trade early, you close for a debit.
Checklist? You mentioned a link to another video on rolling? Maybe I'm asking too much, but I'd expect an option trade strategy checklist to include: candidate (underlying) selection criteria (price, time, event risk, liquidity) trade type selection criteria (volatility, expiration cycle) strike selection (width, premium received) rules of the trade (price discovery, profit target, size) management (taking profits, rolling, exiting, assignment risk, dividend risk) portfolio management (correlated risk, position size, rate of return, theta) Where would I find this sort of checklist at tastytrade, please?
Pam, We certainly go over underlyings in that fashion live on air, but this series had more of an "evergreen" content approach which is why we left the time sensitive specifics out. I would check out Good Trade Bad Trade on tastytrade, which features Tom & Tony picking a stock & finding a trade every morning @ 9:20 CST: www.tastytrade.com/tt/shows/good-trade-bad-trade
Depends on the Brokerage House but usually it will expire worthless on Expiration date at 04:00 PM (I’m talking about naked puts here) and you will receive back your money used to secure the put, after Markets close. Or you can close (buy back that put) or as you call it “recover it” before 04:00 PM at smaller price and use that money for another option. And that is if only you don’t want to wait till Monday when your money is fully refunded.
Far ITM and OTM options lose their extrinsic value faster than ATM options on a % basis, and in the case of a credit spread, you'd also be paying less to define the risk, so this long put would have a more dulled effect on the short put.
Are you forced to close both legs at the same time? What if I closed my short contract at break even or something while the stock started to drop but held on to the buy contract because it would get more valuable the more the stock drops/ITM that contract gets? Wouldn’t that buy contract then have ability to increase all the way until the stock hits zero? Honestly I couldn’t figure out how to put that last part into words that well but hopefully someone understands ha.
Vertical spreads provide cost basis reduction, so selling off a leg would mean a cost basis increase, but you could do it. But, I would beg to ask: why not be naked in the first place?
Typically I look at open interest and ensure the strike is liquid - some might be and others may not be - other than that, it's where I'm comfortable with my risk being - where do you think the stock WILL NOT go?
Hello mike, is there any risk if i choose to select 4DTE to perform short put spread and just wait until its expired and collect the premium. Let say i drag my strike price OTM far away from stock price to increase my probability. Have any of you though that strategy and what is the danger should i taken care of when i imply such strategy for my trading?
We typically don't hold short premium trades to expiration because we have nothing more to make if we've already make the credit received. We're just holding unneccesary risk - we tend to close our trades at 50% profit to ensure we are using our capital efficiently, but there's nothing really wrong with holding to expiration, other than the fact that you hold a lot of risk for little return once your spread starts to lose a lot of value.
You do not - brokers take the max loss as buying power reduction on the spread, so that value is entirely up to you. A $1 wide spread is $100 less credit received. The minimum to open a tastyworks margin account is $2000 - tastyworks.com/accounts.html
Thanks Mike and Tastytrade team this is Gold. I'm new to this. Everytime I watch then rewatch your Videos I learn something new👌.
Your explanations are awesome. Like how u manage to really summarise the concepts well. Thanks Mike and tasty trade team!
I love these explanatrions but they are so confusing when there are no numbers. It is so much easier for me to understand this with the math behind.
yes agreed. have you figured this out? ive been going strictly naked on all my calls/put. i have undefined risk and looking to resolve this moving forward. any ideas
I like your videos, I think they would be better if they were more visual for beginners. It might help more if you used the trade sheet on tasty trades trade tab so I can see just what you are talking about. For advanced traders this is fine, but for a novice such as myself, I get lost because they are no prices to look at.
Is this the same for an inverse options, such as VXX or VIXY?
Thanks
i agree with this comment. this is all theoretical , but it would be nice to show us a trade in action, how to execute it, calculate the option price etc.
this is genius ,,,,you know the risk off top and you collect the premium or take some profit along the way...I love it.selling puts is a real good thing,,,thank you
Interesting how you define a vertical Put credit using horizontal line examples!
Yep! 100%! That alone will confuse many people. Details matter!
Please add the link to the description: Rolling vertical spreads when in the money.
this would have been more helpful he actually used pricing in his graphs. for example Stock price at $50, buy/sell put at 48/47..
Why is it that no one tells people about collateral? Like , it’s important. But no one explains it so that people watching will understand that they’re risking their collateral.
Can you explain a little about what to do if assignment occurs? e.g. Spot goes ITM on the short put, assignment occurs, do you wait & hope for spot to go ITM on the long put so you can exercise (sell the shares)? What about if the spot stays flat or goes way up before the long put expires?
If I'm assigned on the short put, I'd hope for the stock to skyrocket and for me to lose the full value on the long put - OR, for the stock to continue to plummet and sell out of the long put at some point and just ride the shares back up if I became bullish - assignment is literally not on my radar, and I welcome it in most cases. Risk doesn't change in a spread as long as you own the option that defines your risk, just the buying power changes.
Mike great stuff! What happens if on Expiration, the price goes lower than the short strike and higher than our long? Do we get assigned?
I want to know too.
Sorry I missed this! Yes this is the main concern for holding spreads through expiration - if only ONE option ends up ITM, you WILL have shares of stock on Monday - this is why we close spreads at expiration rather than hold them through expiration.
Is it just me or is the max loss much much higher than the credit received? And I'm talking 25 Delta Puts. This is why it doesn't seem too worth it to me. One loss can wipe out 5 or more winners. The only worth it part is the small reduction in buying power. Or am I missing something here? Is there a way to keep max loss not so out of proportion with the max profit potential while still trying to sell one at 30% chance of in the money? Because the only way I've found to not have them super disproportionate is to sell close to the underlying price. Hope to get an answer back. Thanks!
When selling OTM options, the max profit is usually lower than the max risk, because you're moving strikes further from the stock price and giving yourself more room. You can certainly get closer to a 1:1 risk reward ratio with ATM spreads, but you reach losses much faster if the stock goes against you since your strikes are closer. That is the tradeoff!
which delta to choose generally? for Credit Spread
Mike, isn't there a risk of assignment if the underlying ends up in between your two strikes at expiration?
There is risk of assignment on any short option that is ITM, but it is pretty rare.
I view assignment risk through extrinsic value remaining in the option. When you exercise an option, you turn it into stock, which has no extrinsic value.
Therefore if I have an option that has $1.50 in extrinsic value and I exercise it, I literally burn that $150.
Even if a short option is assigned, as long as I have the protective long option my risk doesn't change, just the buying power does, since I'm now long or short shares of stock depending on whether the short option was a put or a call.
The riskiest situation with spreads is if the stock price is between the strikes AT expiration and the trade is held through expiration.
If the short option is ITM and the long option is not, the long option will expire worthless and the short option will turn into shares of stock. If this isn't desired, the trade should be monitored going into expiration day and either rolled or closed.
What happened if you want the shares and the stock goes down pass your put can you sell to close your long put and use your own money to create a cash secured put?
13:21seconds you stated spend the Commissions to get in and spend Commissions to get out but with spreads you pressumably already closed your position. Am I correct? If so what do you mean by spend to close the put buy?
thanks for the video. maybe it would be easier to use a real-life example, gets a bit hard to follow.
Too hard to follow , show real world example 😩
Thank you for the video. I think I am confused on the credit/profit part of the option. If you receive the credit right away upon selling the option, and the max profit is the amount of credit received, why do we have to wait to get to 50%? Don’t we get 100% of the credit upon the initial sell?
You get the credit when the trade opens and when you close it at 50% you close for a debit. So if you get out of the trade early, you close for a debit.
How many option contract you can trade on expiration day?
Checklist?
You mentioned a link to another video on rolling?
Maybe I'm asking too much, but I'd expect an option trade strategy checklist to include:
candidate (underlying) selection criteria (price, time, event risk, liquidity)
trade type selection criteria (volatility, expiration cycle)
strike selection (width, premium received)
rules of the trade (price discovery, profit target, size)
management (taking profits, rolling, exiting, assignment risk, dividend risk)
portfolio management (correlated risk, position size, rate of return, theta)
Where would I find this sort of checklist at tastytrade, please?
Pam,
We certainly go over underlyings in that fashion live on air, but this series had more of an "evergreen" content approach which is why we left the time sensitive specifics out.
I would check out Good Trade Bad Trade on tastytrade, which features Tom & Tony picking a stock & finding a trade every morning @ 9:20 CST:
www.tastytrade.com/tt/shows/good-trade-bad-trade
Huh?
You took two weeks to reply, and ...
1. not include a checklist ...
2. not include a link to the video on rolling
c'mon ...
Hi Pam, You can learn more about order entry at our link below.
www.tastytrade.com/tt/learn/order-entry-checklist
Um... where is the roll/repair video that was mentioned to be put in the description? Thank you.
Here's a new one for ya - ontt.tv/2mMJkxz - sorry about that!
Once your buy is OTM does your trade automatically close or do you have time to recover at expiration?
Depends on the Brokerage House but usually it will expire worthless on Expiration date at 04:00 PM (I’m talking about naked puts here) and you will receive back your money used to secure the put, after Markets close. Or you can close (buy back that put) or as you call it “recover it” before 04:00 PM at smaller price and use that money for another option. And that is if only you don’t want to wait till Monday when your money is fully refunded.
Hpow can I put a stop loss order on a vetritcal credit put spread??????????????
at Least ten minutes after the market opens for the day a market order at 2 or 3 times your profit for that day only. Again the next day.
Why not sell ITM put if the thesis is bullish to collect more premium?
The trade would be expensive to execute: Like an Amazon trade.
Are Chris (from Projectoption) and Mike Butler brother?
Yep!
@@tastyliveshow Thank you. I appreciate them both.
Would theta decay be more in play if the bought put was at an even lower strike price?
Far ITM and OTM options lose their extrinsic value faster than ATM options on a % basis, and in the case of a credit spread, you'd also be paying less to define the risk, so this long put would have a more dulled effect on the short put.
Are you forced to close both legs at the same time? What if I closed my short contract at break even or something while the stock started to drop but held on to the buy contract because it would get more valuable the more the stock drops/ITM that contract gets? Wouldn’t that buy contract then have ability to increase all the way until the stock hits zero? Honestly I couldn’t figure out how to put that last part into words that well but hopefully someone understands ha.
Vertical spreads provide cost basis reduction, so selling off a leg would mean a cost basis increase, but you could do it. But, I would beg to ask: why not be naked in the first place?
how do u choose your sell and buy strikes?
Typically I look at open interest and ensure the strike is liquid - some might be and others may not be - other than that, it's where I'm comfortable with my risk being - where do you think the stock WILL NOT go?
Hello mike, is there any risk if i choose to select 4DTE to perform short put spread and just wait until its expired and collect the premium. Let say i drag my strike price OTM far away from stock price to increase my probability. Have any of you though that strategy and what is the danger should i taken care of when i imply such strategy for my trading?
We typically don't hold short premium trades to expiration because we have nothing more to make if we've already make the credit received. We're just holding unneccesary risk - we tend to close our trades at 50% profit to ensure we are using our capital efficiently, but there's nothing really wrong with holding to expiration, other than the fact that you hold a lot of risk for little return once your spread starts to lose a lot of value.
Do you need a large margin account to do this type of trade?
You do not - brokers take the max loss as buying power reduction on the spread, so that value is entirely up to you. A $1 wide spread is $100 less credit received.
The minimum to open a tastyworks margin account is $2000 - tastyworks.com/accounts.html
It should be in the money not otm