The hidden secrets of Debit Spreads
In this video, we will show you why debit spreads are so simple and yet so powerful when compared to buying calls, puts or just simply buying stock. We will also discuss how debit spreads react to price movement and why they are the best fit for small trading accounts. Here are some of their benefits (more in the video):
- Buying a Call option is usually much costlier than buying a spread.
- Lower initial outlay. Lower risk. Better for small accounts.
- Irrespective of the expiration, or the stock price, spreads cost the same.
- Spreads let your participate in high price equities.
- Fixed Profits, make it easier to control your emotions.
Great explanation. Thank you.
Good discussion and i appreciate the insight.
I would like to add, or emphasize some things.
People can still buy puts and calls on big stocks. They would just have to be way out of the money (OTM). But, then the greeks, and more risk come into play even more. As you pointed out they are complex and risky.
You talk about when to close and that’s great. I would like to emphasize, don’t wait until the last minute! There can be low volume and you can have a lot of trouble getting filled. Also the price can change radically after trading has closed. So be sure and close that trade. Options actually are evaluated on Friday close, on Saturday morning. In my opinion, safer to close before then, and also if you can, when you know you are profitable. As was said, close days before is a good strategy. Please feel free to correct any points i may have correct. I appreciate your insight.
When to close is a great topic.
Great video highlighting the Overwhelming Pros of Bull Call Vertical. Seems so much more capital efficient!
This is a very helpful lesson. I made a lot (60K) of money through naked calls and puts in the beginning but lost it all and some more(100k). Risk management is key to being successful. I wish more people talked about and emphasized this strategy.
Ananjan, were you selling calls and puts naked or were you buying? If buying, your risk should have been limited to the amount of the trade. If selling naked or doin credit spreads, the risk can be too high and lead to large losses. How are you doing in 2021? Any better?
Your ideas are so powerful with great insights. Thank you.
I don’t understand how is it possible always the same cost 500$ or 250$ The real quotes are various and often higher….??!!
As well as the fact that they have the same cost in different deadlines, but I don’t know where you find these situations, I don’t see them except in rare rare cases
Hello, kindly read the FAQ section on Discord and the rule book provided to you. It is explained there. Basically, an ATM (at-the-money spread) will always cost your 1/2 of the width of the strikes. So an ATM $5 wide spread will always cost $2.50 and an ATM $10 wide spread will always cost $5
Thank you for your kindly answer Nishant. I understood by opening a demo account with Interactive Brokers, which gave me the opportunity to see how the US market works, very different from the Italian one 🙂
Your info is very interesting. Thanks again.
Hello. Nice video. Can this be done with bear call/bull put spreads also? Lets say we sell atm(short) and buy otm(long), does this have the same advantages as the debit spreads? Like to know your thoughts please.
Hi, could you clarify the question pleas? Yes, I do this with both put and call debit spreads (in case that was your question)
Is the risk/reward for your debit spreads 1:1
That is what any trading platform will tell you as they completely ignore price action and technical analysis.
eg. Imagine this scenario – AAPL has gone up really fast and is overextended to the top. The overall market has been rallying hard for 6 weeks. What do you think is going to happen next? Usually, when things go up too fast, it is followed by a correction. Now, if you buy an at-the-money AAPL call debit spread at this time, what do you think are your odds of winning? Most trading platforms will still tell you that the odds are 50%. When in reality, the odds are stacked against you. If you go bullish when things are already overextended, I would put your POP at 15% – 25%. So, the POP calculation is clearly incorrect.
You can reverse this explanation for when markets have sold off and are turning around; that is the best time to buy call spreads as the probability of success is most likely 80% or more. But the trading platform will tell you that the POP is 50% even in that scenario.
Nishant, great explanation. I understand it!