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How to Set up a Riskless Spread Trade

163 ratings | 25819 views
We get the question fairly often: "If there are so many spreads that offer double digit returns with high probability, why doesn't everyone trade them?" Well, the answer may surprise you. We can find many 7 day, 10 day or 15 day trades that offer double digit returns with an 80% probability of success...but you will likely need a 90% success rate in order to profit long term. This webinar shows why you are likely not making the returns you expected with credit spreads or other spread strategies. More important, we show a simple structure that guarantees you can't lose more than 6% or so on any position, while still being able to take advantage of the benefits of certain spread trades WITHOUT adding any risk! That's right, done in the proper context you can still trade Credit Spreads, Ratio Spreads and other common spread plays without taking on any additional risk. Enjoy!
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Text Comments (20)
SevenThunderful (1 month ago)
Having to buy the stock greatly reduces your buying power for the options and therefore your return, but thanks for the explanation. If I normally trade 10 contracts on spy but now have to buy 1000 shares of spy, I'd better have a decent size account.
PowerOptions (24 days ago)
@SevenThunderful, I am glad to hear that the presentation gave you some ideas to develop other structures for your portfolio. On your other note, we found it really interesting that a consistent trading plan of Bear Call Credit Spreads (looking for an 85% probability or higher) actually would have lost money in 2018 - even though the overall market was down from beginning to end. A similar Bull Put approach actually would have made money. We discuss this in a more recent webinar: Credit Spreads - Beyond the Basics Part 2: https://youtu.be/qvmgoXeWbo4
SevenThunderful (25 days ago)
@PowerOptions And again thanks for this video. This actually helped me develop some trades around this concept, though rather than a full protected put on the underlying stock, I'm protecting the downside only up to around a 20% probability of loss, using bear spreads. The protected put tends to be expensive otherwise. As for the risk, right you are, it's easy enough to show using probabilities that most of the OTM credit spreads people tout are actually losing trades without extra information. Sudden market moves create big losses.
PowerOptions (26 days ago)
Hello SevenThunderful, Very true. But many spread traders get lured into the idea of double digit returns without realizing that a sudden market move could drop their account significantly. We do teach management techniques and trigger points for management on straight vertical and diagonal spreads - but this concept here shows how to control risks and use spreads in a nested trade - where you do not add to the risk.
Michael Endrizzi (1 year ago)
How did you calculate prob of success? For amazon i calc 100-(.75/7.50)*100=90% and you had 80.6%.
PowerOptions (1 year ago)
Hello Michael, Sorry! For some reason we were not seeing notifications of posted comments, and I just noticed your discussion today. Thank you for your pointers and suggestions! The % Probability of 80.6% I mentioned is a calculation we show on PowerOptions. Using 1 standard deviation of the 52 week trading range of the stock we are able to calculate the likelihood that the stock will be trading above or below a certain price (strike price of the sold option) in a given time frame (at the expiration date). This is the theoretical probability. In this example, the calculation showed there was an 80.6% probability that AMZN would be below $842.50 on FEB 17th, 2016 (expiration day) based on the past trading range of the stock. The equation you referred to is the risk-reward ratio, which yes, would have been 90% - or a 9:1 risk reward ratio which is common with high probability spreads. For AMZN, the stock closed on FEB 17th, 2017 at $845.07. It would have cost $2.57 minimum to buy to close the short call, resulting in a loss on the spread... BUT...done in the context of the Married Put structure, just like we show on UBNT later, the AMZN bear call on top of a Married Put would have left the upside open and we would have had a gain on the entire position...rather than taking 3X the loss of the initial credit we received with just the Bear Call. Thank you again for your feed back.
Michael Endrizzi (1 year ago)
Perhaps I missed previous videos or this is for advanced traders but I feel that your explanations gloss over too many important points, you don't work out the numbers for verification so we can follow, and you use terminology with defining the terms. For example, explaining the delta moves, or how you calculated the risk and profit/losses, or more basic what your charts represent one line at a time, or referring to previous examples verbally without showing and comparing. I DO appreciate the free pointers, just helping you target your audience more. If this is only for advanced traders then ignore my advice. Thanks again.
Phyll (1 year ago)
I suggest you use a larger cursor for your videos.
Brian Kelly (1 year ago)
Michael, thank you for a great presentation; I hope you won't think worse of me for saying that when you begin or end a sentence, I'm sorry, I hear your lips smack and it's distracting:(
Phyll (1 year ago)
It didn't bother me.
PowerOptions (1 year ago)
Hello Brian, my apologies, your comment was held for some reason and I did not see it until today. Many of the webinars from earlier this year were done on an old headset...which finally bit the dust. Many of the newer presentations are done upgraded equipment and I hope they do not distract you :) ~MC
Ford Hood (2 years ago)
Thanks for the exposing reality of high risk low reward in average credit spreads.
PowerOptions (2 years ago)
Thanks, Ford! Credit Spreads can be useful in a trading account, but by only using a small portion of your allocated trading capital (say 10% or so) and only looking at spreads on broad based indexes and ETFs. A better long term approach is to insure your positions against significant losses and forcing yourself into an ideal sized trade. These are the trademarks of the RadioActive / Married Put structure.
N W (2 years ago)
Brilliant! Thank you. My mind is racing with all the opportunities you have so crystalized.
PowerOptions (2 years ago)
Hello Ning, Excellent! I am glad you enjoyed the webinar. Please let us know if you have any questions about setting up Riskless Spread Trades in the proper context.
WeTheAmerican (2 years ago)
Phyll (1 year ago)
Even if you had a good point to make, you ruined any chances of people taking you seriously with the all caps and lack of grammar.
PowerOptions (2 years ago)
Thank you! I am glad to hear you enjoyed the initial video and our response.
phaedrus cj (2 years ago)
Good polite professional response by PowerOptions with more than enough information to further explain what was presented in the video.
PowerOptions (2 years ago)
Hello, I think you missed the Riskless Spread - Ratio Call Spread - done in the context of the limited risk position. We originally had shares of UBNT at $61.75, protected with a far out 65 put that was purchased for $7.65. The total cost was $69.40, but we were guaranteed to get $65.00 back, so our risk is only $4.40, or $440 per 100 shares. We then showed Selling 2 near term 65 calls at $2.75 ($550 total), and Buying 1 60 call at $5.40 ($540 total). So, we only generate $0.10 of credit. BUT - we showed what might happen if the stock was trading at $64.65 at near term expiration. The short 65 calls expire, and we could sell to close the the 60 call we own for intrinsic value of $4.65, reducing our cost basis on the stock. Thus, our remaining position is: Shares of UBNT purchased at $61.75 Minus Net Credit Ratio Spread -$0.10 Minus Intrinsic Call Value -$4.65 New Cost of stock = $57.00 Cost of $65.00 put = $ 7.65 Total Invested = $64.65 Guaranteed Exit from put = -$65.00 New at risk = -$ 0.35. Negative at risk means a Bulletproof position - guaranteed profit to the downside with still unlimited upside profit potential. Thanks for your comment, and feel free to contact the FBI. The numbers support the 'after' position of the Riskless Spread trade against the larger trade, and most traders can see the benefit of that adjustment.

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