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A thread about options spreads : Before I take u there, Part 1 : when you buy option, Theta (Time) is against u, Vega/Delta/Gamma are with u. Simple language, if you're right on directional, option buying gives u profit but slow on direction or no momentum, u lose time value.1/n
2/n Vega can also be against u, if u buy at high IV and then iv falls down. Read about Volatility thread for details. So buying options has low winning Probability (Delta is winning Probability, already explained in a thread). Lower the delta, Low winnin Probability, high RR.
3/n Less known Truth about Vega : Vega can only be hedged by another option.
Now another leg, if u just sell option, u have Theta on your side but Gamma and Delta on your opposite. VEGA on your side partly if shorted at high IV, because IV falls down when news/event's gone.
Now another leg, if u just sell option, u have Theta on your side but Gamma and Delta on your opposite. VEGA on your side partly if shorted at high IV, because IV falls down when news/event's gone.
4/n Short Option has virtuality unlimited risk, as profit is limited to premium but Delta/Gamma/Vega can move against u unlimited or undefined.
So now spread comes in picture. To minimize option buying cost, Or to hedge Unlimited risk on option selling side. You combine both.
So now spread comes in picture. To minimize option buying cost, Or to hedge Unlimited risk on option selling side. You combine both.
5/n, Final part : You buy ATM CE at 20rs and sell 1 strike away OTM CE to partly fund your buying. That's called Debit Bull Spread. Ignore names, it's just a bull spread. You're bullish, so u bought ce, you're not foolish, so u sold another call to receive partial premium back.
6/n same trade with PE, ur bullish (or not BEARISH, but sideway/bullish), so u sold ATM PE, taking unlimited risk. Then u bought slightly OTM put to protect ur risk on downside. So it's PE Bull credit Spread. You're selling premium is high then buying premium as Buying is OTM.
7/n not to confuse simple thread, I will not write about another two spread, named as Put Bearish Spread, Call Bearish spread. You can Google and check image. All those spread are 50/50 probabilities with almost 1:1 or little more RR. If your view is right directionally then
8/n Winning Probability increases, if your TA system gives entry time rightly, then Reward is incredible and u can do better strategy than spreads. Spreads are limited risk and limited rewards but directional view. Sideways is also a view.
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Views are welcome, On a lighter note, retweet for maximum reach are harmful to seminars on options :)
Views are welcome, On a lighter note, retweet for maximum reach are harmful to seminars on options :)
