My last post (Part I of this same topic) discussed debit spreads and credit spreads, both members of the vertical spread family. It was shown how, because of synthetic relationships, a debit call spread is essentially the same as a credit put spread and a debit put spread is essentially the same as a credit call spread. The only real difference is the cash transaction--debit or credit--at the time when the spread is initiated. The potential risk and reward, however, is the same once interest and dividend issues are taken into account. This concept can have an important impact on the psychology of managing an ongoing vertical spread trade.

The Psychology of Trading Verticals
Imagine that a trader buys an out-of-the-money debit call spread, say a 50-55 bull call spread with the underlying stock at $49. This trader gains positive delta, positive gamma, negative theta and positive vega. Specifically, in this example:

Out-Of-The-Money Call Debit Spread
Delta ...

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My last post (Part I of this same topic) discussed debit spreads and credit spreads, both members of the vertical spread family. It was shown how, because of synthetic relationships, a debit call spread is essentially the same as a credit put spread and a debit put spread is essentially the same as a credit call spread. The only real difference is the cash transaction--debit or credit--at the time when the spread is initiated. The potential risk and reward, however, is the same once interest and dividend issues are taken into account. This concept can have an important impact on the psychology of managing an ongoing vertical spread trade.

The Psychology of Trading Verticals
Imagine that a trader buys an out-of-the-money debit call spread, say a 50-55 bull call spread with the underlying stock at $49. This trader gains positive delta, positive gamma, negative theta and positive vega. Specifically, in this example:

Out-Of-The-Money Call Debit Spread
Delta ...

Read Full Article >>

Vertical spreads are one of my favorite subjects to teach. On the surface, they appear to be rather straightforward but, in fact, they are not. The overly simplistic view of vertical spreads held by many traders can lead to poor trade management and ultimately a heap of losers that should have been winners.

Vertical Spreads
Vertical spreads can be divided into two categories: debit spreads and credit spreads. Debit spreads, of course, are called such because when they are established, the trader’s account is debited; that is, the trader pays for the spread upfront in hopes it will gain in value and can be sold at a higher price later. Credit spreads, on the other hand, are called such because they are done for a credit; the trader receives cash upfront, hoping to buy the spread back later at a cheaper price.

While these two spreads seem to be very different animals, and are often traded as such, debit spreads and ...

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The Stock Repair Strategy

It’s been a rough ride for a lot of investors. Formerly solid bellwether stocks like General Electric (GE), Caterpillar (CAT) and Citigroup (C) have taken a beating. Some investors are waiting (patiently) for the market to turn around. Some traders are buying at the new, cheaper prices. But as experienced investors know, the market can always go lower–sometimes fast and furiously. There is one more alternative that can make sense in some cases: the stock ...

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Hi, friends. Long time, no blog! Sorry. Busy, busy, busy. Market Taker Mentoring LLC has a facebook page! you can interact with fellow traders, share trade ideas, and learn more about trading. Visit the page today and meet like minded traders.

Market Taker Option Trading and Trading Education

Knowledge is power! Learn option trading techniques from each other.

Generally I like to offer some free educational option trading tips. But this time I wanted to inform my readers that through my company, Market Taker Mentoring LLC, I'll be offering in-depth, interactive, educational option trading webinars.

These educational option trading webinars will cover a variety of topics. The first series, starting soon, will address the option greeks in a very hands-on way. The webinars are for option traders of all experience levels. Even basic-level traders can benefit greatly from the information in these presentations.

For more information, and to learn how to begin your educational option trading webinars, visit MarketTaker.com.

Dan Passarelli

Nickels add up. It's true. If you're an option trader you realize this by now. Each nickel you make (or save) on an option contract is $5 in your pocket. That's $50 on a 10-lot; $500 on a 100-lot. Over the weeks and months and years, nickels are big money. Interested in learning how to save some nickels? Your method of trade entry may make a difference.

Bids and Offers
Typically, off-floor traders buy offers and sell bids. That is the nature of being a retail trader. But, what if you could get a better trade price? With some trades, I like to "middle the market". That means try to buy below the offer (but above the bid) or sell above the bid (but below the offer). That means, if I get filled, I get filled at a better price--sometimes saving the coveted nickels. But it doesn't always work. There's a trick to it. Here is one tip on middling the market on trade entry.

Middling the Market ...

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The CBOE Volatility Index®, or “theVIX®”, has been at historically high levels for a while now. The question for today is: How long can it stay this high? To answer, let’s first examine what the VIX is and why it rises or falls.

Basically, the VIX is a measurement of the implied volatility on the S&P 500. More specifically, the VIX measures the implied volatility of hypothetical 30-day options listed on the SPX, which is the index contract that represents the S&P 500®.

Implied volatility, as many of us know, is the volatility component embedded in option prices. When option-market participants buy up options–usually in expectation of future volatility–implied volatility (and therefore the price of the option) rises. Likewise, when market players sell options–usually in expectation of waning volatility–implied volatility (the price of options) falls.

A comparison of the ...

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No matter how long you've been a trader, it's easy to slip into bad habits. Among the worst habits for traders new and old is to be undisciplined.

Though there are many different trading philosophies, strategies and methodologies, all traders need to have a plan, and just as importantly, they need to follow it. It's easy to forget the plan when you're in the thick of it. But when you deviate from the plan, emotions can get in the way, clouding judgment and leading to bad decision making. It's the age-old battle of the right brain versus the left brain.

The left brain is the mathematical, logical side. It's the side of your brain that crunches the numbers in your analysis that lead up to a trade. It can methodically lay out the quantifiable steps that make sense to follow. And measure potential profits and losses and deduces ways to curtail losers and make the most out of your winners. The left brain is a trader's friend.
...

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A friend of mine emailed me today inquiring about oil. "it's at it's lows", he said, "looks like it bottomed out; gotta rally from here". Well, I don't know if he's right or wrong, but (for our purposes) that's not important right now. What IS important (and interesting regardless) is how one capitalizes on such an outlook.

There are a few ways, all different in their own right. First--and for a lot of securities options traders, the one that comes to mid initially--is to buy calls on or shares of an oil-services fund-of-sorts like OIH, the oil-services HOLDR. (BTW, a HOLDR is similar to an ETF with small [for most people, insignificant] differences).

While putting a bullish position on an oil-services HOLDR seems like an obvious play for a bullish-on-oil trader, it may not be a perfect trade to match the bullish oil-play objective. Why? First, buying an oil-services HOLDR--by definition--is a position in the stocks of ...

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