Spreads can strictly control the risk versus reward ratio. If
they are kept very tight.
Thus, if one (making up all of this from thin air) sells a
SPY175 put and buys a SPY174 put for a net credit of, oh $0.50 per
spread, then the risk reward ratio is exactly 2:1 [Gain $0.50 or
lose $1.00]
Of course one might multiply that '2' by one's perceived
probability that the price of SPY will be under $175 near the
expiration date. Thus, assume 67% probability and the new deal is
1.34:1. Not a bad wager, if one has checked the charts and feels
this makes sense.
It is rare (yet not unheard of) for options with lots of premium
remaining to be exercised, as this is a loss to the (former) holder
of the premium.
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Spreads can strictly control the
SPY Hedging Ideas, Collars , Spreads
Posted by cubby on 27th of Jan 2014 at 10:49 am
Spreads can strictly control the risk versus reward ratio. If they are kept very tight.
Thus, if one (making up all of this from thin air) sells a SPY175 put and buys a SPY174 put for a net credit of, oh $0.50 per spread, then the risk reward ratio is exactly 2:1 [Gain $0.50 or lose $1.00]
Of course one might multiply that '2' by one's perceived probability that the price of SPY will be under $175 near the expiration date. Thus, assume 67% probability and the new deal is 1.34:1. Not a bad wager, if one has checked the charts and feels this makes sense.
It is rare (yet not unheard of) for options with lots of premium remaining to be exercised, as this is a loss to the (former) holder of the premium.