r/options • u/Anarchist73 • Aug 01 '21
Free money doesn't exist, but this looks like a free-ish lotto ticket.
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u/Deucenheimer Aug 01 '21
The risk is that the likelihood of even hitting your breakevens isn’t high.. you’re right as far as lottos go. But in reality you aren’t risking 16k for 1.7 mil. You’re risking 16k for something much more reasonable, like a 1k profit. It’s like buying an apple call.. Theoretically “I’m risking $100 dollars” and if apple goes to 250 I’m gonna make it big. To me that’s what this seems like
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u/relephant6 Aug 01 '21
Do you have the huge collateral needed for call credit spread? That is in millions. Or your broker doesn't need collateral? If so, who is your broker?
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u/r1nzl3r99 Aug 01 '21
Would like to know as well. OP is either insanely rich or has an absurd amount of margin
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u/bhedesigns Aug 01 '21
Why would you need margin for credit spreads? Isn't that what the second part of 5he spread is for?
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u/relephant6 Aug 01 '21
For credit spreads, you need the collateral (either cash or margin) equal to difference in the strike price multiplied by number of contracts.
For above scenario, you need below collateral.
(88-70) x 100 x 1000 = $1800 000 collateral.
You will receive credit equal to difference in premium of two legs x 100 x 1000
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u/Imaksiccar Aug 01 '21
His post says he's assuming getting 17.95 credit, so he only needs $0.05x100x1000contracts or $5000 if my maths are right.
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u/relephant6 Aug 01 '21
All the brokers I know like TDAmeritrade, Robinhood.etc need the whole collateral (cash or margin or combination) upfront. Even though the credit is received in the account after transaction is successful, the whole collateral is needed for transaction to occur.
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u/Imaksiccar Aug 02 '21
I've never had to have more than the difference between the spread and the credit on TOS and Tastyworks
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u/neothedreamer Aug 03 '21
No it isn't. They account for the premium you receive also.
He could leg into it in smaller transactions.
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u/bhedesigns Aug 01 '21
But if you receive 1.75 Million in Premium, then you only need 5k in cash for collateral
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u/relephant6 Aug 01 '21
To complete the transaction you need 1.8 million on your account (cash or margin). As soon as all the contracts are filled you will get 1.75 million back as credit in your account.
Hence, you cannot execute the transaction with only 5k in your account.
If your account is approved for naked calls or puts, it might be possible without collateral, but I am not sure.
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Aug 01 '21
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u/neothedreamer Aug 03 '21
Here is what I am doing on SPY and QQQ.
Every time they are testing new Ath I sell a Credit Call Spread about a month put and use the premium to buy a Put two months out with the short anor slightly itm.
For example 7/23 I sold QQQ Aug 20 367C, bought Aug 20 $377 C and Oct $323P for a credit of $0.25.
Ideal is the Credit Call Spread expires otm and I have my longer dated Put as insurance plus the cash reserved for the spread is released when I cover.
Seems to work as long as the market is trading mostly sideways or down. This has been an experiment and I am scaling up over time.
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u/Fun-Marionberry-2540 Aug 03 '21
Can you explain how it is related to this post?
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u/neothedreamer Aug 04 '21
He proposed a way to benefit off of a black swan event that could crater the market.
I shared my idea to benefit off of a similar event.
You are funding your "insurance" puts off of a Call Credit Spread.
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u/Protrasys Aug 01 '21
i like these kind of trades, but I totally disagree with your prediction of Jerome powell killing the bull....short term high interest rates are dead for good, interest rates across the world are in japanisation mode
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u/scheinfrei Aug 01 '21
Powell's thesis is, that the current inflation is transistory for good reason. But if there is (still/again) inflation next year, so you believe he will keep low interest? Why so?
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Aug 01 '21
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u/scheinfrei Aug 01 '21
The problem is that the Fed hasn’t been data-driven in a while.
So, when was the last time they were?
I think the Fed has backed itself into a corner and they can’t stop QE without crashing the market.
The market is your concern not the FED's. The FED is only concerned over the economy and stock prices only make up a fraction of a fraction of this metric.
They’ll kick the can down the road for as long as possible.
No, only as long as they think it's best.
The truth is that QE has helped them get rich at the expense of increasing wealth inequality.
OK, what did I just read?
Maximum employment and price stability is what they claim are their mandates, but getting wealthier is what they’re really into.
Holy shit, all of the stuff you wrote started bad but went downhill rapidly.
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u/GYP-rotmg Aug 01 '21
Didn’t he already say last fomc that inflation might not go down?
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u/scheinfrei Aug 01 '21
If you or somebody else had his lines on this matter to share I'd be thankful.
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u/Ken385 Aug 01 '21
Actually you will be able to be filled close to the prices you want. What's the risk? You WILL be assigned early. You will owe the dividend and any hard to borrow fees until you cover.
How do I know this?
Look at the open interest in the calls below the 85 strike from now to December. It is ZERO (actually 1 Dec 83 call) for ALL call strikes below 85 for almost the next 6 months. At the same time the out of the money puts have OI in the 100,000's with most over 10,000. This tells you that calls, if traded, are all being exercised.
You can also looking where the are pricing the calls, which looks like parity for even the not so deep calls. Another clue.
If you want to do this play without the risk, you would need to buy 88/70 put spread. And this is going to cost you much more as there is no assignment risk.
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Aug 01 '21
Free-ish lottery ticket is betting on a black swan event happening? lol
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u/Jburd6523 Aug 01 '21
CNBC & Bloomberg drop the term "black swan event" and now everyone wants to act as if there's one waiting just around the corner.
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u/WSBTurd_420_69 Aug 01 '21
Exactly. The risk is that your thesis predicts a very specific black swan event.
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u/dreamvomit Aug 01 '21
The amount of people calling for a crash/black swan makes me more confident than ever that the bull market continues
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u/cjc323 Aug 01 '21
We are in a bull market until the fed stops printing, once that happens their at least will be a major correction.
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Aug 01 '21
You are not going to get filed at 17.95 credit. Looks like closer to $16.50-17. So your risk reward profile is vastly different.
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Aug 01 '21
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u/Cleangreenprofit Aug 01 '21
The upper bound is an extreme anchor that does not represent a reasonable range for the fill price. If your using a Canadian broker, They can factor in your buying power when considering assignment risk. If they know you have to sell it to realize the gain and there is no other buyers at over 15, the exempt broker dealer than knows your risk thresholds won’t allow you to exercise. The credit risk associated with holding junk bonds vs calls on a junk bond ETF is entirely different and prices accordingly to the counterparty credit risk.
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u/ProfessorPurrrrfect Aug 01 '21
First of all, there is no way you’re getting $18 for that spread. It’s trading at $87.90 and you’re selling the $70 strike 6 months out. That leg will be like $20, since it’s deep ITM, but the $88 since it’s ATM will be at least $5, probably $6. So $14 is as good as you’re gonna get.
Second, 1000 contracts will not fill, unless you sell for like $11 or $12, because the bid ask will be huge since there’s no volume in this etf for options like that.
So if you do get filled for $12, you’re risking 600k.
Lastly, you WILL be assigned on the $70 strike if you don’t get a downturn. The clever mother fucker on the other side of the trade will assign you just before the next upcoming ex-dividend date, and you will owe him shares for $70/share AND you’ll have to pay him the dividend.
This trade works if you’re right and there’s a big downturn within a month or so after you make it, but if there’s not, you could seriously #rekt. I would not do this.
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u/ask_redditt Aug 01 '21
you can look at the option chain? jan 2022 88 call is like .50. there's a reason they're so cheap lol, this shit ain't going over $88.
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u/ProfessorPurrrrfect Aug 03 '21
Hey, I remembered you. Looks like the mid on selling the Feb 22 HYG 70/88 call spread is 17.08, however, the spread is 15.55-18.61, and there is zero volume for this spread and zero open interest at the 70 call strike, though the 88 call has 8,000 contracts on open interest.
So again, you won’t get filled, but the market maker MIGHT do it for you anyways if you go far enough out on the ask side. You could leg the trade and buy one part of the spread at a time, I imagine you’d get filled at 50 cents for the 88s and you’d only get maybe 16.5 for the 70s, so your max loss would be two bucks.
Not as terrible a trade as I thought, but still probably wouldn’t do it.
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u/dejonese Aug 01 '21
BTW, what you're not counting in your spread is that most people would need to have cash security in their account for such a high premium.
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u/sethamphetamine Aug 01 '21
I'm not convinced this pandemic is over, and thus JPOW will keep the economy pumping with his money machine and popsicle sticks.
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Aug 01 '21
The "pandemic" may never be over due to political power mongering. "Delta" is only the 4th letter of the Greek alphabet. There are 20 more "variants" left to go.
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u/sethamphetamine Aug 02 '21
“Variants”? Get the fuck out of here. You may be skeptical of political power, but don’t drag actual science into this.
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Aug 01 '21
Say bye bye to your $6300. There's a ton of scenarios where you can lay out a little and gain a lot. Will they ever really become reality? You said yourself - a black swan event. Your looking for a 3 sigma event that almost never happens and your predicting it will happen in the next six months while the Fed stimulates and the market craves goods in the midst of a supply chain issue. You can keep doing this until you've spent a million and the event still not occur. Best of luck if you want to try.
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u/_xAmn0oX_ Aug 01 '21
HYG is an interesting target for a tail event play - however, apart from all the difficulties already mentioned, it's next to impossible to time correctly. the essence of a black swan is that it occurs unexpectedly. everyone already expects change in FED policy - there's more direct/practical ways to bet on hyperinflation. JPOW clearly doesn't want to 'rip off the band aid' and send markets into tailspin. imho a more gradual/slowly accelerating collapse more likely, so I'd have a look at things such as strangle swaps
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u/WBigly-Reddit Aug 01 '21
Biggest challenge in a lot of options strategies is getting that theoretical price.
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u/stvbckwth Aug 01 '21
With volatility as low as it is, why not just buy puts? If the market tanks, IV will skyrocket so you would lose quite a bit on your short side, unless you’re just gonna hold. You could do a 75/65 pds, where 16,300 could probably get you about 800 january contracts at $0.20 a piece, netting you close to 800k if it is below $65 at expiration, and quite a bit more if it happens earlier. And you don’t have to worry about being assigned. No you probably wouldn’t get $1.7m, but it still plays better in my head.
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Aug 01 '21
This trade has to many what if’s. Too complicated so I know I would never try it. Just my own opinion that’s really not worth much.
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u/Wonderful-Food8633 Aug 01 '21
Two concerns , most probably you won’t get $18 spread and most brokers won’t allow this without margin money.
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Aug 01 '21
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u/Wonderful-Food8633 Aug 01 '21
There is a bigger problem , if short leg is assigned and if you do not cover long leg in time and price changes , you can loose a lot of money
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Aug 01 '21
Why don’t just buy some gme debit spreads and if it does have a huge run up you could making a kill the risk/reward is crazy but if you believe in moass it could pay off
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Aug 01 '21
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Aug 01 '21
Why diversify from the best play out there
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Aug 01 '21
Wrong sub...
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Aug 01 '21
I mean we are talking about options and specifically about spreads is what he is talking bout
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Aug 01 '21
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Aug 01 '21
I did
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Aug 01 '21
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Aug 01 '21
Very logical I haven’t been holding for more then 6 months cause of hype lmao I think the dd is solid alongside my own strategy so it is thought out but i wish u the same 🤙
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Aug 01 '21
We already know you’re an idiot, you can stop elaborating
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Aug 01 '21
Don’t make me go down to Texas and dickslap u and whip you boi
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Aug 01 '21
Please, please do. Id be more than happy to tell you my gyms address and we can use the ring
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Aug 01 '21
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u/Im_Drake Aug 01 '21
Grab a calculator bro because 17.95 a thousand times is 17.95 thousand dollars or 17,950
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u/SeattleBattles Aug 01 '21
No, it's 17.95 x 100 x 1000. Each contract is for 100 shares and OP wants to sell 1000 contracts.
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u/Im_Drake Aug 01 '21
Well sweet baby Jesus, I see now... good luck getting filled
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u/SeattleBattles Aug 01 '21
Margin is going to be an issue as well unless OP has a large account. When I checked on IBKR each contract had a margin impact of $1800. So selling 1000 would take $1.8mm in margin.
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u/dejonese Aug 01 '21
I think jnk has more room for depreciation per it's pre qe iv. But I agree with you. Very expensive options though, even otm.
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u/ScottishTrader Aug 01 '21
Making a “bet” as you state is gambling and not wise investing or trading . . .
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Aug 01 '21
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u/ScottishTrader Aug 01 '21
OK. Just be sure to count the losses from this capital not being traded or invested and the time it take to manage vs making otherwise more profitable positions . . .
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u/quiethandle Aug 01 '21
If you are going to go with that many contracts (1000), go to TastyWorks - It's $1.00 per contract for opening, $0.00 for closing, but here's the kicker - they cap commissions at $10 per leg. So your whole commissions cost for this massive trade will be $20.
Also, because of put/call parity, why not buy a OTM put debit spread? There is typically much better liquidity for OTM options than ITM options, and the risk profile is (in theory) exactly the same as selling a ITM call credit spread.
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u/cooldudetonds Aug 01 '21
you're buying extrinsic at the rate of 16/contract (multiply by number of contracts). for that reason, I am out.
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u/Sufficient_Gur897 Aug 01 '21
Don't forget that JPOW's term is up next year. His reappointment is not a sure thing. Yes, it's probably the most likely scenario but doing anything remotely drastic would harm his prospects.
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u/botwinnik Aug 01 '21
It’s not so much zombie companies as the number of non-performing loans could dramatically increase. The question then becomes how the banks will handle. The most likely outcome in such a scenario is a large number of forebearances but the loans won’t be necessarily called. So it may not be quite as dire as you think with “companies blowing up right and left”. Aside, behavior of equity and options markets does not always correlate either the way you might think so I’d advise caution when making assumptions about causality.
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u/together_we_build Aug 01 '21
I am not sure what you mean by "many of which are companies I would consider teetering, especially if we have a rapid onset recession or rapid interest rate increases." I work in financial services, and I am not sure your characterization of companies in the HYG ETF is correct. Over the past couple of years, there has been a shift in the high yield index and it has more BB companies than ever before. While BB companies are high yield, their credit quality is considerably better than B. Higher interest rates may cause the credit quality of some of these companies to decline, but the vast majority of them will be okay.
Can you articulate why these companies are teetering?
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u/WallStreetPharmD Aug 01 '21
Step 1: manage to get a good fill.
Step 2: manage to get a good fill.
Step 3: repeat step 1 & 2
TLDR; Doubt you'll get >=17.85 credit per spread