A bull put spread is a type of options strategy used by investors who anticipate a moderate rise or at least stability in the price of the underlying asset.
I am not a professional trader. I am learning option strategies. In this article when yo talk about "eliminating the tail risk. This is our preferred solution." What do you mean by that? Could you please write an example of such strategy to minimaze losses ?
In the article cited, the author used a far out-of-the-money put credit spread that has tail risks, hence he needs to use stop loss.
If you use near ATM, or OTM call debit spreads, you still have risks; if the market goes down 3, 4% you still lose, but you don't have tail risks, i.e. if the market goes down 20% you don't wipe out your account.
I prefer this structure instead of using stop loss.
Thank you for the response, but as I understand how spreads work, I don't undestand the difference. I'll try to explain myself.
I understand that in the case of buying a Debit Call Spread, my maximum loss is what I've paid to open that strategy, so no matter how much the market falls, I will only lose that amount.
But I understand that in a Credit Put Spread of 5 points, I also have a limited maximum loss. In this case, $500 minus the credit received. From that perspective, if the market falls 20% or there is a catastrophic event, my maximum loss will always be $500 and I won't have the possibility of wipe out my account.
Surely there's something I don't understand, and if you would be so kind as to explain it to me, I would appreciate it.
On the other hand, using one type of spread or another I believe changes the idea of what the stock can do, and from this perspective, using one or the other differs. That is, a Credit Put Spread reflects that I expect the stock to remain sideways or if it falls, not beyond the sold strike. And I protect the positicon buying a put just in case the stocks falls beyond the strike.
And in the case of a Debit Call Spread, what I expect is that the market will rise at least to the strike of the purchased call, and the sold call helps to minimize the cost of the strategy and as a second consequence, I minimize my potential profits.
However, here I'm talking about far OTM put credit spreads where you risk $5000 to make $500. Many traders, even pros (e.g. Allianz structured alpha which blew up during covid) prefer this structure because it has a high win rate. In this case you need stop losses. If you trade near ATM and have bounded risks then you don't need stop losses, although some people still use them
Good morning !
I am not a professional trader. I am learning option strategies. In this article when yo talk about "eliminating the tail risk. This is our preferred solution." What do you mean by that? Could you please write an example of such strategy to minimaze losses ?
Thanks in advance
In the article cited, the author used a far out-of-the-money put credit spread that has tail risks, hence he needs to use stop loss.
If you use near ATM, or OTM call debit spreads, you still have risks; if the market goes down 3, 4% you still lose, but you don't have tail risks, i.e. if the market goes down 20% you don't wipe out your account.
I prefer this structure instead of using stop loss.
Thank you for the response, but as I understand how spreads work, I don't undestand the difference. I'll try to explain myself.
I understand that in the case of buying a Debit Call Spread, my maximum loss is what I've paid to open that strategy, so no matter how much the market falls, I will only lose that amount.
But I understand that in a Credit Put Spread of 5 points, I also have a limited maximum loss. In this case, $500 minus the credit received. From that perspective, if the market falls 20% or there is a catastrophic event, my maximum loss will always be $500 and I won't have the possibility of wipe out my account.
Surely there's something I don't understand, and if you would be so kind as to explain it to me, I would appreciate it.
On the other hand, using one type of spread or another I believe changes the idea of what the stock can do, and from this perspective, using one or the other differs. That is, a Credit Put Spread reflects that I expect the stock to remain sideways or if it falls, not beyond the sold strike. And I protect the positicon buying a put just in case the stocks falls beyond the strike.
And in the case of a Debit Call Spread, what I expect is that the market will rise at least to the strike of the purchased call, and the sold call helps to minimize the cost of the strategy and as a second consequence, I minimize my potential profits.
Is that right?
You're correct.
However, here I'm talking about far OTM put credit spreads where you risk $5000 to make $500. Many traders, even pros (e.g. Allianz structured alpha which blew up during covid) prefer this structure because it has a high win rate. In this case you need stop losses. If you trade near ATM and have bounded risks then you don't need stop losses, although some people still use them