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AlbertDumb
10-28-2015,
Hey all,

I just want to check if I'm thinking correct, doing paper trading and trying to get a few concepts to stick.

I put on a trade in USO yesterday, which at the moment of my trade was trading at 19 and a bit. I've put on what I belive is a call spread (???). I sold the april 20 call and bought the april 21 call hoping the stock stays where it is or goes down or not up to much. Am i correct here?

Now in my monitor tab i am plus minus zero on the trade. The 20 call i sold is up $20 and the 21 call i bought is down $20. Im not really sure why the two move in different directions though?

All advice is much appreciated!

alutixusini
10-30-2015,
Ye any time you sell a more expensive option and buy a cheaper option it is called a credit spread...means you received a credit. Your max profit is the credit received and you max loss is the width of the strikes minus your credit received. So yea when you sell a call spread it is a neutral to bearish play. Don't look at the P/L of the individual positions....pay attention to the overall P/L.

If you put the trade on as one...treat it as one position. Don't try to leg out individual strikes. When the position gets to your profit target buy back the whole thing at once. If the price moves against you...wait it out....your risk never changes...your max loss will never be more than the width of the strikes minus the credit received.

aojlhjpo09
10-31-2015,
Thanks for the reply! Ok I undestand. What would a reasonable profit target be in this case? And in the tastytrade videos they always talk about your probability of success, is this type of trade falling under the category of high probability?

Anthonyfamy
10-31-2015,
Ye ...you can approximate your prob by looking at the deltas. Just subtract your credit received from the short strike and that gives you your break even point. Then you can look at that prices probability of OTM or ITM or Deltas. Without looking I'm going to guess you collected around .33 so your probability of success was around 60%+. Tastytrade research shows that the best exit is around 30-50% max profit....but being that you only collected prob .33 it would really suck to get out at .16 and pay 6$ per spread for the round trip. So if it were me I would have made the strikes wider say 20-18 if I could collect .60 or more then look to exit when I could buy it back for .25 or so.

But as it is I would hold on to it until you can get enough to cover the fees and still make a little.

Also as soon as I was up a little I might look to sell the other side (put credit spread) anywhere I could get another 1/3 the width of the strikes (creating an iron condor) as that would get you another .33 cents without using anymore buying power and the probabilities won't change much.

Also (more advanced) if you do put a trade on the other side you could go 2$ wide creating a skewed Iron Condor eliminating the upside risk altogether or close to it. But that would require another 140 in buying power reduction per spread (approx) and put all your risk to the downside....but that's just one of the things I do when I think something might have bottomed out and could turn around.