32 lines
2.2 KiB
Plaintext
32 lines
2.2 KiB
Plaintext
The Interrelations of Credit
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Spreads and Debit Spreads
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Many traders I know specialize in certain niches. Sometimes this is because
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they find something they know well and are really good at. Sometimes it’s
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because they have become comfortable and don’t have the desire to try
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anything new. I’ve seen this strategy specialization sometimes with traders
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trading credit spreads and debit spreads. I’ve had serial credit spread traders
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tell me credit spreads are the best trades in the world, much better than debit
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spreads. Habitual debit spread traders have likewise said their chosen
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spread is the best. But credit spreads and debit spreads are not so different.
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In fact, one could argue that they are really the same thing.
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Conventionally, credit-spread traders have the goal of generating income.
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The short option is usually ATM or OTM. The long option is more OTM.
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The traders profit from nonmovement via time decay. Debit-spread traders
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conventionally are delta-bet traders. They buy the ATM or just out-of-the-
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money option and look for movement away from or through the long strike
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to the short strike. The common themes between the two are that the
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underlying needs to end up around the short strike price and that time has to
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pass to get the most out of either spread.
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With either spread, movement in the underlying may be required,
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depending on the relationship of the underlying price to the strike prices of
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the options. And certainly, with a credit spread or debit spread, if the
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underlying is at the short strike, that option will have the most premium.
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For the trade to reach the maximum profit, it will need to decay.
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For many retail traders, debit spreads and credit spreads begin to look
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even more similar when margin is considered. Margin requirements can
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vary from firm to firm, but verticals in retail accounts at option-friendly
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brokerage firms are usually margined in such a way that the maximum loss
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is required to be deposited to hold the position (this assumes Regulation T
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margining). For all intents and purposes, this can turn the trader’s cash
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position from a credit into a debit. From a cash perspective, all vertical
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spreads are spreads that require a debit under these margin requirements. |