<<Have spread plays been effective for you?>>
Yes, so far. But, so far, I have been correct on the movement of the underlying. Beginner's luck. (g) And you do need movement with debit spreads to make money since it is essentially a long call or put position with some help. You can't sit back and wait for time to expire as with covered calls. The short half of the position helps reduce or eliminate the time premium for the long half which makes it more attractive than just going long.
For example, with QCOM at a little over 42 the 45/40 put spread cost me $2.95. In other words it didn't cost me any time premium to control the stock movement between 45 and 40 for two months. Shorting the stock outright would have not involved any time premium either, would be more profitable with QCOM heading way south of 40, but would have required a lot more capital to control the same number of shares. Reduced risk with reduced reward still applies.
The combination of two option positions means that the spreads can kill you if you want to close the position early. I am finding that, without a big price move, one has to be patient and wait for expiration to wring profit out of a spread. Or else bail early and preserve capital. I did the latter with a SEBL put spread recently that would have worked out very profitably if I had not gotten nervous waiting. On 3/21, with the stock around 33, I bought the SEBL Apr 30/25 Put spread for 1.10 (Max profit potential 5 - 1.10 = 3.90). More risky since it was OTM than the ITM QCOM spread so I watched it more closely. On 4/2, almost halfway to expiration with the stock having moved only 2 dollars to a little over 31, I bailed out. The spread netted me the same 1.10 getting out so it only cost me commissions. Of course, the next day the slide started in earnest. Capital preservation has become very important to me in this market, so I don't regret the defensive move, but that 355% profit (quite a bit of leverage there) would have been nice.
I think Dan and I are talking about the same approach (puts being a better way to take advantage of a decline in price than covered calls) but a put spread has even less capital at risk than a long put does. I am just trying to develop tools to use in a variety of situations. And I am trying to be agnostic in my view of the market. Credit spreads for flat markets. Debit put spreads in down trends, debit call spreads in up trends.Whatever will make money. I still have some covered calls, but I am doing buy/writes with deeper ITM calls six months or so out in most cases given the perils of this market. I have very few uncovered long stock positions and I am about half in cash. Spreads (on QCOM, QQQ and OEX) amount to less than 5% of my total investments. |
