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 Engineering Professor (EngProf6)

        Hybrid Timing Model for Analyzing Stocks and Indices


Last Updated:  January 21, 2007    



 Credit Option Spreads – Is this what I should be doing?


I have given this subject some thought. Perhaps, I’ve tried to be too careful – too conservative in latching onto credit option spreads. I am coming to the realization that credit option spreads now are not as appealing to me as they once were.


Option spreads have several major disadvantages. One that I’ve harped on for some time is the pricing. Remember when you trade a spread you are buying and selling 2 different options simultaneously. The gap between the bid and ask can be 20 or 30%. Moreover, even as the underlying stock price moves, the price of the spread does not move that much because the spread is priced as the difference between 2 options that move in the same direction.


This brings me to the second major disadvantage. Regardless of how big the move is, the maximum profit and loss are set when the spread is entered into. This can be a significant drawback when one is looking at large moves in the markets.


My tendency as we go into 2007 is to simply buy calls and puts the ‘old-fashioned way’. I actually did that on Friday, the last day of 2006. I bought 5 calls on the SPY (ETF). These are the Jan 143 calls. I paid $1.00 around 2:30 pm. The markets then suffered a relapse and they closed at around 80 cents. I am going to see how this works out. I will try it a few times before I formulate a conclusion.


At this point, however, I prefer trading the futures.



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