Engineering Professor (EngProf6)
Hybrid Timing Model for Analyzing
Stocks and Indices
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.