Replies to post #44603 on Options Wonderland

[leemalone2k3]

Good questions.

1. Legging into a trade means that you buy the option in one trade and you sell the option in another trade. If bullish using calls you would obviously enter the long side at support and the the short side at resistance. That way you are buying the calls when it is cheapest and selling the next strike up when it is more expensive. The pro of legging in is that you may get better prices. The con is that if you choose the wrong entries, you can end up paying too much and getting too little in return. You can also enter the trade as a single execution.

2. TOS charges a flat 1.50/contract fees with no added fee so the trade would cost you 3.00 to enter the spread-1.50 for the bought call and 1.50 for the short call. You may be able to negotiate a smaller fee. They also allow you to buy back any short position that is worth .05 for no commission so you can take all your risk off the table very cheap. You dont want to go into expiry holding a short position if you have made a nice profit on that because options expire Saturday and if news comes out on Friday after the market closes you can really screw yourself.

There are two types of verticals- credit and debit spreads. If you have sold a bull credit spread you would buy a lower strike put and sell a higher strike put. If you have sold a bearish credit spread you will be buying higher strike calls and selling lower strike calls. If the bull put spread closes above the higher strike prices then both puts expire worthless on expiration. You dont even have to close the trade, both options expire worthless and you keep the entire credit. The same is true if you have sold a bearish call credit spread. If the stock is below the lower strike on expiry, they both expire worthless and you have no closing commission. Remember that you still have risk on the short side, so to be safe, you could close out your short side only and pay commms on that.

Debit spreads are different. You must close out the trade manually even if they are in the money.

The two types of debit spreads are the Bull Call and the Bear Put. In these cases you are buying the spread instead of selling the spread. If bullish you would buy the lower stike call and sell the higher strike calls. If bearish, then you buy the higher strike puts and sell the lower strike puts. Play credit spreads during high volatility


To determine the profits and losses:
Credit Spreads-
Max gain is the credit you bring in.
Max losss is difference between te strike prices minus the net credit.
Breakeven- Driver (more expensive strike)+/- Net credit, depending on whether its a cal or put.
BE Bull Put= Driver-Net Credit
BE Bear Call= Driver + Net Credit
Margin required is the Difference between the Strikes x # of shares minus the net credit
Early exercise=Max LOSS

Debit Spreads-
Max Gain= Difference between the Strikes - net Debit
Max Loss= Net Debit
BE for call spread= Bought call Strike+Net Debit
BE for Put Spread= Bought Put Strike-Net Debit
ROI= Max Gain divided by the Net Debit
Early exercise produced Max Gain.
There is no Margin required because you are buying the spread, not selling it.


I would strongly advise practicing these trades in the TOS paper acct until you can execute these trades without having to think about how to do them because if you fat finger and exectue the wrong trade you can end up being in a naked short position accidentally. You dont want this to happen.

One other thing, TOS gives a 50.00 referral to any members who refer others that fund an acct. If you decide to fund with them I would really appreciate if you would use me as your referral. All you need to do is give them my name and acct. # which I will be happy to email to you.

Hope this helps.

lm2k3