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Credit Spread Options vs Our Method of Options Trading

Credit Spread Options vs San Jose Options' methods. Here are two ways to manage a directional play, but see which is safer and which can yield more.
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Credit Spread Options vs Our Method of Trading

Video Transcript

Hi everybody! Welcome to Strategy Comparison by San Jose Options. In this video, we’ll be discussing the difference in comparing credit spreads to one of our favorite strategies and give the option trader an idea of some of the different possibilities out there besides just using simple credit spreads. To do this, we’ll be using Thinker Swim and let’s go ahead and get started.
What we’re looking at here is actually a high probability credit spread using spy, the spiders, and we’ve set this credit spread up to be a play to the downside. It’s actually a bear call spread. You can see our Greeks here, most of them and you can also see the risk graph. Let’s first go ahead and look at our starting position. This trade, first of all, I have over here you can see, this is an investment of $18,000 and we’ll be comparing it side by side with one of our strategies, which also is of $18,000.

The first thing I want to point out here is when you enter this credit spread, you’re immediately entering into a very directional trade. Go ahead and look down here and you’ll notice that they have almost a 600 negative delta. This means that for every point spy goes this direction, you lose $600. And every point it goes this way, you can make $600. But essentially, this is a very directional trade. Keep that in mind when you’re trading credit spreads. We also have a very high gamma so as the price changes then our delta’s going to even get worse. The theta is fairly okay, almost $80 a day on the theta and we have a vega of -328 which means that we can profit $328 if the volatility drops. Let’s bring in our trade now to compare.

To start with, I’d also like to point out, our trade here you can see is $18,000 if you look at the green numbers. So we’re essentially investing the same amount of money. Let’s come over here. Let’s take a look at our starting point on our trade. You’ll see the delta is more neutral and still a little bit positive. The other one I believe was over 400 or so. This is only a hundred delta. Our gamma is more intact, not such a great gamma, meaning that our position is less volatile. Our theta is almost as healthy as the other one and our vega is more neutral. The other one had a really negative vega which exposes you to rises in volatility. Essentially, the beginning of our trade is much more relaxed. You’re not jumping into a fire. You’re not jumping into a speed boat. You’re just riding on a cruiser.

Continuing back to the credit spread, actually that was a negative almost 600 delta, huge difference – almost a 400-point difference. really showing the difference how directional this one is compared to ours. Now, what I want to do is, the next step I want to do is I want to compare these trades 2 weeks down the road. So, we’re going to change the time by 2 weeks using Thinker Swim. Let’s go ahead and do that. To do this, I come over to Thinker Swim and you’ll watch and I’ll just change these 2 weeks ahead of time. I’ll go approximately to July 2nd. Let’s compare the numbers now. So we went 2 weeks ahead of time, let’s look at the credit spread. Let’s do some stress testing with prices. What I’m going to do is I’m going to say, “Let’s see what happens if the price moves up, approximately 6 points.” If we do, we’ll be right here and you’ll see that the credit spread will be down about $4,500 and that’s at the 142 mark. Let’s write this down on paper. That’s approximately minus 4500. If we go down now, 6 points will be down to about the 130-price or so. Let’s drag this over here to 130 and you’ll see, if this occurs, we’ll be at about $18-1,900. Let’s just put 1900. Now what I’m going to do is I’m going to add those 2 numbers together and this is what I call my plus or minus relativity score and let’s add those together and see what kind of number we come up with. If we take 1900 and move to the upside and if we subtract the 4500 6-point move to this side, we end up with a -$2,600. So this gives me an idea of the kind of odds that I’m looking at before I enter a trade. It’s a great way to analyze your trade and do some stress testing. Let’s compare the plus or minus 6 points with our strategy.

Our strategy, I left this one here, so right at the 130, well, we’ll only be up about $265. Write that down, 265. And let’s see what happens on the other side of the graph. If we go back to the 142.50, you’ll see our trade would be up $650. So as I said earlier, our trades are less volatile and definitely a lot safer. So let’s add those up. We got 650 plus our 265 and we come to $915. So at this point in the video, our stress test after 2 weeks shows our strategy up 915 and the credit spread at a -$2,600, testing the different probabilities. Let’s look at what would happen after 2 more weeks.

Let me go ahead and change this to about the 15th or so, maybe 16th, maybe 17th of the month form today. Let’s put the credit spread through the test. Okay, 136, 10-point move to the upside. Look where we are. We’re over here, -14, almost -$15,000. Let me write that down and let’s do the downside move to about the 126 area. One-twenty six-fifty or so and this trade is up $1,900. Let’s add up the -15,000 and the positive 1,900. You’re popular credit spread gives us a -$13,100. Now let’s take a look at our trade. So our trade, if it goes against us, it’s got up to 146 over here. We’ll see we’re ahead $561. Let me write that down. Okay so 561, if we’re wrong on the trade. Guess what happens if we’re right on the trade folks. If we’re right on the trade, we go down to 126 in change, look where we are, we’re up 9,000, almost $9,400. Let me write that down.

Here come the results. Our trade up $9,961, the credit spread down $13,100. That’s the difference in your account of approximately %23,000. What do you guys think?

So here you have it folks, the result of our plus or minus stress test: our strategy a positive $9,961, the credit spread, based on a similar trading strategy, a trade to the downside, the credit spread overall, doesn’t pass the stress test, -$13,000. Just a great way to demonstrate how directional the credit spread is. It really is a directional trade and it’s just not the best strategy in the world.
Hope you guys have enjoyed our video here and please visit our website. Once again, thank you very much! That’s sjoptions.com. maximum safety, maximum reward. Thank you very much!