Articles

Calculations for the bear call credit spread

by Michael Thomsett

Among the range of vertical spreads, the bear call credit spread is of special interest to traders. Although it employs calls exclusively, it is used for a bearish sentiment. In a similar manner, its opposite, the bull put credit spread is based solely on puts but represents a bullish assumption. The bear call credit spread… [READ MORE]

Calculations for the bear put debit spread

by Michael Thomsett

The bear put debit spread is designed to limit losses, in exchange for also limiting profits. It combines a long in-the-money put with a short out-of-the-money put, each with the same expiration date. This sets up the limited profit and limited loss, illustrated in the payoff diagram. A profit is realized when the underlying moves… [READ MORE]

Calculations for the bull put credit spread

by Michael Thomsett

The bull put credit spread yields either a limited profit or a limited loss. This makes it a desirable strategy, in which the limits work out favorably for both sides. A limited profit is acceptable in exchange for a limited loss, making it a conservative strategy. When underlying volatility is high, this credit spread is… [READ MORE]

Calculations for the bull call debit spread

by Michael Thomsett

The bull call debit spread offers one of two outcomes: limited profit or limited loss. It sets up as a debit in every case. Outcomes depend on the bid-ask spread and also on selection of strikes. Because the outcomes vary with these considerations, profit, loss and breakeven will vary as well. This consists of a… [READ MORE]

Probability – Is your options calculation accurate? (Probably not)

by Michael Thomsett

How do you calculate probability? One mathematical paradox is that a commonly used method is inaccurate. The additive method is used frequently. In this method, you calculate the likelihood of one outcome. For example, in the roll of one die, there is a one in six chance of any one number coming up, right? Consider… [READ MORE]

Options: 4 Ways To Exploit Price Changes 

by Michael Thomsett

Many traders start out with a sensible plan, only to abandon it because of the way the markets move. This abandonment of a smart plan may lead to potentially large net losses. In entering a trade, it is sensible to set two goals: the point where profits will be taken, and the bail-out point where… [READ MORE]

T-line convergence and divergence

by Michael Thomsett

The timing of entry and exit may be made based on numerous signals. One that often is overlooked in the trend in the t-line and more specifically, how that trend moves in relation to the Bollinger middle band. The middle band is a 20-day simple moving average, whereas the t-line is an 8-day exponential moving… [READ MORE]

Covered Calls – Calculating Total Return

by Michael Thomsett

How much return do you earn from writing a covered call. The answer: That depends. There are two important qualifying tests to apply in order to ensure like-kind comparisons between two or more covered call outcomes. Assume you write two different covered calls on the same day and both expire worthless. Also assume that both… [READ MORE]

Can you overcome losses with bigger risks?

by Michael Thomsett

Trading is a lot like chess. You need to look several moves ahead, coordinate attack and defense using multiple pieces, and recognize what is going on with both players at the same time. More than anything else, traders need to apply the chess rule when it comes to losses. There is offense and there is… [READ MORE]

Options – When to use the Collars as a Portfolio Management Strategy

by Michael Thomsett

The problem for anyone in the market is the threat of loss. Owning stock means you risk a decline in the price, and this is where some specific options-based protective strategies are exceptionally valuable. One such strategy is the collar. The collar has three parts: 100 shares of long stock, a short call, and a… [READ MORE]

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