#bear spread

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TRADE IQ WITH OPTIONS STRATEGY(BINARY OPTION STRATEGY). IQ OPTIONS REVIEW 2017 [… TRADE IQ WITH OPTIONS STRATEGY(BINARY OPTION STRATEGY). IQ OPTIONS REVIEW 2017

[naeem987]

[tickertank]

Vertical Spreads How To, Part 3: Maximum Entry Price

We're back with part 3 of our Vertical Spreads How To series.  In part 2 we discussed our minimum entry price rule of one third the width of the spread. Now let's take a look at the maximum entry price rule.

What is the most you will pay when entering a Vertical Spread?

When you are considering maximum price on entry with a vertical, you are looking at an aggressive spread.  Therefore, you will be looking at buying a Debit Spread.  The most we pay for a Debit Spread 99% of the time is half the width of the spread. 

Let's look at a few examples...

If we're looking at a bullish SPY spread on this mornings weak opening, we may be looking to buy the 114/115 Call Spread.  Since the width of the spread is 1 (115-114), the most we would be willing to pay is 0.50, or a $50 debit per spread.

Let's say we're bearish on Gold here and want to play it via a GLD vertical.  We're confident in our direction, so we want to play a bearish Debit Spread. We may buy the 182/185 Put Spread. This spread is 3 points wide (185-182), so the most we would pay is 1.50, or $150 debit per spread.

We cap ourselves out at half the width of the spread because anything above that is getting a bit too aggressive from a probability perspective. generally if you are paying half the width of the spread, your probability of success is 50% (give or take a few percentage points). 

Per our experience, it's not worth pursuing a spread that offers less than 50% probability of success for obvious reasons.  Frankly, we sell Credit Spreads with 55%+ probability of success more often than anything else. 

The math is easy, pulling the trigger on the trade is the hard part.  That's why we're sharing our Vertical Spread rules with you, we hope this will make you more confident in your trading abilities. In turn, we hope that leads to higher trade frequency which hopefully translates to increased annual income from trading.