Re: Need help and guidance in understanding Option Trading

Thanks to Jessie and Ryan for giving me the pointers to read and learn
some more on the basic of option trading.

I will like to pursue further the pointers given (Ryan, I just emailed
you for more info.)

In the meantime, I wlll appreciate if someone could also read my
previous post and correct my logic presented for me to learn faster.

QuaSyLaTic, Andrew



[EMAIL PROTECTED] (QuaSyLaTic) wrote in message news:<[EMAIL PROTECTED]>...
> Jim,
> 
> Thank you very much for your response and explanation. I appreciate it
> very much.
> 
> First, I go along with your assumption on vertical spread.
> 
> You said,
> 
> >If you buy a lower strike and sell a higher strike, that's bullish. 
> If you buy a higher strike and sell a lower strike, that's bearish. 
> There are two parts to this type of vertical spread, the amount you
> get and the amount it costs you.
> 
> As a rule or procedure and logic, I am ok with the above. 
> 
> >If you set up the spread as bearish with calls or bullish with puts
> (the sold option is more expensive than the bought option) you are
> said to be "selling" the spread;  you get a credit (the amount you
> get) first and must close the spread at a debit (the amount it costs
> you) later, hopefully less than your credit.
> 
> >If you set up the spread as bullish with calls or bearish with puts
> (the sold option is less expensive than the bought option) you are
> said to be "buying" the spread;  you get the spread at a debit (the
> amount it costs you) first and then close the spread at a credit (the
> amount you get) later, hopefully more than your debit.
> 
> You explained very well the distinctions between Credit Spread, and
> Debit Spread.
> 
> My difficulty is the logic of vertical spread of bullish with puts
> (the sold option is more expensive than the bought option) as follow:
> 
> a)    I can understand vertical spread of bullish call (debit spread),
> i.e. buy low, sell high. Hence I buy call at lower strike, sell call
> at higher strike price. On or before the expiration date, I could
> exercise my right either to buy the underlying asset at lower strike
> price and sell the same at higher strike price if the market moves in
> my expected direction and price. Or, I could sell the lower strike
> price option as it is ITM with higher option value if the market also
> moves in my expected direction and price.
> 
> b)    I am now thinking of using the same logic as above in the bullish
> put situation, i.e. in order to buy at lower strike price, I sell put
> at that low price with the view that if I get exercised, I can acquire
> the underlying asset at lower price.  At the same time, I buy a put at
> higher strike price, with the view that if the market moves up to that
> level, I have the right to sell at the higher strike price.
> 
> As far as logic is concerned and follow the rules of Call and Put,
> does the above comply?
> 
> I do understand that the above is still a debit spread, not credit
> spread, hence not making full advantage of the purpose you had
> mentioned on Bullish Puts with Credit spread.
>  
> c)    Now coming back to your explanation of &#8220;bullish with puts
> (the sold option is more expensive than the bought option)&#8221;:
> 
> In order to achieve Credit spread with sold option more expensive than
> the bought option, we need to buy put at lower strike price (Near the
> Money, hence lower option price) and sell put at the higher strike
> price (ITM, hence higher option price).
> 
> My Concern on the above : By doing so, we get a credit spread with the
> hope that Sell Put at higher strike price expires worthless, and we
> keep the original credit in the account. But at the moment we sell put
> at higher strike price, it is ITM, which can be attractive to the Put
> buyer, who may like to exercise the right to sell to me at that higher
> strike price (higher than the current market price). Isn&#8217;t that
> much to my dis-advantage?
> 
> Furthermore  it goes against the logic I stated in b) i.e. Sell Put at
> higher strike price, with obligation to buy at higher strike price if
> exercised (when market price is low) and Buy put at lower strike
> price, which means Buy High and Sell Low?
> 
> This is where I get stuck with my originally stated logic. Please help
> me to UNLEARN.
> 
> > 
> > "QuaSyLaTic" <[EMAIL PROTECTED]> wrote in message
> > news:[EMAIL PROTECTED]
> > > I am a novice on option trading.
> > >
> > > I appreciate help and guidance to a spicific question I have as at
> > >
> > > http://www.360q.com/Options/Option_Query1.htm
> > >
> > > Appreciate you email me at [EMAIL PROTECTED]
> > >
> > > Regards
> > >
> > > QuaSyLaTic, Andrew