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You have approximately the same downside risk as with an outright future. The advantage is that you can liquidate the different options at different times. The disadvantage is higher commissions.
Yes indeed, as I dig deeper into the strategy am beginning to better understand the pros and cons.
The advantage is that i buy an ATM by selling other stuff which brings my breakeven much much closer. If the sales cover the cost of purchase... then a little move onside can result in a green PnL. (Like a furtures).
There is also a better ROC here, simply because I don't have the margin used for a futures. I didn't think of that initially.
But yes... you are right... risk is the same as the outright... if the price moves down (in my bullish example)... I start to loose from the long call spread portian instantly ...
So even though..my initial outlay can be small.... I could loose more than small premium paid. (Up to put spread width).
In the example below, I still loose between 115 and 110
Short call at 120
Long Call at 115
Market at 115
Short put at 110
Long long 105
Can you elaborate on how u would leg out ?
Or exit the legs at different times?
You will have approx. the same margin requirement as for the future.
The exit strategy depends on the development of the trade. Normal case would be to liquidate all positions at the same time. But I would liquidate the short option in case it is almost wprthless to reduce downside risk.
It is important to recognize which kind of trades to enter at certain times.
In recent years, optoin selling was not very promising. On the one hand, Mr. Trump is unpredictable. On the other hand, option premium was low.
But in recent years, stocks moved up significantly. I expect this to continue in 2020, as Mr. Trump will do everything to assist stock prices, as he wants to be elected.