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Re:Introducing Multi-Leg Options Strategies by koolba on Wednesday June 13, 2018 @10:30AM (#17303387)
Multi-leg option strategies are designed to constrain the total risk exposure and possible profit of a combination of trades.

One of the simplest example is to sell a call at $X and purchase one at $X+N[1]. The purchased call is insurance against being on the hook for an unknown rise in the prices of security (which would then be exercised against your sold call). The "bet" in this case is that the rise in the price of the stock during the period of the spread is not going to rise above $X by more than the price difference of the two options.

All the rest of the fancy names are combinations of buying or selling these types of combinations. The names come a combination of the desired result (ex: "strangle") or the shape of the profit graph (ex: "condor").

Do a lot of reading before dipping your toes into options trading. On the one hand it's arguably less risky than regular equities as you "know" what you're risking. On the other hand it's very easy to get wiped out as well. Something as stupid as not closing your our spreads before expiration can destroy your account if they get exercised.

[1]: https://en.wikipedia.org/wiki/Bear_spread#Bear_call_spread

Re:Introducing Multi-Leg Options Strategies by ryandrake on Wednesday June 13, 2018 @11:35AM (#17304054)
Honestly these tools remind me of all the “systems” gamblers are constantly coming up with, thinking they can beat the casino in the long term. Complete with the goofy names and cottage industry of books, experts and courses teaching you the system.
Re:Introducing Multi-Leg Options Strategies by throwawaymath on Wednesday June 13, 2018 @01:54PM (#17305473)
There is a cottage industry of people selling trainings and courses for trading options. As you'd expect, this tends to attract many of the same people as the older day trading training industry. If you visit /r/options or /r/algotrading you'll see plenty of this spam in action. Instead of learning options theory from first principles, these courses focus on rote memorization of common patterns (e.g. "what is an iron condor"). Naturally the market is efficient enough that such a brittle understanding of derivatives and market dynamics is not consistently profitable.

The people in the know (those who actually beat the market) don't teach other people how to trade, because giving away information is strictly less profitable than trading on it yourself (or on behalf of your firm). They also very rarely trade their own capital, and typically work within funds. This sets up a dynamic where it's extraordinarily difficult to learn the "proper" principles of derivatives trading in a sound framework of market microstructure unless you join a firm, because all public information on the subject is almost definitionally misleading. The next best thing is to learn from established textbooks, but surprise, very few people want to read three - five textbooks with advanced mathematics instead of watching a few webinars on "the greeks."

Re:Introducing Multi-Leg Options Strategies by jonknee on Wednesday June 13, 2018 @11:42AM (#17304131)
It's just different ways of describing risk/reward. Unlike a casino you can take either side of the contract.
Re:Introducing Multi-Leg Options Strategies by ryandrake on Wednesday June 13, 2018 @12:09PM (#17304373)
It’s more like poker in the casino. There are at least three sides: player A (you), player B (your counterparty), and the casino (Wall St.). It’s zero sum between A and B, but the casino always takes their cut. +EV for the casino means -EV for the players on average
Re:Introducing Multi-Leg Options Strategies by function_seven on Wednesday June 13, 2018 @12:22PM (#17304530)
Yeah, I always visualize large ask/bid spreads as the "rake".
Re:Introducing Multi-Leg Options Strategies by radiusvector on Wednesday June 13, 2018 @11:49AM (#17304197)
How can you "wipe out" your account if you don't close a spread? AFAIK Robinhood does not allow for naked calls/puts or selling strangles without a collateral upfront.
Re:Introducing Multi-Leg Options Strategies by koolba on Wednesday June 13, 2018 @12:33PM (#17304627)
If you don't close a spread prior to it expiring then it's possible for a execution of the option by the counter party. In that situation you can be forced to either provide the securities (if you sold calls) or forced to buy the stock (if you sold puts). As it happens at the expiration of the option you no longer have the option to exercise the other half of your spread.

As the margin required for a spread is substantially less than the full price of the security (which is the whole point of the spread), you can end up in a situation where you're forced to buy more stock than the total liquidation value of your portfolio. Plus this happens at the close on a Friday (as that's when option expiration happens) so you can't liquidate the stock until Monday morning and you're at the mercy of the opening price. If the quantity of options sold is large enough and the price moves against you far enough, you can get completely wiped out.

It's your responsibility to close out your spreads prior to close. FYI, this situation can happen even if they're out of the money as the counter party to the worthless option could still choose to exercise it.

Re:Introducing Multi-Leg Options Strategies by radiusvector on Wednesday June 13, 2018 @12:54PM (#17304844)
Could you give me a concrete example?

To me, it sounds like you are describing a naked short call, or a short put.

It is not a spread. By definition, spreads have limited risk, and limited rewards.

The four main types of spreads. Take a look at the PNL diagrams. It is limited risk. https://www.optionseducation.org/strategies_advanced_concept... https://www.optionseducation.org/strategies_advanced_concept... https://www.optionseducation.org/strategies_advanced_concept... https://www.optionseducation.org/strategies_advanced_concept...

Re:Introducing Multi-Leg Options Strategies by koolba on Wednesday June 13, 2018 @01:05PM (#17304976)
Read this article: http://tastytradenetwork.squarespace.com/tt/blog/options-ass...

The situation I’m describing is when the sold option expires in the money but the purchased cover does not. It won’t automatically execute and you’re left with essentially a naked short.