limited risk reversal spread trade

[jim leahy]

there's an article in the september "technical analysis of stocks and commodities" magazine, called
"the limited risk reversal spread trade". it details a variation of a risk reversal, but it seems
more like a variation of a long call to me. anyway, the article is written by robert j. seifert who, according
to his bio, is president and ceo of optionomics group llc. i was curious what that was about so i went
to the web site, https://www.optionomicsgroup.com. it's an option trading service, like many others, that send
you trades for a monthly subscription. it turns out mr. seifert wrote a book last year called "trading options
my way". if you scroll half way down their web page there's a link to a pdf of the book. in the book, he details
this trade and several others. i think it's an interesting trade and i'm considering trying it. this is not a
recommendation, nor endorsement for optiononomics. i'm not a subscriber.

 

[BrandonW]

Hey @jim leahy, were you able to incorporate any of Optionomics information/strategies? I downloaded the eBook just now. Will check it out this week. The "Scoreboard" on their website did not peek my interest too much, but I'm always interested in learning other methods. Thanks for sharing.

 

[jim leahy]

brandon, i've used this trade for several months, but stopped after the crash because liquidity
dried up in a lot of the stocks i was trading. i'll trade it again when liquidity returns. i've done it
using stocks i own, as a covered call replacement, as well as using a longer term deep in the money
call as stock replacement. the benefit of using a deep in the money call is it limits your downside
risk without hindering the upside. the big disadvantage is when the stock drops a lot and approaches
the long call, you can't do the spread for a credit any more. the negative theta on the long call is too great.

this is a bullish strategy so when stocks go down profits are difficult. one of the characteristics of the trade
that isn't mentioned in the book is when the stock is rising a lot, you have to roll the spread for a debit.
granted, you make more on the stock than you lose on the spread, but it's still a loss. if the stock drops
again you may have a net loss. when the stock drops, you roll for a credit but lose on the stock. this is
no different than writing a covered call but it's not acknowledged in the ebook.

i don't know if it's more profitable than covered calls but i can do this trade and not have to worry the stock
run up so far that i have it called away.