Whether you believe an upside breakout may be coming or you are concerned about a possible retracement in market prices, lower-cost debit spreads may be one way to limit your risk while potentially profiting through a limited-risk limited-reward strategy.

Think about it this way:  if your preferred strategy is to sell out-of-the-money SPY (SPDR S&P 500 ETF) puts as a strategy to gain neutral-to-bullish market exposure, the premium you now receive by selling put options is considerably lower than it was two months ago.² You either have to sell options with strike prices that are significantly closer to being at-the-money (ATM)³ to receive the same premium, or you have to sell options that are the same distance out-of-the-money for much lower premium.

Is it worth it?  The maximum reward for a short/sold put is limited to the premium collected upfront (while risk is unlimited down to zero).  Perhaps the strategy is still worth it for some traders, but those concerned about the risk/reward of short options might look to the lower-volatility environment for current opportunities that are present in long debit call spreads. It may make some sense, because if options are too cheap to sell, they may be a value to buy.  The risk to buying debit spreads is 100% of the premium paid, while the profit is limited to the difference in the traded options’ strike prices less this premium.

Conversely, if you don’t believe this rally, what could you do?  Well, with the market run-up and the volatility decline, there are symbols on which you can buy debit put spreads that would be in-the-money if the underlying stock retraces back to trading prices just 30 days ago on January 1, 2012.   The prices of these debit put spreads are now lower than they have been in the recent past and may once again provide compelling limited-risk, limited-return trades.

We have two useful tools to assist our traders in analyzing the possibilities:

The Trade Generator in our suite of platform tools has a debit-spread finder, which is ideal for scanning for these opportunities. You can access the Trade Generator from the latest version of the OptionsHouse platform by clicking on the Tools tab.  You can also click on any down arrow, select Tool Navigator, and get to the Trade Generator from there.

The Debit Spread tool inside of the Trade Generator (which you can select from the strategy drop-down menu)  allows you to  search by industry group, Watchlist or a single security, for debit call spreads and debit put spreads based on your selected criteria.  A comparison between historical and implied volatilities is generated and the ideas will populate based on maximum potential ROR.⁴

For example, say you think that Apple shares could retrace back toward the price the shares were trading on January 1^st, 405.00.  The Trade Generator highlights trades such as the April 12 420/415 debit put spread (going long the 420 put, shorting the 415 put) for $1.20 per spread. If AAPL is trading below $415 when the spread expires, the profit maxes out at $380.00 (before commissions).  The risk is capped at the $120.00 premium paid.   This represents a 316% return on risk on this trade.

We also have a Spread Investigator tool in our suite, which shows potentially inexpensive call and put spreads currently available in the market.  This has less qualitative screening capabilities and is intended to show lower-cost debit spreads, which oftentimes are very far out-of-the-money (OTM⁵). Be forewarned, the farther out-of-the-money the spread is positioned, the lower the probability exists that they it become profitable at expiration.

In conclusion, this is not intended to be any sort of buy or sell recommendation but is rather aimed to stimulate your thoughts around trading the volatility environment that currently exists.  When volatility levels are lower, it may make sense for long option spreads.  For more information on vertical spreads check out our webinar archive for presentations on long call spreads and bear put spreads.

Related posts:

1. Will the technology conversion affect my checkbook and/or debit card?

OptionsHouse, LLC has prepared this report pursuant to a US Securities and Exchange Commission rule requiring all brokerage firms to make publicly available quarterly reports describing their order routing practices. The report provides information on the routing of non-directed orders (any order that the customer has not specifically instructed to be routed to a particular venue for execution). For non-directed orders, OptionsHouse will determine the execution venues for its customers.

The reports are broken down into 4 sections: 1) NYSE equities 2) NASDAQ equities 3) Amex or regional exchange traded equities 4) exchange listed options. Each section will show non-directed orders as a percentage of total customer orders, market orders as a percentage of non-directed orders, and limit orders as a percentage of non-directed orders. Each section will address material relationships with each venue to which trades are routed.

Click a report to view it.

Related posts:

1. Will the technology conversion impact my open orders?

Related posts:

1. Will the technology conversion affect my checkbook and/or debit card?
2. Will the technology conversion impact my open orders?
3. How do I elect average cost accounting for gain/loss reporting on mutual funds and other regulated investment companies?

Related posts:

1. What is the Penson/Broadridge technology conversion?
2. Will the technology conversion impact my open orders?
3. Will the conversion change how I can transfer funds to my account?

Your login information remains the same as before and trading activity will not be affected (with the exception of certain good-till-cancelled orders).  Note that the site will not be accessible for a brief period during the weekend while this technology conversion takes place. This outage is scheduled to occur on Sunday, January 29^th, from 4 p.m. until 9 p.m. Central Time.

Account Number Changes:

New account numbers were automatically assigned to all customers.  These new numbers appeared on your November and December account statements (see example below). You will also be able to view your new account number in the platform.  Finally, the last four digits will appear in all trade confirmations.  While the old account numbers began with numbers (e.g. 1275****), new account numbers will look like 4ZE**** or 5PD****.  Nothing is required on your end to process this change.

Related posts:

1. Will the conversion change how I can transfer funds to my account?

Related posts:

1. Will the technology conversion affect my checkbook and/or debit card?
2. Who is Penson?
3. Will the technology conversion impact my open orders?

Penson is the second-largest clearing broker in the United States and is the clearing firm for OptionsHouse. More information about Penson can be found on the company’s website.

Related posts:

1. What is the Penson/Broadridge technology conversion?
2. Will there be any changes to my account number, trading activity, or login information?

Advanced (including already triggered advanced orders), complex, and virtual GTC orders will be cancelled but will not be replicated by the system and will show as cancelled by 4 p.m. Central Time on Friday, January 27th. Customers who wish for these specialized GTC orders to be active in the market Monday morning (January 30^th) may replace these orders manually beginning at 6 p.m. Central Time on Friday, January 27th.

Related posts:

1. Will the technology conversion affect my checkbook and/or debit card?
2. What is the Penson/Broadridge technology conversion?
3. Will the conversion change how I can transfer funds to my account?

Please note that average-cost accounting must be chosen prior to the first sell or transfer out, once the default is set to average-cost accounting and a sell or transfer out has occurred the shares elected for average cost must remain average cost until they are depleted.

If no election is made for average-cost accounting, any shares purchased after January 1, 2012 will be reported at the account’s current default method for equities.  All accounts default to first in, first out (FIFO) unless you have chosen to switch to last in, first out (LIFO).

Shares purchased prior to January 1, 2012 will continue to be reported without basis information as uncovered holdings.

To elect average-cost accounting, please send an email from your email address of record to customerservice@optionshouse.com .  Please include the last four digits of your account number, the last four digits of your social security number, and your date of birth for verification.

Related posts:

1. Will the conversion change how I can transfer funds to my account?
2. Can I access my tax forms online?
3. Will there be any changes to my account number, trading activity, or login information?

Tax forms are located in the Manage Accounts tab:

Then click Tax Information, then Tax Forms:

No related posts.