Options Boot Camp 370: More Trouble With Vertical Spreads

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Member of Finra, NFA and CIPIC. Fall in boot. It's time to get into Peak Options trading shape. It's time for Options Boot Camp. Alright everybody, that song, that music means it is time once again for OBC. The options education program here on the old network. My name, of course, Mark Longo from the Options Insider.com, as well as from the aforementioned network, reminding you, hey, make sure you subscribe.

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Check that out, the optionsinsider.com slash pro is the place to go to learn more as we learn who's joining us for episode two of our OBC Doubleheader, none other than my good pal, Mr. Daniel Southern Comfort. Pasarelli the third Esquire. Mr. Dan, welcome back to the show. Put down that glass of delicious SC and uh join us for a program or two soon. What do you think?

Oh my god, it has probably been 25 years. Years. Do you remember that? Ha ha ha. Do people still drink it? I think they do. I haven't had it in a long time either. But so it it just leapt to mind and it seemed appropriate for today, Mr. Dan. Right. As we think, listeners, of long forgotten liqueurs, let's keep on rolling right on into a little bit of the old mail call. Mail call. Time to look at questions submitted by our listeners. All right, welcome to the mail call. And Mr. Dan I wanna start

With a bit of an update and a payoff and some thoughts on a question we discussed last week in real time, two weeks ago, as the folks are hearing this episode, Dan, which is of course on the on-demand side at least. Pro folks hearing it right now, of course. But we had a a question, a write in from and you know Dan, you know I love the folks. Who have listened to every episode of the show. To me, that is just an impressive feat that merits some consideration from us.

And so uh this person Matt wrote in, Matt Rolane, I believe, and his brother, which I learned this week, his brother's name is Adam. So welcome. Adam, thanks both of them have been listening in tandem, Dan. They wrote in last week that says question for options bootcamp. My brother and I are avid listeners of the show and have listened to every episode from the beginning.

Thanks for everything you do. So Dan, when people ride in, they've been they've been engaged from the beginning. They get a little bit of extra love here on there. We love them all out there, but you hardcores, you full timers, let's just say.

get a little bit of a bounce. Check out the last week's episode, listeners, if you want the full or two weeks ago's episode now on the on-demand side, if you want the full regaling of Adam and Matt's uh difficulties. But Dan, it boiled down to They bought a call vertical back in early December on Marvell. And they did everything right. They bought it was a ninety-seven ninety-eight call vertical. They paid 38 cents for a$1 vertical. The stock took off, spent most of the week north of$100.

So they're like, Okay, I'm good, I'm filled. And they weren't even greedy. They worked an offer to get out at eighty five cents. They weren't trying to get out for a buck or anything. And the options stayed bid all week. The spread never widened out for them, Dan. And then it ended up the stock went out after the close. On Friday, uh I forgot the exact level here, but I believe it was north of a hundred, definitely north of their strike.

And both the ninety seven and the ninety eight calls went out at over three dollars. They said it was absolutely insanity. The broker ended up liquidating them in the after hours, right as right as the close is coming around, I think. And they paid thirty eight cents for the spread. They the best they could do was thirty seven cents. So they actually lost money. It was only a penny, but still. They lost money, Dan, on a call vertical.

That went their way. Went their way pretty aggressively. And what they found out, they did some digging, was that uh there was some rumors that Marvell might be added to the SP in the after hours on that Friday. So that's where that premium came.

And so they ended up getting caught up in that. It didn't happen. Even by the close of the after hour session, the stock was back below their strikes, but it was too late, Dan. The damage was done. So they wrote in. Brian and I weighed in with our thoughts last week.

Since they've been listening for a long time and they wrote in specifically to me and you, I wanted to make sure I felt bad that you were left out of that, Mr. Dan. So if you have any thoughts you want to add for Matt and his brother, have at it, then I will give you uh their follow-up and some thoughts. Wow. So so even though intrinsically it was worth a buck, they couldn't sell it at at any better than thirty seven cents. Is that

It could not sell it at any better. It executed at three fifty five for thirty seven cents. Yeah. After that's the broker liquidated. Liquidated it. They tried selling it earlier in the week for higher prices and never got The spread the best they saw was about a fifty cent bid for the spread.

That is a kick in the nuts. Um well I mean a couple of things. You see that is bid 50 cents and did you put it like I'm wondering if they put in a fifty cent offer, which I'm assuming it sounds like they did, right? Oh, this was in the middle of the week. I'm at the end of the week, I don't think it was bid fifty cents anymore. I think they they were trying to sell it for eighty-five, which again, I don't blame'em. It's worth a buck. Yeah.

Right. So I'm I'm not giving it away for fifty cents either. I think they were trying to sell it uh for other levels, but they never they never got their 85 cents stand. And then at the end the broker tried to liquidate it for them, the best they could do was 37. Yeah, I mean vertical spreads are kind of weird in that

You look at the PL diagram and you're like, oh, if it goes above my short strike, there I hit my maximum uh gain. But you know, that's only at expiration. The you gotta wait for theta to come and pay off. So It it seems like you always end up doing a little worse prior to expiration with vertical spreads. And so I don't know. I mean, I I always like to when I'm in situations like this, because uh, you know, I uh obviously I've been in situations like this.

to just say, Oh crap, man, what is the bid? Okay, the bid is 60 cents. I'm just gonna put in a 60 cent offer. And sometimes you don't get filled. And then What you have to do is you have to leg it because it might be offered on one exchange, but bid on a different exchange in the spread. So then you just close this leg and then close this leg and you should be able to leg your sixty cents or whatever, but

I don't know. I mean, I I think if if you didn't if if you guys, the brothers didn't put in a um in order to sell at the bed, uh consider doing that next time. I thought about, you know, the idea of lagging it last week too, but now when they're in the money options you're you're taking some size delta risk on that. I don't know if they wanted to do that for just

just a few cents and obviously each leg is now a hundred deltas effectively. Uh so legging is challenging. My first thought when I saw this, Dan, and Brian concurred with this, was obviously executions when it comes to spreads. can be a little bit wonky because you're not like you're getting just straight MBBO, hit the bid, lift the offer like you do with single leg trades. They get routed to a spread book somewhere.

And that it could sit in that spread book, and that spread book could suck, or that spread book could not line up. And it's up to your broker to kind of, you know, hopefully get you filled if you have a Excuse me, a good broker. Uh so that was my thought. That was Brian's kind of thought as well. His suggestion being the broker representative, he said. Next time might also help you if you cancel and replace the order because

We all said obviously contact your broker. That's the first thing you do in this scenario. But in lieu of that, or maybe before you do that, if you want to go out, cancel the order and replace it, because at the very least, it forces the broker to see it again.

And it forces them to deal with that. So I thought that was an interesting little nugget. I was glad Brian was on last week. He spent most of his time in the broker side of the space. So he brings a little bit of a a different perspective, Dan. Uh so Matt and Adam did follow up this week. And he says, uh hi Mark and Brian, so you're out, Dan.

And he says, and Dan, if he comments in a future show. Ha ha. So he knew you take Umbridge. I guess he has been listening for a long time. Uh thank you for your response and insight. Just wanted to follow up on a few of your comments. I was using Robin Hood for the trade, so maybe the PFOV had an effect. So that that could have been, we could have been right on with that. The spread book with Robin Hood. Maybe they are not.

Again, a lot of that gets tied up into how they're paid and whether they want to route an order away if it doesn't fit with their payment plan and everything else. So That's the one the one area where spreads kind of fall behind, which does infuriate me from time to time. And I I have a sneaking suspicion maybe you kinda got caught up in some of that, Matt and Adam. And he actually they also say they actually canceled and resent the order

Twenty-seven times throughout the week. So that didn't happen. So they did try Brian's tip twenty-seven times. The broker sure the gu I guess didn't get the message. Wow, that's uh that's awful. Hopefully this won't happen again, but I appreciate the advice to contact my broker if it does. Yeah, I know no one wants to get on the phone with your broker, but with something like this, that's kinda

What you need to do really. Uh, thank you again for all your help. I'm glad it was a good discussion, but it was a good discussion point. Matt and Adam. And you guys are A, I love longtime listeners. B you are charitable in sharing your pain with the rest of the world so folks can learn from this. So look for an email from our producers. We like to reward.

folks who are A longtime listeners and B share their wisdom with the rest of the folks that or in this case they're paying in. Because we can learn we can learn from all of that. So yeah, that's that just I think we can sum up that, Dan, is that sucks. That really sucks. You did everything right. And it's still sometimes the options world or as we know the market, Dan, Ted.

Call back from the last show. Uh Ted can be a capricious bastard sometimes and it sounds like Ted was just a jerk to you guys. So I would not get him a Christmas card if I was you. All right, let's go out. Oh, this is this is along those same lines, Dan. This comes from Nyx or maybe Nick Z, either way they say that horror story from last episode has me spooked.

About vertical call spreads. Well, I I can't say I blame you after that. It wasn't uh it didn't exactly inspire confidence. But we did have a lot of caveats in there. So again, listen to all of our discussion there. Should I avoid them now? Shift to straight long premium trades instead, or maybe just avoid them around earnings or events. I'd say I'd close them before expiration on Friday, but that didn't work for the listener. Yeah, they tried 27 times. Didn't work. Uh help. I'm scared. So Dan.

They listened to our last episode and now they've been scared off of trading vertical spreads. What do you have to say for let's go with Nick Z when? Well, uh, Nixie, I wouldn't be I think that that's situational. You know, like I'm looking at the markets here in Marvel. And they're, you know, they're not super tight. They're not like ridiculous drive a truck through the bid ass spread, but you know, they're not super tight. And when stuff is really going on and you get those big pops.

the bid ass spread still widen. Uh and maybe it's Robin Hood's with their uh payment for order flow. I I don't know. But I think that that's less often the case than more often the case. If you're trading like Apple Options or Tesla options, Amazon, whatever. Um most of the time, almost all the time, you're gonna be fine getting in and out of your birthday.

Yeah, I do think uh Matt and his brother kinda got caught up in a in a extreme and unfortunately for them adverse scenario. I wouldn't let that scare you off. vertical spreads, but I can see why you be a little bit more cautious. And certainly if there's some big event happening at the end of the week or some rumors swirling around your stock, maybe be prepared for having a little bit of a difficult time.

Getting out of that trade at the very least. But you know what, listeners, you've been waiting patiently for a couple of weeks for Dan to come back. Now it's time, listeners. It is time for the market taker. It's the moment you It's time for the Taker question of the wheel Feels like forever since I've heard that song. Mr. Southern Comfort, what you got for us this week? Okay, well, how about this one? What determines the width of the bid ask spread?

I thought you were gonna say what happens when the wheel goes bad. When the wheels fall off the bus. Uh Um yeah, so what determines the width of the bid as spread, and and that's a lot of things. Um we have to start at the heart of it, which is the psychology of the market maker.

Those bids and asks are there because there are market makers who say, I will buy it here and I will sell it here. And they don't care if they buy it or sell it. They're on both the bid and the offer a lot of the time, most of the time. So when it's a very, very actively traded stock option.

like Apple or something like that, then the bid aspirants are very, very tight because they know if if they sell it here, they can buy it here, sell it here, buy it here. That's fine. But if it's a more illiquid name where there's not a whole ton of volume or open interest, and if a market maker's, you know, somebody buys their offer. They might have to wait weeks before they're able to

have somebody s sell them their bid and therefore close it out. So it's it's really a measure of liquidity. I mean it's it's the best measure of liquidity, really. It well, it is liquidity by definition, I guess I should say. Um the the More volume, the tighter the markets, the less volume, the wider the markets. But there's another thing in there too, and that is how much volatility the underlying experiences. Because

Every time a market maker buys a bid, they have to sell stock. And when they well, for calls anyway, sorry. And when they sell a call, they have to buy stock and just vice versa for puts. the underlying stack is really whipping around, they could miss their price and they could change a um, you know, a theoretical profit into a theoretical loss in a snack.

So the greater the volatility, the wider the markets have to be because the market makers have to get compensated more for that volatility risk. Or stock price moving risk might be a better way to say it. And the less the stock is moving, the tighter the market. There you go, sir. Since we're talking questions of the week, let's pay off our one from our few episodes ago. We asked you folks, listeners, you know, prediction binary markets kind of all the rage.

Listen to the last episode of the European market brief we just did yesterday, talking about'em there as well. They are inescapable. But we asked you a couple weeks ago, where does a trade end and a bet begin? And uh should ex should we limit it to financial related products or should we cover all events like sports and the Oscars? And Dan, it ended up coming down forty five and a half percent of our audience.

Said trading products only. 36.4% went for the this makes me nervous. And 18.2% went for the Calci model of binaries on everything. What are your thoughts, Mr. Dan? Um, I mean, just like backseat quarterback in these numbers here, I'm looking at, I'm not really surprised by it. Um less than twenty percent are you know all for hey, they're just gonna be loosey goosey gambler, you know.

Caution caution to the wind uh about the um financial security of exchanges. Uh doesn't matter, just give me more opportunities to bet on stuff. Less than twenty percent. That's that's Logical. There's gonna be a lot of money spent, Dan. over the next uh next year or two trying to determine what is a bet and what is a trade, Dan, and whether the true lie Robin Hood just announcing you know they're offering sports betting effectively on their own platform. So

Continuing to blur that line even further. CME and FanDuel, they're offering going live this month as well. So a lot going on in that space, Dan. We have not heard the end. of binaries is the old term. We call'em prediction markets now, Dan. Sounds sounds cooler and far more respectable. All right. Let's go out to our our questions of the week this week. Dan, we have a twofer based on a couple of different popular asset classes right now.

Our our first our big question of the week is, you know, and Uncle Mike's favorite question. Silver on a historic run this year, but can it continue in twenty twenty six? Quite simply, if you have to buy an add the money put. Or call in SLV expiring at the end of the year, which way are you going? You gonna buy the put? You're gonna buy the call? Or are you out on medals entirely? And then Dan, we have a related question.

That goes along with our crypto rundown program. It's our crypto question of the week, Dan, and it's along those same lines, but broader. We said, Is winter coming for crypto, Dan? We have seen some sell-offs. Are the White Walkers on the horizon or is this sell-off overdone? We gave you two choices there. Winter is coming or by the dip. So Dan, you have to answer for two.

Are you long or short silver through the end of next year, or are you just out on metals entirely? And are you buying the dip in crypto or are the White Walkers on the horizon?

Mm-hmm. Um, I would definitely be a silver call buyer, uh given those two choices for sure. year, I guess. And as far as crypto goes, I yeah, maybe I don't that one's a tough one, man. I don't I I honestly just don't know to tell you the truth. Um, I know that I am not buying the dip. I know I definitely live there. Um, but is winter coming? Hmm. I don't know, man. Wouldn't be surprised either way.

Right now, Dan, half of our audience, a full fifty percent, say they want to buy that put on silver. They're they're getting the heck out of dodge. Thirty percent wanna go your way by the call. Twenty percent say I'm out entirely.

On metals, they've had a good run. Can't really blame'em. Uh listen to the futures rundown coming up, listeners, if you want to hear more talk on the wild year that has been metals. And on the crypto side, Dan, fifty-seven point one percent right now say winter is coming. So, uh Strapped down in Winterfell there, I guess. And then uh forty two point nine percent, Dan. Wanna buy the dip so

Close to fifty fifty, not quite, leaning towards uh the White Walker side there. And exactly fifty percent of you want to buy or put an SLV, get over there at options right now and make your voice heard. Speaking of going places, listeners, I have to continue with this Quintuple Palooza here on the network. I have to keep on rolling into the future's rundown. I will be joined by our good buddy, Mr. Jamal Chandler from Tasty Trade.

Uh they've been on OBC a number of times joining us to talk some future Right after this show, so that should be a fun time. Yet another reason, listeners, why you should be subscribed to the full network. Otherwise, you're missing out. And Dan, if they're not going to wealth building with options or market taker.com, what are they missing out?

They're missing out on everything, man. I spent a lot of time cranking out content for our readers and our video watchers and everything. There's lots of great I think it's great. I hope it's great. I try to make it great. I think it's great. Lots of great stuff on both of those, wealth building with options, substack, and market taker.com. And I hope to see you there. I hope that you are a consumer of my content.

Both Dan and his mom, Mama Southern Comfort herself, both think his content is great. So check it out for yourselves. Market Taker.com. Don't forget the second T for Theta and Wealth BuildingWithOptions.com. While you're checking things out, check out where Jramal hangs out, tastytrade.com, the place to go to kick the tires and light the fires. Specifically tastytrade.com slash podcast to learn more. I'll be back with Jamal in a few minutes.

If you're listening live, just hang out. Yet another reason why you should be visiting us over there, the optionsinsider.com slash pro. Otherwise, look for it on demand on your podcast player of choice. And then back with our rest of our Quintuple Mania today and all the rest of our content. Until we're back again next Education Wednesday, another episode of Options Bootcamp. Stay safe out there, everybody. Old trading walks into a bar. New trading raises it. That's Tasty Trade.

Keep focused with news feeds that matter. See opportunity differently in analysis mode. Chart your heart out with over 300 indicators. Plus, you can get low pricing, lots of education, and a support team that really gets out traders trade. It's no wonder. Investopedia named Tasty Trade the best broker for options in 2024. Genius loves company. Go to tastytrade.com/slash podcasts and see for yourself. Tasty Trade Incorporated is a registered broker dealer and member.

Member of Finra, NFA, and CIPIC. You're listening to the Options Insider Radio Network. Quality Options programs visit www.theoptionsinsider.com or Options Insider Radio Network and your podcast provider of choice. Listeners can also access all of our programming through our mobile app. Available in iTunes and on Google Plus.