You’ll never guess the best way to dramatically improve your risk and return on options spreads

[@smbcapital]

Learn more about the Options Signal here: smbu.com/weeklyoptions

[@sethfreudberg4750]

@u2 Us that would not apply to this trade as this is an index options trading strategy.

[@sethfreudberg4750]

@u2 because index options are cash settled,.

[@MisterMojoYT]

While it is true the ROC is far greater when your spread's strikes are close, you have to keep in mind that you need to be extremely confident on a few things. First, that your broker can fulfill all the extra contracts you wish to open (looking at you Robinhood) and second, that you're confident any price movement against you won't go beyond the really narrow gap you gave yourself. Also, keep in mind the chance to close early due to the price moving in your favor is also lower because the long you bought will keep more value than a strike further away from the money. With this being said, I do like close strikes on plays that are close to expiration (like a week or less) because you get more ROC on a play that you already believe to be highly in your favor. I definitely take further strikes on longer DTE plays, though. Much safer and gives better opportunity to close early.

[@DJ369-Miami]

If you cant get filled for a couple spreads with SPX your broker is no good.

[@mohsin360]

Agree with DJ, that should never be an issue

[@benpyeatt9986]

This info is gold. I use credit spreads a lot and didn’t know this. Thanks so much for the video.

[@nevinkuser9892]

This is just about the best video I've ever seen on KZbin.

[@smbcapital]

nice

[@miamibeachbroker305]

Great lecture! Thank you :). I never thought of credit spreads in this way before.

[@BillBaran]

I wished you discussed the trade-off you're making wrt the distance from break-even. Your break-even is the high strike minus the credit. With the narrower spread you get less credit per contract so you have less of a buffer if your trade goes bad. That means you need to make the decision of whether or not to cut your potential losses much quicker. So while your potential profit wrt to buying power is higher, your probability of profit is lower.

[@sethfreudberg4750]

Bill, you are right the probability of profit is lower, but the risk reward trade off is far superior. That's the choice each trader must make.

[@neuvocastezero1838]

Thanks for the video. Do you apply this principle when constructing condors as well?

[@joesemo]

How would this work for Debit Spreads? Would have been nice to see information on Debit Spreads

[@shafquatshafaat4187]

That was informative and very helpful. Thank you!

[@justinidiot7161]

Thanks for the vid! Nice to see a realization, I thought I discovered, presented. Multiple spreads with single strikes are usually better than a single spread spanning multiple strikes. If the underlying is volatile, and I anticipate rolling the trade, I'll use the single spread multi strike to save on the cost of the trade and get a faster fill. After I got pinned for losses a few times, I figured it out.

[@sethfreudberg4750]

I guess great minds think alike :)

[@ghostwhowalks5623]

wow excellent video! Is there a difference bw ROC (return on capital) and ROR (return on risk) for such trades? The 55.4% looks like a ROC...but to calc the ROR, would you need to probability weight the outcomes and divide by the max loss? Just trying to understand some of the lingo I see in various forums. Thanks!

[@songoku8627]

I will be a trader at SMB Capital one day. Mark my words. I’m still learning and learned a lot more after getting too cocky and blowing up my account but it’s only motivated me even more. I will not give up and one day I’ll be one of the best traders on the desk at SMB mark my words. Until then I will continue to study.

[@sethfreudberg4750]

We're waiting for that day Son!

[@Jp421JP]

Yes good info. But while the smaller distance between the strikes increases the profit, doesn’t it also decrease the probability of that profit? You did say to use this when the IQ indicates a move up and away from the spread, so the percentage the IQ prediction is correct, would affect that probability of profit, which I expect is what your research was for. Is that right?

[@jeannotnelson4048]

wow, super revealing - thank you

[@QuoteFarm]

Nice video. I like most of them actually. In this one, however, your third example labeled the long put as a 3790 strike when it was supposed to be a 3795.

[@kevinranatunga4902]

Can I subscribe to the IQ Signal service. Is it available to the public.

[@dek2000utube]

This doesn't take into account what would happen if the market closed between the two strike prices. Ex. If mkt closed at 3790 and your long was at 3780 it would not be a max loss.

[@codesymphony]

it would be 1000 minus the credit you receive ($700ish) so you would only be down $300.

[@ckparam]

David is right. My comments. Too many typos & wrong prices. Look at the 2 credit spread slide, the credit was used to show 4 credit spread. Also imagine the index finishes 3795, for the numbers mentioned, 1-wide will be some profit, 2-wide some loss, 4-wide the max loss - so risk does not reflect when it finishes between the strikes.

[@vsync]

it doesn't not take into account it just doesn't cover that case which should be familiar to experienced traders

[@georgekatcharava6087]

with all due respect Seth, i disagree with saying that selling 4 lots 3795 puts is less riskier and than selling 1 lot 3780 put spread. i think in this case you get what you pay for! if you think about if SPX closes 3995 (for example) that you would have lost entire 1148 but you would have made 213 profit if you had 1 lot of 3780 puts credit spread instead of 4 lots of 3795 put credit spread. think about that... so in my opinion, you get more money selling 4 3795 puts spread but it is more riskier than selling 1 lot of 3780 puts credit spread.

[@stevehebert2189]

exactly - and if you have to pay commissions - 4x that

[@davek7511]

Exactly. With a 5 wide spread you've raised your max loss price by $15, so you really assume more risk.

[@sethfreudberg4750]

George and others, I didn't say in the video that it was less risky, I said, and I stand by that, that the risk reward trade off is better. The expectancy of this difference needs to be studied of course, but some people just prefer better risk reward trade-offs on their trades, even it provides less expectancy.

[@georgekatcharava6087]

@@sethfreudberg4750 understood Seth! i must have misunderstood what you said (my bad) ... you know i took your options foundation and i am huge fan of your program! i mainly trade stocks (opening drive plays). but i also want to do options and get better at it. and Seth thanx for explaining this! i love your options videos especially when you do earnings plays!

[@brandysoda8665]

Regarding ROI some traders calc return, cr received divided by collateral. Ex 5 wide if u receive $100 return is 100/500 20%. So who is correct .?

[@sethfreudberg4750]

Brandy, you are close. You need to add subtract the credit received from the collateral, so in this example, the return would be 25% (100/400)

[@chuckcarlson7940]

What Seth presented is true if you just look at premium and risk. However, this concept would need to be backtested over a long time. I suspect both strategies would come out about the same in the long run, because there is more chance for max loss in the 5-wide, vs 10-wide.

[@cchoi108]

The idea of max loss is irrelevant here. It's not like trading stocks or futures where you get stopped out and then you're done with that trade. The idea is to cap the losses. It's a subtle distinction but there's definitely a distinction because a) there's that whole window of spread and b) the loss doesn't happen until expiration. It can go past your stop, as it were, and come all the way back right until expiration when the trade actually ends or you end it some other way.

[@sergeisokolov6849]

Very true Cchoi!

[@yasirali709]

Nice work!

[@smbcapital]

thx Yasir

[@markmcnair5864]

This discussion doesn't include the increased manageability that the wider spread has. With intentional profit-taking in place, the wider spread can have a higher profit *expectancy* than the more narrow spread and after multiple iterations; a higher P/L. The premise is totally true though - the more narrow the spread > the greater ROC.

[@sethfreudberg4750]

Exactly Marc. Expectancy is a different topic from risk/reward. That's what has alot of people confused apparently.

[@xxxs8309]

Good strategy and risk vs reward is reasonable

[@sethfreudberg4750]

Thank you.

[@jwcooper89]

Thanks for making these videos Seth and SMB!

[@smbcapital]

of course!

[@MrPaulzeng]

Hey SMB Capital, Quick question, how many hours of video is in the SMB Trader DNA Program? Thanks!

[@smbcapital]

Hey Paul, I would reach out to [e-mail] and ask them for that. to give a rough estimate I would say over 20 hours

[@goldpyramidsfoodtravelvlog7984]

Very good video! This is better than tasty trade! Please do more about fine tuning the option strategies!

[@smbcapital]

will do!

[@sethfreudberg4750]

Will do Gold

[@IoannisS84]

Seth, this presentation is very clear, succinct and concise. Very much appreciated. Thank you, sir.

[@smbcapital]

you are welcome

[@sethfreudberg4750]

Thank you!

[@dannytetreault]

That was gold! Gold!

[@TBradFashionModel]

A chart, and examples of what and where would be helpful, not just an option table......

[@jimgriffith6483]

You will have more max losses on the 5 wide spread vs a partial loss on the wider spread scenarios... curious what how that impacts expectancy for these different spreads

[@justinidiot7161]

If you mean 'what if the close at exp is midway between the strikes' The losses would be equal. However, if the short option/s are just $0.01 to $5 in the money, then the fewer spreads would have the least losses (using his examples) Without hashing it out completely, the increased losses are offset by the initial premium collected. So, you'd have a better break even with the multiples. Frankly, if you're risk tolerant enough to trade options in the first place, it's just 'hairsplitting'. Max loss is my primary driver. Max profit and probability are interchangeable as secondary and tertiary factors. I prefer multiple tight spreads most of the time. Where I prefer to use single, wider spreads is when the underlying is volatile. This is when I anticipate having to roll the trade, so saving contract and exchange fees. Plus, the orders tend to fill faster, and I am less likely to get pinned.

[@sethfreudberg4750]

Excellent point Jim and of course you are correct. We are actually studying that right now.

[@bondtrader222]

Can you provide the Probability of profit on each scenario?

[@sethfreudberg4750]

you'd need options analysis software for that Bond

[@EDWARD13421]

Excellent mathematical information

[@smbcapital]

thx Ed!

[@henrybarnard644]

Interesting counterintuitive facts. Thanks.

[@sethfreudberg4750]

Lots of things about options are counterintuitive, great point.

[@gregoryroebuck8273]

How do you get The Signal ?

[@smbcapital]

Greg, check out the class we put together here that will dive deeper into it smbu.com/weeklyoptions

[@codesymphony]

$2500 usd a year

[@johncalvo1743]

@@codesymphony Of course! They have to charge to subsidize their losses when the signal is wrong! Lol. If there was a system that was TRULY robust and highly accurate, it would not be shared. Think about that. I know that if I ever discovered a sure-fire way to fabricate wealth, it would go with me to my grave.

[@IoannisS84]

Seth, question, for this strategy, when I short and long the put, should i slap the bid or give a credit limit order?

[@codesymphony]

set limit order at ask always. then move it down by 5 cents incrementally until it fills

[@stevehebert2189]

Always work the order - starting better than the midpoint, (Start higher if going for a credit, lower if working a debit) I put trades in multiple accounts and have often put in what I thought was a good bid, get filled in a split second, then try next one tried for a better price, bing filled, then went even more aggressive for a better price, and still get filled. (I feel like a fool when that happens)

[@sethfreudberg4750]

Ioannis, never ever use a a market order which is what i think you mean by slapping the bid. See my other video on this.

[@sethfreudberg4750]

kzbin.info/www/bejne/Zqndpnp3irukiK8

[@MrScalius]

Video is way too long. Was fast forwarding looking for that gold nugget and almost missed it because it was so small.

[@codesymphony]

yeah these slides with just text and numbers are very dry and hard to visualize, and the important information is spread out through the entire video. showing us the graph in optionvue or tos and showing us a slide with side by side comparisons would go a long way

[@johncalvo1743]

@@codesymphony Not to mention that the info on the graph is misleading and confusing because the numbers are usually WRONG. For example, he talks about the 10-wide spread yet in the example it still says 20-wide. The same with the 5-wide spread. How can a newbie understand this when the guy posting the video doesn't take the time to proof-read and correct his slides? It's a regular problem on these vids. The info IS useful though, once you figure it out.

[@Mellowyellow8888]

how come theres no discussion on DTE?.. theta decay plays into alot of the decision process.. Or I guess this is targetted at people doing day trades..

[@kettod]

They're doing a 0dte credit spread. So theta decay doesn't apply. Even if it was greater than a 0dte strategy, as a net seller, theta decay is in your favor. Also since they're letting the put spread expire as opposed to closing it before market close, it's not considered a day trade

[@sethfreudberg4750]

This subject is independent of DTE. The risk reward trade offs remain.

[@jms4406]

Are you picking the same expiration?

[@codesymphony]

yes

[@alexh.4842]

Just made that wide spread “mistake” yesterday. Will pay attention next time and verify. Thanks for tips!!

[@smbcapital]

of course Alex, glad it was helpful

[@michaelkofman3881]

Would the inverse be true for debit spreads?

[@stevehebert2189]

Yes - but read other comments, not a clear cut as video makes it seem

[@sethfreudberg4750]

please explain exactly what you are asking. a put credit spread and a call debit spread at the exact same short and long strikes are exactly the same trade synthetically in every single respect.

[@SHAKASCALPS]

Seth, how do I become a subscriber of the IQ service?

[@smbcapital]

Stephen we put together a video detailing the signal here: smbu.com/weeklyoptions let us know if you have anymore questions.

[@rajdpatel13]

@@smbcapital This link is not going to a video but a generic ad page........

[@kartikiyer4375]

Narrowing the width reduces your probability significantly. Being a 0DTE, this is either gonna be 90pc winner or full loser. For stock options, makes more sense to do wider width rather than more contracts with higher ROI as the breakeven is much better.

[@nigelfernandez5039]

I share the same thoughts regarding the width of strikes!

[@sethfreudberg4750]

But the risk reward is much worse, Kartik. That's the whole point of this video.

[@TubeDirektor]

The video is only talking about 2 optimistic scenarios (closing above or equal to strike 1 and closing below strike 2), but not discussing the scenario of exiting between strike1 and strike2. As a person who went through this scenario and got assigned on margin, it was a painful experience, that is a risk aspect that should be discussed here as well.

[@codesymphony]

trade it on an index. no chance of assignment

[@sethfreudberg4750]

Tube, these are index options so you can't get assigned. That is why I went through the explanation in the video of how index options work.

[@TubeDirektor]

@@sethfreudberg4750 thanks for clarifying, I missed that part.

[@kartikiyer4375]

@Seth, do you recommend using this only for 0DTE and specifically for index options? Or across the board do you feel this is a better strategy than the lower contract wider width spread?

[@sethfreudberg4750]

Every DTE has its pluses and minuses Kartik. and every wing width has its pluses and minuses also.

[@jereomen]

The market only has to go against you 5 points to reach maximum loss in the example with 4 contracts and 20 in the example with 1. Probability of profit is higher in the examples with fewer contracts.

[@stevehebert2189]

Yes - the break even point is much lower (better) on the wider spread, The only advantages I personally really see with the narrower spread, Cheaper if you can only afford 1 contract, and if you do more than one, you have the ability to scale out if that is your style. (Plus if you are paying commission - you have 4 x commissions to pay with narrower spreads)

[@sethfreudberg4750]

Yes, that is true, but the risk reward trade off is far better. As they say, "pick your poison"

[@joegreen4959]

Decreasing the gap in strikes in order to increase leverage is a VERY risky move. This greatly increases your likelihood of max loss. Why not just put on 20,000 contracts with a 1 cent wide gap in strikes? Because you would be at max loss if the market moved even 1 cent against you. Keeping risk and amounts of loss under control is more important than increasing max profit.

[@valleyautodiagnostics]

Seth is a Godfather of options!

[@smbcapital]

haha, every trader at SMB comes to Seth with their options trades. We actually have a video we just shot yesterday with Seth breaking down a SMB trader's option trade. Should be out later today

[@sethfreudberg4750]

I'll give you an offer you can't refuse :)

[@osmstitch9559]

I'm very appreciative of all of your videos Seth - but this isn't one of your best. As previous comments mentioned you completely dismiss breakeven price. The 20 point spread is far superior than the other two making your probability of profit higher.

[@HunterWilson22]

Agreed, especially since the probability of a max loss in the 20 pt spread is less than the probability of hitting max loss in the 5 pt spread.

[@johncalvo1743]

But, but, the IQ signal is never wrong so you don't have to worry about losses! Pay $2500 and you'll see!

[@sethfreudberg4750]

@@johncalvo1743 LOL , no system is right all the time.

[@sethfreudberg4750]

OSM and others, the breakeven is of course better on the wider spreads because you'll get more premium. That wasn't the point of this video. The point is that the risk reward trade off is far better. The video doesn't cover the relative expectancy of wider vs. narrower spreads.

[@CapWalks1]

No more 30 wide spreads for me

[@codesymphony]

it depends. you can do a super wide credit spread and use stop losses to mitigate your risk instead too. they're different but similar strategies. a 50 point wide spread is essentially a strangle, but reduces the buying power needed. you'll take in a lot of credit, but need stop losses on the short legs to protect you

[@sethfreudberg4750]

There are pluses and minuses Capwalks1. Check some of my earlier comments.

[@milkmaned5770]

You talk WAY Too fast! I'm lost

[@phmg7516]

Well it is true but reality is transactional costs will make it a bit less but so true better tighten the spread and increase the number of contracts the margin will be the same as the net law loss In my case interactive broker charges 2 dollars per option contract traded So you will go from 4 dollars for 1 spread to 26 dollars