<p>@DrGoogle - (post 9300) – I’ve done some of the combinations and spreads. One thing I like about TDAmeritrade is that the trading platform does a pretty good job of explaining to newbies what they all are and pros/cons – I mean there is a pick-a-strategy function that gives you suggested trades. </p>
<p>So that’s what I do for learning – for example, I recently read about vertical credit spread and wanted to learn more. That’s when you create a spread where buy and sell at different strike levels, and the strike you sell costs more than the one you buy, so you take a profit a the beginning. The best case scenario is that both strikes expire worthless. </p>
<p>So in July I set up a “bear credit spread” in SPY. I think SPY was at about 198 at the time. I bought 205 puts and sold 202.50 puts., August expiration. There was a 19 cent price differential. So I bought 10 contracts, which is the most that I have ever bought, and was a mistake even though I won that trade. </p>
<p>I netted around $185 or so on that trade. SPY went down – I had intended to close out the spread well before expiration but by mid August SPY was down so low that I didn’t bother. </p>
<p>Here’s why it was a mistake and what I learned from it: a credit spread is not free money. The trader gets money up front, but the setup is that the money received on day 1 is the maximum gain, and its downhill from there. Because I had 10 contracts and there was a 2.5 difference between strike prices, I could have lost $2500. So, not counting commissions, my maximum gain was $190 and my maximum loss was $2500. The odds were in my favor at the beginning, but I made that investment about 3 weeks out and a lot can happen in 3 weeks. TD Ameritrade is very, very good at reminding me that I had $2500 at risk (they essentially put a hold on those funds in my account and that’s there for me to see every time I log in.)</p>
<p>I won, but the amount of money I got was not worth the emotional stress I had along the way. </p>
<p>Like most people, I am loss-averse emotionally – I get more upset thinking about what I might lose than thinking about what I haven’t gained. </p>
<p>So my big takeaway from that single trade was that credit spreads are not for me. I only want to enter trades where my potential gain is better than than my potential loss. </p>
<p>I should have been able to figure that out without making the trade – I’m sure that there are plenty of web sites that explain that in very simple terms – but for me, it really took the daily reminder that I could lose that money in order for the lesson to stick. Of course, I never would have really lost the money, because if SPY had gone to 200 I would have closed out the trade. (SPY is a little under 201 right now – but my trades expired worthless on Aug. 16.)</p>
<p>But that’s basically what I do to learn. I think that things work best for me when there is some stock I can invest him that I think will go up, but it’s risky and/or I can’t afford the full cost of the stock, so I can set up a debit spread that will let me get a piece of the profit. I learned the hard way not to simply buy calls because then I can lose everything if the stock goes down and the call expires worthless-- so the spread limits my risk – but of course my maximum gain is limited as well. But if I gain $2 on a stock that goes up $5, that’s $2 more than I would have if I hadn’t invested at all… so it’s a win. </p>
<p>But again, I’m only doing this as a learning exercise. My current “budget” for spreads is $2000. The SPY spread exceeded the budget, because it was putting $2500 on the line – mistake made, lesson learned. I could have done the same trade with less risk with a debit spread on lower-strike calls. </p>
<p>So I think you can see why Dstark and I aren’t playing in the same league. I’m not even in Little League yet. I am playing option T-Ball/ </p>
I lose many times and I hate losing. I hate losing. I hate losing more than I like winning. </p>