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Vertical Option Spreads: A Study of the 1.8 Standard Deviation Inflection Point, + Website by Scott Hanson, Charles Conrick IV

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CHAPTER 5

Structuring a Trade

Once your account has been opened, and assuming you're going to trade spreads, our intent is to guide you through the mechanics of the process using some real numbers and positions with SPY. Whatever you do, please make absolutely sure you thoroughly understand the mechanics of opening, monitoring, and closing a trade with whatever broker you use prior to risking real money! If you don't understand how to set up and monitor a trade, it's like driving a car without a license or training! Get ready for an accident! If necessary, pay or call your broker and have them set up the trade as you want or you're asking for trouble, and it will find you! You've been warned!

We will use e-Option's screen as a guide and set up a credit spread on SPY so you have a good idea of the process (see Figure 5.1). As of today, let's assume SPY is trading at about $138.00 and we have decided to place a trade for both a bull put spread and a bear call spread; the combination of the two is an iron condor. In order to set up the trade, we need to decide what strike prices we want, which is covered in chapters 4 and 8. Here, we are only interested in the mechanics of setting up and placing a trade. We decide on strikes of $134 and $135 for our put side and $141 and $142 for our call strikes. We will buy 100 SPY $134 puts for next week's expiry and sell $135 SPY puts. We will sell $141 SPY calls and buy $142 SPY calls. To talk like a pro to your broker, you would say, “I want ...

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