Today we look at the victory spread options strategy. We’re going to look at what they are and how to trade them.
There is no shortage of different combination options.
Such a combination is known as a victory spread.
This article will take an unbiased look at the distribution of wins.
We will talk about the pros and cons of this type of trading.
We will then determine when is the best time to place a victory spread on a stock.
A win spread is similar to a Call ratio backspread.
In this case, one option is sold near the money and multiple options are bought out of the money.
What sets the Victory Spread apart is that the options traded have different expiry times, similar to a diagonal.
This results in a similar, but somewhat unique, payout complex.
Because of this structure, a victory spread could also be referred to as a ratio diagonal spread.
Below is an example of a win spread.
In this case, I sold an Apple 130 call that expired in August while I bought four 175 calls that expired in September.
At the beginning, Apple acts in the red circle.
The corresponding structure will take a little credit if Apple goes down.
If Apple is slowly going up, the position will take a loss.
The loss on this trade is limited but still substantial.
Even so, if we have a major move in the underlying past, it is ours long call Options we have unlimited profit potential.
This is because we bought four of the 175 calls but sold only one 130 call.
You might be tempted to say they are short volatility on a win spread, as if the price doesn’t move at expiration they will take out a small loan.
Others would say that the potential for a large move would result in long volatility. Both could be true.
Depending on where you place the strikes, your winning spread will take on different volatility characteristics.
As trade evolves, these properties will also evolve.
One of the most important questions is when someone should use such a spread.
Victory Spreads, like any other spread, are not a free lunch.
When someone expresses such a trade, they are expressing the view that the stock has the ability to make an explosive upward move and if that move does not take place it is likely to drift downward.
One question to ask yourself is in what situation will this occur?
Biotechs are a clear example. Imagine a small biotech company trying to find a cure for cancer.
Most likely, money will slowly bleed and go away, but just imagine your drug study suddenly succeeding.
The stock could skyrocket.
Access 9 FREE Option Books
Now before you go out and buy all the win spreads in small biotechs that you can, there is a caveat.
The market is not stupid. It rates this risk as a call skew.
This means that the remote OTM options you buy will cost more (in terms of implied volatility) than those that are closer to the money you are selling.
This makes the payout less attractive.
The key to victory spreads is in situations like this little biotech, but especially when you think the market is underestimating the potential for a massive upward move.
This could either be due to a binary event or a possible catalyst ahead.
In the example above we used a call victory spread, but we can do the same structure with puts.
This would express the view that an investor feels that a big rapid downward move is possible, but if it doesn’t, the stock will drift higher.
We can see this in a put-win spread shown below.
Win spreads are incredibly similar to Ratio spreads, both in the payouts and in the view they have expressed. Still there is a difference.
The long leg has a different sequence than the short leg.
By trading a victory spread, the investor also takes a look at the maturity structure by saying that he thinks the further dated volatility is undervalued.
They act more Vega Instead of gamma.
So why should one want to express this view?
Let’s say you think there is going to be a major event that could cause the stock to move, but you also think that because of that move, the stock will become more volatile in the future.
For example, moving from Bidu to the EV space drove the stock up sharply while adding to the longer-term implied volatility.
The company turned and became a more volatile company.
Another reason is that you might just think that short-term volatility looks expensive compared to longer-term volatility when you look at the volatility for yourself.
Moral of the story if you don’t look at that Volatility term structure of the underlying asset, you may find it easier to express your opinion simply by trading a ratio spread.
Trade the commitments you want, not the commitments you don’t.
Victory spreads can be useful in certain situations.
Especially when an investor feels that it is a Possibility for a big up or down and that the market is not pricing in the potential for this move.
Even so, they are not a foolproof option strategy.
Not a strategy is. Forget what online marketing suggests about win spreads.
However, understand when it is beneficial to choose a structure like a victory spread.
This will improve your long term profitability as a trader.
Disclaimer: The information above is for For educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are unfamiliar with exchange-traded options. All readers interested in this strategy should do their own research and seek advice from a licensed financial advisor.