ITM vs OTM Spreads

#1

If, everything is about equal. Which is better, a ITM or OTM ? What if the OTM has half the risk, and twice the reward?

#2

Define everything being equal? Otm will have less risk as it has to move much further to be break even There is time risk Movement risk And dollar risk Dollar risk is important but time and movement(breakeven) are more important

Ie $5 risk on us 500 otm spread where es has to move 8 Pts to be breakeven Versus a $20 risk on an itm spread where es only has to move 2 Pts to be breakeven

The itm is much better no matter the profit potential of the otm The 5 otm won’t even be breakeven for 8 Pts By that time it got to breakeven the itm would be extremely profitable

The otm has to be user very on purpose right before high volatility etc it should not be used by most traders

#3

So, the breakeven is a major point to look at. If, the expiration is the same. The 5 pts to breakeven is better than a 7 pts…

#4

Expiration needs to be time you think market needs to move

Breakeven is how far market will have to move to get your risk capital back

A $5.00 risk with a 5.0(US 500) move on ES is not a good trade as market has to move 5.0 pts just to get your money back.

Better off with a $20 risk with a 1.0 move on ES(US 500) more risk but market only has to move 1pt

So breakeven trumps risk

Now if you don’t like the risk you don’t have to do the trade

But don’t force a trade if the breakeven is not there - no matter how low the risk

And don’t forget as odd as it sounds - you don’t have to take the max risk…you can get out (ie if using apex getting out at the P bar so you could pick a better closer to be spread and just exit if it hits the stop) - this would mean you could have a breakeven of say .3 with only a $10 risk etc… you just have to manage the stop

I covered this on the trailing stop webinar here: http://apexinvesting.net/bonus-webinars-series-2/ “http://apexinvesting.net/bonus-webinars-series-2/”

Some may say but isn’t that the point of Nadex not having to get stopped out… well yes that is one big advantage but even if you choose to take a stop so you can get a better breakeven trade leverage is higher, risk is lower, margin is lower, risk is defined fees are capped so there is more than one way to trade nadex spreads :slight_smile:

#5

Darrell, You’re the best!