credit spreads.. the good, bad, ugly and dirty of them?

thanks muff, appreciate it, let me try moving it up.. also for reference this was a month ago I believe, contract is set to expire though, yes, and is not even a real contract, was for reference... haha

I'm still lost on the math though, as I usually just sold naked, and would move over the decimal two places ( earnings so 100 contracts, not futures.. ) , such as this week ran some Micron and I never get confused what my exits and profit / loss is as anything multiplier by 100x is easy.. this seems the same calculation though I always use by some reason you are ending up way crazy then my calculations

can you dummy explain how you end up with 92,000 risk on a 20 spread, as my math still says 920??? it sounds absurd sure, but if you wanna go line by line, I'm listening

ok, maybe I see the problem,, I was meaning the 1 contract is for 50, not the usual 100 multiple on normal stock.. I was just talking about one contract. not selling 50 of them...
 
IndyJonerJr said:
that can't be right muff?? a 92,000 risk... for $80 in premium ??????

credit spread is width of spread minus premium right ( 20 - 1.6 = 18.4 per contract, times 50 since it's ES = $920 risk.
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One point equals $100.
If the credit is 1.6 points, that's $160.
If the risk is 18.4 points per contract, that's $1,840 per contract.
Doing 50 contacts is $92,000 of risk
 
Option contracts operate under multipliers like 50; 100; 250; 1,000; 10,000. (I'd love to know if there are others, but it's not going to be something I will ever commit to memory, either.) These multipliers happen to coincide with equity shares covered, for equity options. (i.e., 1 contract ≡ 100 shares.)

For the ES e-Mini S&P 500 Future contract, 1 FOP ≡ 1 future contract.
({Or the cash equivalent.} This works out nicely, as the future contract itself operates under a 50 multiplier, same as does the ES FOP.)

SO!

A $20-wide spread carries with it $20*50 = $1,000 of exposure.
If that spread sells for $1.60, the seller receives $80 in gross revenue.
(And yes, an instantaneous calculation would show an increase in exposure {decrease in available capital} of [(Spread_width - price) * multiplier] of $920, or an 8.7% position reward/risk.

Drive safely.
 
Phil, I recently read the old thread --parts of it, anyway, because it is long-- you started back in 2005 on credit spreads on the SPX. I've been studying techniques on trading credit spreads for the past year after reading Gerhard Larcher's (et al) paper on the subject but have not taken the plunge. May I ask if you are still doing credit spread trades?


El OchoCinco said:
Credit spreads work until they don't...and when they don't they blow up like a hurricane. Never commit more than 40% of your capital to the maximum spread loss and at least you will never blow up. It is more art than science.
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SteveTheSloth said:
Phil, I recently read the old thread --parts of it, anyway, because it is long-- you started back in 2005 on credit spreads on the SPX. I've been studying techniques on trading credit spreads for the past year after reading Gerhard Larcher's (et al) paper on the subject but have not taken the plunge. May I ask if you are still doing credit spread trades?
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No I am not. I phased them out when the vols starting ticking up in 07- 08 and the market swings were getting too wild to trade with partial hedges (partial hedges only "help" on mild swings but not on big swings). Also the risk keeps growing as you get bigger and bigger even though I never used more than 30-40% max risk of my account. There are better ways to make money but it depends on personal preference I guess.

Today's market swings would give me a heart attack. Selling premium seems better when vols are higher but as you saw from the thread, it works best in low vol quiet environments. However lately, that can change into a high vol environment quite quickly.

I mainly trade VIX futures spreads and Brent/WTI spreads. In other words I became a futures spread trader. Easier for me to model and trade without so many scares :).

But happy to answer any questions. It was a profitable run for me but was happy to not be heavily in when the shit hit the fan in 2008. Lucky perhaps. Over the long run I feel that you will eventually get hit by the big wave that can wipe out years of work IMHO.
 
Phil,

Thanks for your response. May I ask what kind of returns you've got on future spread trades over time? Can you recommend literature on this technique?

Steve
 
tommcginnis said:
http://www.acrn-journals.eu/resources/201201a.pdf

"Nice!"
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It is an interesting strategy on paper, but Larcher's group used a volatility-based measure to determine how far out of the money (OTM) to write their put credit spreads, and it generally worked out to be about 3-4% OTM, with tight automatic stops at around 7% OTM. While the premiums are obvious quite rich at that entry level, their examination is a backtest and it would be too nerve-racking for me to handle the losses even with the advanced knowledge of the backtest results.

It is increasingly clear that the only practitioners who continue with credit spreads strategies for long have very tight stop loss rules --still seems like an awfully unstable way to make returns when the market experiences any turbulence, even with strict rules. Would love to hear from someone who has been doing this for a full market cycle.
 
SteveTheSloth said:
Larcher's group used a volatility-based measure to determine how far out of the money (OTM) to write their put credit spreads, and it generally worked out to be about 3-4% OTM, with tight automatic stops at around 7% OTM. While the premiums are obvious quite rich at that entry level,...

It is increasingly clear that the only practitioners who continue with credit spreads strategies for long have very tight stop loss rules -- still seems like an awfully unstable way to make returns when the market experiences any turbulence, even with strict rules.
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I think there is a basic misconception presented, anytime that I see option positions (of any sort) discussed: position management. My stuff is constantly on a bubble, of shortening (I bought back whole above-market sides during yesterdays dip) and of lengthening (and sold a bunchy back to the market with a 10pt rise this morning).

I have been writing at between a 15 and 25 delta for years, rolling most out-or-away when they breach/hold 25 delta past 2pm ET. 4-5 years ago, I wrote weekly for 7-9 days (and it was "easy"). Increasingly from 2016, I wrote 2-3 weeks out, and prayed to make a positive week. ("Yipes!" You can look at IV and IV/HV to see why.) I do that now, looking to hold for ~5days.

While entry set-ups have pretty much stayed the same, I have had to *invent* all sorts of inventory/management rules/techniques/guides to keep my exposure in line with what the market would allow to safely age away. The biggest was to simply *not*write* when IV buried itself under HV: when your measured performance + promises *depend* on it, it's hard to put the mouse down/"S.O.H." {sit on hands} for days and weeks at a time.

And here we are in June, and the VXST (Ooops, "VIX9D") has *shrunk* to <15 today. A year ago, I saw sub7 prints. :wtf::vomit::confused::(:(:(

Capital preservation be the name o' the game.
 
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