How to hedge credit spread option strategy?

tommcginnis said:
Eeeek! You would *never* want to short the further option -- a recipe for TFD. ("Total Financial Disaster"... maybe.)
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It's there something specific I'm overlooking? I'm not seeing a risk gap here as long as you roll the longs...but it wouldn't be the first time I overlooked a risk.

By my thinking you've got a high decay on the short term, and can roll this indefinitely to pay for the position. Then optimistically close the calendar when conditions are favorable.
 
beerntrading said:
It's there something specific I'm overlooking? I'm not seeing a risk gap here as long as you roll the longs...but it wouldn't be the first time I overlooked a risk.

By my thinking you've got a high decay on the short term, and can roll this indefinitely to pay for the position. Then optimistically close the calendar when conditions are favorable.
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I *think* your applying a standard "calendar" intuition, to the reverse of it.
If the nearer short dies out and the further long hangs on, "Yay, team!"
But (in reverse) if a nearer long dies, that further short leaves you essentially, naked.
Your broker will harm you, and hurt you, and make you feel bad.
(I'm trying to quote Frank Zappa here, circa Joe's Garage....)
 
tommcginnis said:
If the nearer short dies out and the further long hangs on, "Yay, team!"
But (in reverse) if a nearer long dies, that further short leaves you essentially, naked.
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So true. But what if you immediately put on another long to hedge prior to expiry? Of course it will cost you $ to do and I wonder if it is worth it rather than just close out the calendar and call it a day?
 
ironchef said:
So true. But what if you immediately put on another long to hedge prior to expiry? Of course it will cost you $ to do and I wonder if it is worth it rather than just close out the calendar and call it a day?
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Absolutely not worth it: bring up a some option chains (with Greeks) and compare the further deltas and vegas -- That's a buzz-kill right there.....

And this gets back to why you want to sell calendars (or "horizontals") at periods of low vol: because any return to a normal vol regime juices your longs more than the shorts, and any turn *to* you juices the longs more than the shorts. And any turn of a calendar page *deflates* the longs *less*than* the shorts.

("Can I get an "A-men"!!) "A-men!"

The problem is -- as beerntradin' notes, getting into these bastards at a good price.
I got in to a bunch of call calendars (thin numbers, but over many strikes) after 4pm last Monday -- I'm talking ~10¢-15¢. They're mostly 2450-2490, I think, and although I've *seen* them sit at 30¢-45¢ for most of the day, I'm not getting hit when I go there. WTH? And maybe I just don't have enough money there to work 'em hard? But...... But I'm thinking, I don't know. Maybe I don't know what to think. If I'd worked the put side heavier, I'd be singing a different tune -- what was 20¢-25¢ on Monday pm are now 2x-5x that price. {I think I just answered my own question. And beern'tradin'?!?!? To be plain, I *think* my lesson is, to try and work *both*sides* -- so if you get hit wear you wish on one side, spend the extra nickel and work to get in on the other. And FWIW, I've had those put entrees sitting there for days. Why won't they let me buy a spread for 20¢, instead of insisting on 85¢? Why? Sheeesh.}

"Always be learnin'."

Oh, and my solution to the above "no takers on my sell-to-exit" maneuver will be to wait wait wait until the Jul20s are down to scrap level Jul19am-Jul20am, and either sell them outright, or diagonal them with the Jul21 longs, such that I end up with a net credit spread (overnight??) for Jul21. I'll target more action next week -- I want the Jul20s to cook off some more, and I want to give the market a chance to come up to the Jul21s (the 'anchors'!) that I really care about.

And maybe today...... maybe....... I'll work those puts.... Nope! Just saw that we actually have VXST at 10.4 and VIX at 11.8 -- I'm not selling vol at that.

"Always be learnin' and watching and shit...."

(It is Friday -- is it time for a beer yet?)
 
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tommcginnis said:
Absolutely not worth it: bring up a some option chains (with Greeks) and compare the further deltas and vegas -- That's a buzz-kill right there.....

And this gets back to why you want to sell calendars (or "horizontals") at periods of low vol: because any return to a normal vol regime juices your longs more than the shorts, and any turn *to* you juices the longs more than the shorts. And any turn of a calendar page *deflates* the longs *less*than* the shorts.

("Can I get an "A-men"!!) "A-men!"

The problem is -- as beerntradin' notes, getting into these bastards at a good price.
I got in to a bunch of call calendars (thin numbers, but over many strikes) after 4pm last Monday -- I'm talking ~10¢-15¢. They're mostly 2450-2490, I think, and although I've *seen* them sit at 30¢-45¢ for most of the day, I'm not getting hit when I go there. WTH? And maybe I just don't have enough money there to work 'em hard? But...... But I'm thinking, I don't know. Maybe I don't know what to think. If I'd worked the put side heavier, I'd be singing a different tune -- what was 20¢-25¢ on Monday pm are now 2x-5x that price. {I think I just answered my own question. And beern'tradin'?!?!? To be plain, I *think* my lesson is, to try and work *both*sides* -- so if you get hit wear you wish on one side, spend the extra nickel and work to get in on the other. And FWIW, I've had those put entrees sitting there for days. Why won't they let me buy a spread for 20¢, instead of insisting on 85¢? Why? Sheeesh.}

"Always be learnin'."

Oh, and my solution to the above "no takers on my sell-to-exit" maneuver will be to wait wait wait until the Jul20s are down to scrap level Jul19am-Jul20am, and either sell them outright, or diagonal them with the Jul21 longs, such that I end up with a net credit spread (overnight??) for Jul21. I'll target more action next week -- I want the Jul20s to cook off some more, and I want to give the market a chance to come up to the Jul21s (the 'anchors'!) that I really care about.

And maybe today...... maybe....... I'll work those puts.... Nope! Just saw that we actually have VXST at 10.4 and VIX at 11.8 -- I'm not selling vol at that.

"Always be learnin' and watching and shit...."

(It is Friday -- is it time for a beer yet?)
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Thanks. I understand what you are saying, I think?o_O
 
Hi
@ironchef
You are a very active participant in the forum and you look a serious person. And I am curious about your method.
Options are an instrument, very usefull, and there are a lot of ways to use them. In my little experience,still, the way I have found is selling options. Sell extrinsic value it is a thing that only is possible with options. That's what I do and suppose a lot of people do.

But you are an options buyer, and you said you like directional bets. These types of strategies can also be done using stocks or futures.
I would like to ask you what advantages do you find in using options instead of stocks or futures. Obviously one can be the leverage, but you are paying a price for it. I mean your edge is in the use of a method or in the use of an instrument.

I want to say that the only purpose of this question is to learn and maybe see something that I have not seen yet.

Thany you.
 
Quick update:
I spent yesterday cursing calendars, because I could not enter put-side calendars at "the price I wanted" {read: 10¢ 15¢ 20¢ or so} -- even missed our "Donald,Jr." dip to 2405 -- and nothing seemed to be happening on top.

(holding Jun20/21 @ 2450; 2455; ; ;2470; 2475;2480;2485)

As of right now, I've exited the 2470 for flat (0¢ net of commissions), exited the
2450 at mid of 45¢ (entered for 20¢, net 20¢ profit)
2455 at mid of 40¢ (entered for 20¢, net 15¢ profit)

at this point (a week to go), I can conclude...
1) This is an entirely different mindset than strictly-directional credit spreads -- demanding a whole different set of on-the-fly calculations for management. (Not a *bad* thing, just *different* and therefore, *extra*...)
2) Working both sides of the market (*I* think) is important -- working this hard on just one side, and knowing the whole thing (my sweet debit(ed) investments!) would go to near-$0 should the market go away from the positions... that takes so much brain-power/attention -- having both sides engaged would justify not only the cash investment, but the mental investment as well.
3) The two "winners" nearer the market paid for the others further away.
4) The remaining 2475;2480;2485 will *likely* be turned into verticals, selling the Jun21 2470s, creating a $5, $10, and $15 spread: this will be equivalent to placing 6x $5 spreads.
5) If there's an advantage here, the credit received (now) from placing those calendar-exiting diagonal spreads (e.g., buying back the Jun20 2475 + selling the Jun21 2470) will be greater than the credit from selling a Jun21 2470/2475 vertical.
6) One thing to keep in mind, re 5) above, is that the risk/exposure from selling a vertical right now, is different from that involved in selling the same vertical a week ago -- and so a fair market will incorporate that exposure difference. The question becomes, Does the zero-margin-risk/exposure of buying a calendar make up for any loss of premium for having waited. (I'll work to get that set of calculations up "soon" -- maybe in a further update.)

As a whole, calendars -- being that the risk is entirely made up in the debit, *and* that the ones not-so-profitable *may* be worked into a vertical "at some future date" -- seem a fairly entertaining "vacation trade".....

More later.
 
raf_bcn said:
Hi
@ironchef
But you are an options buyer, and you said you like directional bets.
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I do both long and short so to say I am an options buyer is not correct.

I am new to options, being trading only since 2013. I am not a professional trader, just an amateur small mom and pop retail trader - one pro here called me a pleb (plebeian, peasant), one who he took money from. As such, I don't understand nor am capable of trading complex option instruments (spreads, condors, butterfly...) , so my only way to make money, not that I like it, is to gamble on the direction and if I got it right I profited if not I licked my wounds.

I assume you are asking for my input if so: Learn as much as you can from the pros here. They will not give out specific recipes but willing to share general principles. You want to incorporate those into your own methodology. Principles, like the laws in science, drive the outcome. For, even if someone gives you his recipe, your results will not be the same as the giver's. A few years ago, a friend who was an extremely successful day trader saw me struggling with day trading, actually gave me his recipe/formula. I loss money using the exact formula and gave up!

The only reason I post is to learn to be a good trader from all the professionals and successful traders here. I am happy to discuss principles and help out but you have to develop your own methodology otherwise it won't work for you.

A final word of advice: If you are new to options, trade against the herd, trade where no one wants to trade and keep things simple.

Good luck to you and best wishes.
 
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