If it does I'll know exactly what my loss will be - 2% of my trading accountQuote from optioncoach:
well as long as SPX does not have a 500 point down day
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Index Option Credit Spreads
- Thread starter torontoman
- Start date
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There's several managed futures programs and funds who only sell SP calls and puts around 100 points OTM with 1 and 2 months to go. These funds are very leveraged. (8 by 8 per 100k on SPXx250)
In 2002 and 03 these guys had 100% years. As vols have contracted, the returns have fallen to below 25% the past two years. A sixty point hedgeless move, i.e. unexpected Fed move, assassination ect. would possibly wipe them out. As is 2/27 cost them 17% and the aftermath another 5%. They've made back the last 5% on the rally but now their premium selling margin has been cut by a fifth.
Like various carry trades this is straight out of Taleb. I suppose mortality itself is just one giant short put but what passes as both genius and formally high Sharpe ratios is beyond me.
In 2002 and 03 these guys had 100% years. As vols have contracted, the returns have fallen to below 25% the past two years. A sixty point hedgeless move, i.e. unexpected Fed move, assassination ect. would possibly wipe them out. As is 2/27 cost them 17% and the aftermath another 5%. They've made back the last 5% on the rally but now their premium selling margin has been cut by a fifth.
Like various carry trades this is straight out of Taleb. I suppose mortality itself is just one giant short put but what passes as both genius and formally high Sharpe ratios is beyond me.
Credit spreads may have their shortcomings but selling naked options is a higher form of suicide....
Well 1 thing the OP could do is take the credit recieved from selling cheap gamma to buy even more cheap gamma. True, selling FOTM verticals will blow up in your face once in a while, the only real thing is to control how much is at risk. I advocate decreased returns by buying extra wings rather then sticking to some set percentage/amount of return per month. Keeping your capital to survive is paramount since this trading style will have one eventually get run over by the proverbial bulldozer.
Does anyone agree with jj90? It might be a good point!
Perhaps I am naive.
Let's say the SPX is at 1400 today and I want to create a 1465/1475 credit spread for .65. I plan to use strict risk management, for example rolling when my credit amount doubles or triples, or roll it out when the SPX goes to 1455. Remember these are puts, not calls, so many black swan events are not applicable.
What can go wrong?
Thanks in advance,
Torontoman
Let's say the SPX is at 1400 today and I want to create a 1465/1475 credit spread for .65. I plan to use strict risk management, for example rolling when my credit amount doubles or triples, or roll it out when the SPX goes to 1455. Remember these are puts, not calls, so many black swan events are not applicable.
What can go wrong?
Thanks in advance,
Torontoman
This point has been addressed in some other thread, recently. Basically, while downmoves is what most people worry about, there have been significant upmoves as well, such as when the Fed announced an unexpected cut and etc. Nothing is a sure thing! Btw, I'm sure you meant CALLS and not PUTS.
YES. You're right. My error.