Is Credit Spread really profitable?

[drmark27]

The seller of premium automatically is rewarded for the risk taken. If that seller is knowledgable and has some skill realizing the risk premium he will be profitable in the long-term bucking against the statistical outcomes. The outsized losses credit spread traders incur is natural to the position, so the trader should be very aware of tail risk and measure skew and kurtosis like a hawk and most importantly, position sizing. You cant blow an account if you manage risk like a beast. Its all about awareness.

Those last two sentences are woefully incomplete.

Maybe you can't make any money, either, if you "manage risk like a beast." A statement like that needs supporting evidence to be convincing.

WRT "awareness," it's often an illusion. I'll assume you're referring to risk and then reference my last paragraph.

 

[BlueWaterSailor]

Those last two sentences are woefully incomplete.

I'm not particularly interested in critiquing someone's writing style here - it's essentially irrelevant to the information being conveyed - but the problem with that post is that it conveyed essentially no information. How does a beast manage risk (fight-or-flight, perhaps)? How do hawks measure kurtosis and skew (and are these actually measured or evaluated?)

Frankly, that gnomic pronouncement coupled with a vision of a statistically-inclined zoo did nothing for me, and I doubt that it did anything useful for anyone else.

 

[ffs1001]

The markets have fallen today due to a few tweets from the President; volumes were light; VIX has risen to over 20. It feels like we've been here before - just a few days ago in fact.

Does this make for a good opportunity to sell credit spreads? Iron Condors perhaps? Yep, I feel so.

I'll be putting on this trade soon.

 

[BlueWaterSailor]

The markets have fallen today due to a few tweets from the President; volumes were light; VIX has risen to over 20. It feels like we've been here before - just a few days ago in fact.

Does this make for a good opportunity to sell credit spreads? Iron Condors perhaps? Yep, I feel so.

I'll be putting on this trade soon.

You might want to review the IC I just documented in my journal. It's a little odd - a 0-day, low-delta SPY trade - but still worth looking at for the lessons it contains in this environment.

 

[Philo Judeaus]

Those last two sentences are woefully incomplete.

Maybe you can't make any money, either, if you "manage risk like a beast." A statement like that needs supporting evidence to be convincing.

WRT "awareness," it's often an illusion. I'll assume you're referring to risk and then reference my last paragraph.

I'm not trying to convince anyone of anything. You know what I meant. Of course if you manage early all the time you'll never profit and not even break-even, the point is if you scale positions you'll be ok. Follow your R:R and keep the system running.

Awareness is not an illusion. If I'm aware of the -corr between Boeing and the Diamonds I can bank a coin. But if you arent aware you could never bank that same coin. You can always refer any concept in trading back down to risk.

 

[Baozi]

a vision of a statistically-inclined zoo

This sentence made my day

I think that what he meant was:

1- measure the parameters of the underlying distribution every day on multiple lookback periods.

2- use the resulting distribution parameters to determine the expectancy of your spread.

3- sell only the spreads with the highest (positive) expectancy, close a spread when expectancy becomes negative

4- take a maximum risk equal only to a small % of your trading capital

 

[misterkel]

the most basic risk management techniques such as stops)

Stops don't work very well with options in my experience. They move too much, get triggered really easily without need, so you have to put in so much slack that it's not worth the approach. IMO, the whole point of the credit spread is that the risk management is built right into the trade structure itself.

 

[BlueWaterSailor]

@Baozi - it's always possible to come up with an interpretation that gives the greatest latitude, infinite benefit of the doubt, and adds depth an complexity where none exists. Religious apologists are quite facile with that process, for example.

But this does not and cannot improve the quality of what is written. The only thing it does is cast doubt on the motives of the interpreter.

The thing to do here is ask yourself: would the post have conveyed any shade of that to someone who is new and trying to learn? You know the answer to that as well as I do.

 

[BlueWaterSailor]

Stops don't work very well with options in my experience. They move too much, get triggered really easily without need, so you have to put in so much slack that it's not worth the approach. IMO, the whole point of the credit spread is that the risk management is built right into the trade structure itself.

You may have missed the "most basic" qualifier in what I wrote. Please review it; it really is the key to understanding the entire phrase.

1) Stops don't "move too much"; they're fixed.
2) If yours "get triggered really easily without need", then you're using them incorrectly.
3) There are trades in which they're appropriate, and other trades in which they're not. Low-ratio spreads are an example of the latter; TA-based day trades in stock would be an example of the former.

It's foolish to dismiss something you don't understand, or to claim that it's useless because your experience or use case is inapplicable.

 

[qlai]

- take a maximum risk equal only to a small % of your trading capital

I can't figure this one out ... You know you are picking pennies in front of a steamroller, so the answer is to trade small. How small to make it meaningful though? I just can't understand why retail trader would play this game with personal funds without any possibility to scale? I'm getting a feeling many people simply find it intellectually challenging. But I guess nothing wrong with learning new things, should pay benefits sooner or later.