lack of credit in spy bull put spreads

[JackRab]

Let's please stop using ROC (Return on Capital) incorrectly. Unless you put 100% of all your capital into this trade and that was the only trade you did all year then it is not even close to representing what you mean.

What kind of credit are you expecting for 1 month to expiration and deltas near .2 and IV of 12.5%

Yeah, who came up with that ROC? I don't know why anyone would use that way... it's more like a return/risk measure.

Stick with credit/margin required... and be aware of the risk.

And indeed... what do you expect of a 2 dollar put spread with a low IV. The spread has a delta of 0.05-ish...

 

[HappyTrader]

OP:
You're getting a low credit because premium is low (duh).
You're getting low premium because volatility is low.

The higher the volatility, the higher the premium. Right now it's trading at roughly 10% volatility which is towards the 'very' low end of the spectrum. You may have been used to seeing 20%+ volatility in the previous month and set expectations accordingly.

The rationale behind this is the higher the volatility the higher the premium.

I believe the reason for the low volatility right now is that the general consensus is that it's another bull market and things can only get better from here. And if that's the general consensus, who wants to buy 'insurance'. Low demand, low price. Ergo, the pittance on the spread.

On the plus side, you're more likely to not have your puts assigned So your return is lower but your risk adjusted return may be higher (10% return on a 20% probability of exercise versus 20% return on an 80% probability of exercise)... if one could measure such things.

At this point, you either want to increase the spread, go completely naked, choose alternative underlying or switch to buy-side on the option.

(Technically you could just buy 1-2 month out options at low volatility and 'hope' the volatility increases and re-sell the option). Yes of course this is a completely different trade tho

Good luck, choose wisely, and it's great your asking the right questions.

 

[Cswim63]

Not sure I'd want to be short put premium here. Watching Euro, Deutsch Bank continue to trickle down. Now the Aussie, Kiwi selling off. I felt as if as long as those two held up we'd be ok, as there was at least some risk taking going on. TLT calls, anyone?

 

[FreakofNature]

Not sure I'd want to be short put premium here. Watching Euro, Deutsch Bank continue to trickle down. Now the Aussie, Kiwi selling off. I felt as if as long as those two held up we'd be ok, as there was at least some risk taking going on. TLT calls, anyone?

Indices are mean reversive, otherwise, DOW would be at 2,000,000 SP at 2,100,000, the time is to sell CALL Premium.

 

[sss12]

OP:
You're getting a low credit because premium is low (duh).
You're getting low premium because volatility is low.

The higher the volatility, the higher the premium. Right now it's trading at roughly 10% volatility which is towards the 'very' low end of the spectrum. You may have been used to seeing 20%+ volatility in the previous month and set expectations accordingly.

The rationale behind this is the higher the volatility the higher the premium.

I believe the reason for the low volatility right now is that the general consensus is that it's another bull market and things can only get better from here. And if that's the general consensus, who wants to buy 'insurance'. Low demand, low price. Ergo, the pittance on the spread.

On the plus side, you're more likely to not have your puts assigned So your return is lower but your risk adjusted return may be higher (10% return on a 20% probability of exercise versus 20% return on an 80% probability of exercise)... if one could measure such things.

At this point, you either want to increase the spread, go completely naked, choose alternative underlying or switch to buy-side on the option.

(Technically you could just buy 1-2 month out options at low volatility and 'hope' the volatility increases and re-sell the option). Yes of course this is a completely different trade tho

Good luck, choose wisely, and it's great your asking the right questions.

Thanks, actually I have been buying the ITM 60 delta calls +60 DTE since I'm not getting compensated selling put premium.

But back to my original OP concerning credit spreads.....maybe net credit received/margin requirement DOES need to at least equal the short side delta for it to be worthwhile ? Maybe a good general guideline preventing one from selling spreads if vol is to low ? Thoughts ?

 

[HappyTrader]

Thanks, actually I have been buying the ITM 60 delta calls +60 DTE since I'm not getting compensated selling put premium.

But back to my original OP concerning credit spreads.....maybe net credit received/margin requirement DOES need to at least equal the short side delta for it to be worthwhile ? Maybe a good general guideline preventing one from selling spreads if vol is to low ? Thoughts ?

Low IV will net lower premium (and may effect your profit/loss ratio). That being said, there are some situations where it's still worthwhile (increase the spread if you are confident of a bull).

So I guess a 'General Rule' could be:
Widen the spread to a point where the credit received (after commissions!) is sufficient to compensate the risk. If such a point can not be reached, abort!

I.e.:
Minimum acceptable credit is 1$
IV High: 90/89.5 nets credit 1$ --- Good
IV Low: 90/80 nets credit 1$ --- Bad

 

[sss12]

Low IV will net lower premium (and may effect your profit/loss ratio). That being said, there are some situations where it's still worthwhile (increase the spread if you are confident of a bull).

So I guess a 'General Rule' could be:
Widen the spread to a point where the credit received (after commissions!) is sufficient to compensate the risk. If such a point can not be reached, abort!

I.e.:
Minimum acceptable credit is 1$
IV High: 90/89.5 nets credit 1$ --- Good
IV Low: 90/80 nets credit 1$ --- Bad

yea thanks, that's along the lines of my thinking.