Scalping PM settled credit spreads

[Ironplates]

Once a month the SP500 PM Settled Index expires. These options do not have pin risk, are highly liquid, and stop trading at 4pm ET

In the last minutes before the closing bell the near money spreads will start fluctuating wildly.

about 2019.5, I was able to sell a 2020/2025 credit call spread for $1.00 and find that the index closed at 2019.38. The high was 2020.40, this would still leave $.60 profit if it closed there.

I was also trading the 2025/2030 credit call spread for $.25 where I identified a structured market stop of 2021.5, but that was of no interest when the 2020 strike came alive for explosive vega scalps.

Anyone else here have experience exploiting these spreads and willing to share their experience working these kind of trades?

Getting some hedges lined up ahead of time are key and knowing when to place them are key in the event the price action moves to BEP of the trade.

 

[FSU]

The premiums did seem a bit high to me as well on the at the money options right before the close. I have seen the index move several points though in the last minutes, so these positions do carry some risk.

You don't have to wait for the SPXPM expiration to play this game, as the SPXW (weeklies) expire every Friday afternoon as well. There is a real opportunity in the last 10 seconds or so with these plays. It seems the markets go extra wide in the last 30 seconds or so and some market maker pricing models don't work well in the last seconds, especially with a large futures move in the final seconds. For example on Friday the SPXPM 2020/2015 put spread traded at about 2 with just a couple of seconds to go. It ended up being worth only .62

 

[rmorse]

FSU,
I agree but others should consider the risk involved with this strategy. You are very dependent on the COB for execution with wide markets at an illiquid time. You have to assume if you can get in, that getting out might be expensive if you choose to cover.

 

[i960]

FSU,
I agree but others should consider the risk involved with this strategy. You are very dependent on the COB for execution with wide markets at an illiquid time. You have to assume if you can get in, that getting out might be expensive if you choose to cover.

Yep this seems like a pretty risky possibly pound foolish strategy that might end up with a lot of resultant hassle for little gain if timing or liquidity is less than ideal.

 

[FSU]

FSU,
I agree but others should consider the risk involved with this strategy. You are very dependent on the COB for execution with wide markets at an illiquid time. You have to assume if you can get in, that getting out might be expensive if you choose to cover.

Bob, you are entirely dependent on a COB misprice here. If it doesn't happen, no worries, you are simply not filled on your opening trade. You are not going to be able to cover this position, you are stuck with it. It is simply a play on a mispricing in the final seconds.

As to i960's comment, you want to make sure the risk reward is worth it and not play for a very small gain. For example Friday when the index was around 2019.60 with a few seconds left, and the 2020/2015 put spread trades for 2. Here you are risking 3, but this would require a very substantial drop in the Index (it could happen as the index continues to move after the 3pm close) but the risk/reward is good on this trade. This trade made 1.62 which is not a small profit, especially when compared to the likelihood of a loss.

 

[Ironplates]

Bob, you are entirely dependent on a COB misprice here. If it doesn't happen, no worries, you are simply not filled on your opening trade. You are not going to be able to cover this position, you are stuck with it. It is simply a play on a mispricing in the final seconds.

As to i960's comment, you want to make sure the risk reward is worth it and not play for a very small gain. For example Friday when the index was around 2019.60 with a few seconds left, and the 2020/2015 put spread trades for 2. Here you are risking 3, but this would require a very substantial drop in the Index (it could happen as the index continues to move after the 3pm close) but the risk/reward is good on this trade. This trade made 1.62 which is not a small profit, especially when compared to the likelihood of a loss.

The SPXPM expiry settlement price is at the close, therefore afterhours price action does not matter.

imo, time decay is a significant element moments before expiration.

I trade these strategies as one entry, with no exit trade. Hedge would need to be used via different strikes, expiry, or both.

I found selling 3x more size than my original size at another strike spread can cover loses on the original spread (especially when more time value is present). Sometimes the 3x hedge results in an overall position gain.

I will not even start with my conspiracy theory on Monday morning moves, assignments and margin calls. I will only say, that I think the exploitation only works in paper trading accounts, where an ITM spread in actuality is allowed to be traded the following Monday for massive returns as the moves continue the expected market structure of price, that is slightly obscured at the Friday close.

What are effective risk management tactics I should consider when trading these opportunities?

 

[FSU]

The SPXPM expiry settlement price is at the close, therefore afterhours price action does not matter.


What are effective risk management tactics I should consider when trading these opportunities?

The settlement price is based on the closing price of all the stocks in the SPX. This may not be known until sometime after 3pm ct. Generally the SPX will stop ticking at about 302, but I have seen it move as late as 330.

The only risk management you can do here is make the risk reward worthwhile. You know your max loss, and make the trade when it looks like you have significant edge.

 

[Ironplates]

The settlement price is based on the closing price of all the stocks in the SPX. This may not be known until sometime after 3pm ct. Generally the SPX will stop ticking at about 302, but I have seen it move as late as 330.

The only risk management you can do here is make the risk reward worthwhile. You know your max loss, and make the trade when it looks like you have significant edge.

The SPXPM settlement price may respond as such on any given day, EXCEPT final settlement on monthly expiration is at the 4pm close.

 

[FSU]

The SPXPM settlement price may respond as such on any given day, EXCEPT final settlement on monthly expiration is at the 4pm close.

The final settlement is NOT set at exactly 4pm. As I mentioned earlier, you will continue to see this tick for a minute or two past 4est ( and some times much later). It is based on the closing prices of the SPX stocks, which may not be know at exactly 4pm.

 

[Ironplates]

The final settlement is NOT set at exactly 4pm. As I mentioned earlier, you will continue to see this tick for a minute or two past 4est ( and some times much later). It is based on the closing prices of the SPX stocks, which may not be know at exactly 4pm.

Have you ever traded SPXPM into expiration? If you have you would know what I mean. When trading this credit spread, all I care is if the short leg is worthless at expiration, so I can keep my short premium. On this particular contract, that happens at the close. This contract does not trade after the close on expiration nor does it have pin risk thereafter.