SPX Credit Spread Trader

Quote from rallymode:

Interesting, i see you used the key word swap, so no reduction as you originally stated, but rather a transfer to the future as you just said. The same effect could be achieved in a retail account, you simply need more cash. No?
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No, risk is being reduced TODAY. It's simply being swapped forward. So TODAY, you have less risk. No, you could not synthetically achieve this in a retail account given the same cash amount. Now, I know you can say, well, I'll just use more cash. But that is silly. That's like saying I can make as much money as Steven Cohen does. I just need to have 10 billion dollars to invest in treasuries.

Trading is about the efficient use of capital. If it takes you 10,000 to make what I can make with 1k, one of us is doing something wrong. I mean what is the difference between a hedge fund that earns 10% and 20%? One could could argue that you could invest twice as much money in the 10% hedge fund and earn the same dollar return. True, but then why not invest that same amount of money in the 20% hedge fund? LOL.

You can't simply discount capital usage as if it was a trivial variable. It is "THE" variable when it comes to trading. Risk can always be swapped around. Not to get rid of it, but rather to enhance the return on capital or lower the variance of your returns. That's right, your risk based haircut can actually lower the volatility of your returns and achieve better performance. This is called a utility function or improving the utility of your capital. Yes, we are going back to your econ 101 classes here. Enjoy!
 
I've been lurking on this thread for a while and wonder if I may be allowed to ask a question. What tools do most people here use to evaluate IV, greeks etc? I see that ToS and IB both offer free tool to acc. holders - how do these compare to one another, and to the restof the field?

Thanks,
1c
 
Quote from 1contract:

I've been lurking on this thread for a while and wonder if I may be allowed to ask a question. What tools do most people here use to evaluate IV, greeks etc? I see that ToS and IB both offer free tool to acc. holders - how do these compare to one another, and to the restof the field?

Thanks,
1c
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For trading options ToS and IB are the way to go IMO. Many people on this board favor ToS (me included) but others have good things to say about IB. I know you can download the ToS software and play with it for 10 days free, you should start there.
 
Quote from Maverick74:

No, risk is being reduced TODAY. It's simply being swapped forward. So TODAY, you have less risk. No, you could not synthetically achieve this in a retail account given the same cash amount. Now, I know you can say, well, I'll just use more cash. But that is silly. That's like saying I can make as much money as Steven Cohen does. I just need to have 10 billion dollars to invest in treasuries.

Trading is about the efficient use of capital. If it takes you 10,000 to make what I can make with 1k, one of us is doing something wrong. I mean what is the difference between a hedge fund that earns 10% and 20%? One could could argue that you could invest twice as much money in the 10% hedge fund and earn the same dollar return. True, but then why not invest that same amount of money in the 20% hedge fund? LOL.

You can't simply discount capital usage as if it was a trivial variable. It is "THE" variable when it comes to trading. Risk can always be swapped around. Not to get rid of it, but rather to enhance the return on capital or lower the variance of your returns. That's right, your risk based haircut can actually lower the volatility of your returns and achieve better performance. This is called a utility function or improving the utility of your capital. Yes, we are going back to your econ 101 classes here. Enjoy!
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Apparently, my econ 101 professor skipped over the material that covered how cross-margining allows one to actually cut risk by simply swapping it to another derivative. Perhaps, i should request a refund.

Anyway, given the fact you run a prop office and i am trading retail, i will stop dwelling on this. Appreciated the input.
 
phil, since you are now a full time trader, [this question is also for all other full time traders] i have always wondered how much "salary" do you pay yourself? iow, do you treat trading like a job where you sit for 6-8 hours daily and expect a certain amount of compensation for that time beyond trading profits? to me this would be an essential factor in calculating real profits. of course, i'm not asking for a dollar amount per hour/year, however my point is you are worth some monetary figure for the time spent in pursuing a profit.
 
>i dont see how you are reducing risk by using haircut.

I want to see if I understand.

On an Iron Condor, for example, some brokerage firms margin both legs of the IC, even though the market can only go against one leg at expiration.

It does not affect the actual risk when my broker margins for only one leg. I can then use the free capital to diversify my portfolio, or hedge my positions, which does reduce real risk.

Am I understanding this correctly?
 
Great question. Ufortunately there is no general answer because it depends on each individual person's financial situation.

I can only give you my overview and advice attached with it.

1. First you need to have a cushion saved up. Your savings/checking account should have enough money to make you feel comfortable. Also you need to do your family/personal budget so you know how much you need a month minimum to keep the status quo from swapping incomes.

2. My wife still works (she better!) so there is still a 2nd income.

3. I do not pay a salary, I occasionally draw funds when needed. I do not think you can start trading if you have to take out a specific amount every month. Handcuffs the growth of your portfolio and what happens when you have a losing month. I draw a small amount once in a while if needed.

4. With the great increase in free time I started teaching classes on options. It brings a secondary salary and doing something I love without HAVING to do it also helps in the happiness department. Teaching brings in a secondary income which, though not large enough to live off of by itself, allows me to build up my savings.

5. And as I mentioned everyone has a unique situation. I have other sources of i ncome through investments which also give me a comfort level.

So in general here are the ingredients that might be needed in some ccombination:

- Savings/checking cushion before leaving a full-time job

- Better not need to make constant specific withdrawals from your account because you will become so dependent on them that it will affect your trading as well as your mental trading state if you have a bad month or two. If you can trade and make way mroe than the needed withdrawals then you have a cushion. However I want my account to grow so I take out only when needed.

- Other income streams to keep you going and smooth out income volatility lol. Spousal income, secondary pursuit (like teaching, consulting...etc), other investments.

- A track record that you can rely on to know how much you can make consistently. I have a general idea from my history and experience how much I can make at a minimum in a month.

Well this is the the RIGHT answer, it is just an answer from my experience...

For me, even if I had to take a pay cut to do this I still would given the lack of stress now have (left lawyer job- trading is stressful but not the same way), freedom to work when i want, opportunity to be home with my son :)..... Those things are really why I did it lol..

But I have been preparing for this specifically since 2002 more or less. It takes time to get the right cushion and comfort level..




Quote from iprph90:

phil, since you are now a full time trader, [this question is also for all other full time traders] i have always wondered how much "salary" do you pay yourself? iow, do you treat trading like a job where you sit for 6-8 hours daily and expect a certain amount of compensation for that time beyond trading profits? to me this would be an essential factor in calculating real profits. of course, i'm not asking for a dollar amount per hour/year, however my point is you are worth some monetary figure for the time spent in pursuing a profit.
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OC , how would you calculated retail ( and prop) margins on this position(disregarding premium received) :

Spot is at 100

sell 1 - 95 call
sell 1 - 95 put

buy 1 - 105 call
buy 1 - 105 put

short 100 shares

all options are for the same month.
TIA
 
So you have a bear put spread and a bear call spread. The bear put spread is a net debit and has no margin. But you do have to pay the net debit.

The bear call spread has a margin of $10 minus the credit received for retail.

For haircut the margin would have to be between $5 and $10 but I do not have the formula for how they calculate haircut. The clearing firm does it automatically and who knows how exactly the calculate it lol...

Short stock has retai margin of 50%. Haircut would be slightly less at $100.

You have 3 bearish positions combined so they do not hedge each other really. If the market goes up you lose on all 3.

Honestly the great thing about haircut is that shows up on your sheets every day. Mav may know the specific % move up/down the clearing firm uses to calculate it.

But in your case with 3 separate bearish positions I think hairuct would be slightly less for the credit spread and the short stock but not offset since they are both bearish.

Quote from IV_Trader:

OC , how would you calculated retail ( and prop) margins on this position(disregarding premium received) :

Spot is at 100

sell 1 - 95 call
sell 1 - 95 put

buy 1 - 105 call
buy 1 - 105 put

short 100 shares

all options are for the same month.
TIA
More...
 
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