SPX Credit Spread Trader

Quote from Sailing:

Gentlemen.... Ladies....

We're not playing DELTAs here..... either for credit or debit... you're playing VEGA.

Yes - if I hold the position for any length of time, VEGA is the primary Greek that determines my profit. But, if the market runs away from the strikes, then I can close for another cash credit early, making a profit from the combination of delta and theta.

You can enter a diagonal for $4.00 debit... and when VEGA increases... sell it for $6.00. Or.. you can enter for $0.20 credit... and let vega drain out.. and collect your $ .20. It's not what you enter as... but rather how you exit.

But, if VEGA does not increase - if it fact it decreases, I still can get a quick PROFIT when the market runs away from the strikes. That is one way I enhance the probability of earning a profit on each trade without having to depend on our ally, VEGA. A smaller profit than I would like, but it's better than having a losing position that results from paying a debit in these situations.

As far as which months.... again... it's a VEGA play. I would personally want to enter with VEGA low, and play the VEGA spike anytime during the month. Sell on the spike.. and re-enter at lower levels.

You certainly can play Nov/Dec... but you're not taking advantage of the full skew in THETA/VEGA. I would suggest you play Oct/Dec... at an opportune time, exit on a VEGA spike, and re-enter... maybe back into Oct or maybe Nov...

Too many of you are caught up in DELTA.... . it's not a DELTA play.

Murray, I've learned a great deal from your posts. But, I disagree. It's a DELTA play if I choose to make it a DELTA play. And I only do that, if and only if, the market runs away from the strikes - especially to the upside when VEGA decreases. If I sold put spreads yesterday (I did) for a nice credit, and if I take it off today (I didn't, I'm holding)) on the rally, then any profit earned is from DELTA.

The longer I hold the position, the more depenedent I am on VEGA to determine the size of my profit. But, by holding, I've also capitalized on THETA and that is a major contributor to any profit. The VEGA profit might or might not dwarf the THETA profit, but THETA has been a large factor also. And delta plays a smaller (but not insignificant) role for me - because by doing credit spreads with strikes further apart, I am not delta neutral on any individual spread. I do both puts and calls to neutralize the deltas of my portfolio.


The advantage of going further out... ie, Oct/Dec or Nov/March would be further Break evens at expiration (if you're still in the trade) or a longer period of time to look for a VEGA spike to sell into....

These are not for me. Debit too large and I want to close positions as quickly as possible. Thus, for my comfort zone, I use consecutive months only. But, there are no rules here. This is a method that can be modified endlessly - to fit the comfort zone of the spread holder.

One of the nicest features of the Double Diagonal... is the fact that is can be morphed into an Iron Condor, easily.... , and then into Credit Butterflies. WHY? if you have a VEGA spike... you can lock your profits by rolling into an Iron Condor.... now... when the VEGA dips lower... you can either re-enter the Diagonal... or convert into two "BATMAN" butterflies.... usually for some good credit. Two credit butterflies is awesome... positive expectancy..... and .... besides making a small guaranteed profit... you have two huge lottery tickets... which could net you.... 10:1 returns on investment.

Playing positive expectancy... ie, not closing trades for profits, but rather rolling them into locked profits with higher potential returns.... is where we're missing the 'leg' here on this discussion board. But we'll go there another day.

Great idea. But, not for me. I have no interested in playing with 'locked profits' nor in attempting to own a free lottery ticket. I close my diagonals for cash profits and re-open new diagonals every month. I choose to place my money (as much capital as I care to use) completely into diagonals. Not looking for bonanzas. Just want STEADY INCOME. Works for me.

If you're interested in trading DELTAs... there are much more profitable strategies to consider, ie, long calls, puts, bull calls, etc.

M~
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That's the point. I am NOT interested in playing deltas. But sometimes, these diagonals turn into short-term delta plays, even though that was not my intention.

Appreciate your detailed response.

Mark
 
Quote from Sailing:

Gentlemen.... Ladies....

We're not playing DELTAs here..... either for credit or debit... you're playing VEGA.

You can enter a diagonal for $4.00 debit... and when VEGA increases... sell it for $6.00. Or.. you can enter for $0.20 credit... and let vega drain out.. and collect your $ .20. It's not what you enter as... but rather how you exit.

If you have any doubts... just play with your 'vol' feature within ToS's platform..... it's all in the picture if calculating isn't your thing.

M~
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Murry, SPX is at 1327 and vega is at ~-67. I'm just learning about vega. I would assume that would be high?
 
Quote from rdemyan:

Do you mind sharing a typical Nov/Dec diagonal that you placed. Details such as the credit received and the date the trade was placed are very helpful. Also do you typically leg in or do you place the spread in one transaction?

Appreciate any information you care to share.

Thanks.
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I don't keep records of which spreads were put on on which day, but today, I had just a tiny bit of free margin so I opened a one lot spread on the rally: Bot MID Dec 830 call; Sld Nov 800. Credit 95 cents. I have this same spread from some time ago when I received a credit of $1.60.

One other sample position in my portfolio is the NDX Dec 1400 put vs. Nov 1475 put for a credit of $1.20. Opened about one week ago.

I do NOT take legs. I enter the spread via IB's system.

Mark
 
Coach,

I have trouble to understand your calculation. The following is my calculation, and do not know why the result is different.

step 1: 270*4.70=12690

step 2: 135*5.25 + 135*2.55=10530

step 3: Net debt=12690-10530=2160

So the adjustment is a net debt, not net credit.


mdshiao


------------------------------------------------------------------------------------

FINAL ADJUSTMENT

Converted diagonal to a short OCT ES Butterfly for a net credit:

Step 1. Bought back 270 SEP EW 1340 Calls @ 4.70

Step 2. Sold 135 OCT ES 1355 Calls @ 5.25
Sold 135 OCT ES 1365 Calls @ 2.55
Credit = 7.80

Step 3. Net Credit from Adjustment = 3.10 or $41,850

Step 4. Adding original net credit of $10,275, TOTAL NET CREDIT =$52,125
---------------------------------------------------------------------------------
 
Quote from Sailing:

I hope you're keeping a log of this.... or I'll have to have MO link all this stuff in a few months from now. :)


M~
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No need to keep a log or link back. My humble opinion is that most folks only hear things when they are ready and that's largely only when it's directly applicable to their current situation. That will be different times for different people. Be prepared to re-type everything again multiple times! After all, that's why this thread is so long :D

For anyone interested, Cottle's book covers a great deal on the topic of options metamorphosis. There is also a lot of coverage of synthetics and position dissection therein. IMO, these are key concepts to understand for facilitating metamorphosis. The idea is to be able to leverage existing inventory to build desired positions which are thus attained at better than "fair value". This is what some would refer to as positive expectancy.

This isn't a free lunch of course. One has to assume time, direction or volatility risk initially to build the inventory.

Riskarb's combo to fly conversion journal was a classic example of attempting to get into positive expectancy flies by first assuming some risk on a short straddle.

FWIW, I also briefly noted some directional-only (time, volatility risk ignored) routes to positive expectancy flies which perhaps illustrates the concept in one dimension: http://www.elitetrader.com/vb/showthread.php?s=&postid=1126635#post1126635

The options are endless. Imagination is the only limitation :D

2 cents.

MoMoney.
 
Quote from rbsanders:

Anyone here daytrade futures and have an opinion on T or S versus Interactive Brokers thanks
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The ToS platform is not suitable for day trading futures IMO though it depends how heavy your trading will be.

With Interactive Brokers you have the choice of multiple third-party front-ends which are designed and built for day trading and scalping etc. They aren't X Trader but there are some good alternatives e.g.

www.buttontrader.com
www.zerolinetrader.com

Depending on your methodology, you could just use IB's TWS but Book Trader is a disaster waiting to happen IMO LOL. Things may have changed since I last looked at it though so see for yourself.

Good luck.

MoMoney.
 
Quote from rallymode:

Phil,

nice credit on your last adjustment. I must admit, i am clueless as to why you chose to offset your short 1340's ATM with 4 days to go. I would've thought you would've waited for the last few days of decay to kick in and given the fact you are short downside gamma, it wasnt to risky for you at this juncture but i am sure that's just optioncoach's finance an adjustment type of thinking i see here. :)
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FWIW, if I'm anywhere near the sweet spot of a calendar in the last week, I take it. Bird in the hand mentality I suppose and/or past experiences. The PnL can drop off quite quickly waiting for the last few days of theta. Similar with flies.
 
Your calculation is correct. Phil is computing a net credit of 7.80 but using 270 as the multiplier, when he should use 135. The credit on 270 is not the sum of 5.25 and 2.55, but the average which is 3.90, giving a net credit of -4.70 + 3.90 = -.80

Quote from mdshiao:

Coach,

I have trouble to understand your calculation. The following is my calculation, and do not know why the result is different.

step 1: 270*4.70=12690

step 2: 135*5.25 + 135*2.55=10530

step 3: Net debt=12690-10530=2160

So the adjustment is a net debt, not net credit.


mdshiao


------------------------------------------------------------------------------------

FINAL ADJUSTMENT

Converted diagonal to a short OCT ES Butterfly for a net credit:

Step 1. Bought back 270 SEP EW 1340 Calls @ 4.70

Step 2. Sold 135 OCT ES 1355 Calls @ 5.25
Sold 135 OCT ES 1365 Calls @ 2.55
Credit = 7.80

Step 3. Net Credit from Adjustment = 3.10 or $41,850

Step 4. Adding original net credit of $10,275, TOTAL NET CREDIT =$52,125
---------------------------------------------------------------------------------
More...
 
Quote from Jeff Dickson:

Your calculation is correct. Phil is computing a net credit of 7.80 but using 270 as the multiplier, when he should use 135. The credit on 270 is not the sum of 5.25 and 2.55, but the average which is 3.90, giving a net credit of -4.70 + 3.90 = -.80
More...

Doh!
 
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