SPX Credit Spread Trader

[El OchoCinco]

You just have to use your imagination a little...

If the market is near the strike at expiration, the position is worth quite a bit of money. For comparison, take SPX and assume at OCT expiration the SPX is at 1350 and you are left with the NOV 1350 and DEC 1350. The remaining backspread will have a huge premium in it for a nice net credit.

THe position does not cost hardly anything to put on. In fact, using OTM strikes I can put it on for a net credit. If the market drops or runs too far up, the position can be closed for a small profit in most cases. If the market is near the strike at expiration , the profit potential is huge.

The position is Vega neutral at inception and a rise in the market results in a drop in IV.

The underlying bet is that the short wing expires worthless and I can close out the remaining backspread for a net credit.

Just test out some scenarios. That is what I am doing today.

One question I still have is whether I can do it for a net credit. I will have to wait until the market opens and see the actual b/a spreads. Also, test the legs for IV changes.

Rally, if the short leg expires worthless and the market rallies huge, assuming I did not close the backspread, the profits are also huge.

Quote from rallymode:

It doesnt matter whether we look at the position as a backspread and a short call in the current month or as a long and short calendars. The result is the same. I am still not understanding what the underlying bet is here. It sounds like you are playing for theta and expiration near your short strike, while to me it appears vega dominates the position. I cant imagine the position moving more than 20 cents away from neutrality. You just end up paying the vig on 3 legs. I am deeply puzzled by this position as i cannot understand for the life of me why one would put it on.

Would be nice if riskarb peeked in here and made a comment on this.

 

[riskarb]

Quote from rallymode:

It doesnt matter whether we look at the position as a backspread and a short call in the current month or as a long and short calendars. The result is the same. I am still not understanding what the underlying bet is here. It sounds like you are playing for theta and expiration near your short strike, while to me it appears vega dominates the position. I am deeply puzzled by this position as i cannot understand for the life of me why one would put it on.

Would be nice if riskarb peeked in here and made a comment on this.

I need a refresher on the position here, but I assume it's the 1375/1400 diagonal? Yeah, it's initially vega risk, but every greek conspires as spot trades away. Position greeks peak at the short strike, sans delta. Something you absolutely must avoid if taking a bet AGAINST that strike. I don't know... I never buy upside diagonals or time spreads. Right on direction typically means a loss on vol. Debits vanish as gammas go to nil away from the strike. Upside vegas are meaningless if we drop to 5d on your long call strike. I'd rather be short the bear-delta combo, but that's no surprise to anyone here. =)

You need to target a strike if short gamma. Avoiding the strike if long gamma. Seems as thought Coach was/is bearish, correct me if I am wrong. If so, he should be trading strikes under spot with put diagonals, or preferably same strike spreads due to the desired long vol.

Buying the time spread at the 20d strike will achieve a triple if stated strike is reached in three weeks time. Hedge softly with futures or itm calls and you've got a very large payoff distro.

 

[El OchoCinco]

Risk:

The position proposed is:

- OCTEW1395 Call
+2 NOVES 1395 Call
- DECES 1395 Call

Possible net credit = 2.45 per FLY.

Goal is to close out at OCT EW expiration.
Initial Assumption is that haircut is near $0.
Expect market to be at or below strike by expiration

 

[riskarb]

Quote from optioncoach:

Risk:

The position proposed is:

- OCTEW1395 Call
+2 NOVES 1395 Call
- DECES 1395 Call

Possible net credit = 2.45 per FLY.

Man, you guys are busier than a cat covering sh*t. I have no problem with the position, bu the credit seems light. A lot of convergence risk to 95 in Nov expiration. Haven't modeled it, but I see close to 15 points of risk on the positon near Nov expiration at 1390-1395. Don't bite my head off if I guess heavy on risk.

You're doubling the risk on a 1:1 short calendar at 1395 for a $2.45 potential.

Edit: Now you come back with an edit, timing your offset... I refuse to be mocked! =)

Further edit: I wouldn't do it, so it's probably a lock. I don't see being bearish and short vol as complimentary here. Yeah, i think it may earn, but it's loaded with risk at 85-95.

 

[El OchoCinco]

But the main idea is to close at OCT EW expiration. So forget about risk at NOV expiration......

Once the OCT wing expires, can take profit on the remaining backspread.

Quote from riskarb:

Man, you guys are busier than a cat covering sh*t. I have no problem with the position, bu the credit seems light. A lot of convergence risk to 95 in Nov expiration. Haven't modeled it, but I see close to 15 points of risk on the positon near Nov expiration at 1390-1395. Don't bite my head off if I guess heavy on risk.

You're doubling the risk on a 1:1 short calendar at 1395 for a $2.45 potential.

Edit: Now you come back with your offset timing... I refuse to be mocked! =)

 

[El OchoCinco]

What risk do you see at 85-95 at OCT expiration.

For example, looking at the NOV/DEC 1360 (ATM strike) assuming the OCT expired worthless at 1360, the backspread has a net credit of 11 points..

Quote from riskarb:



Further edit: I wouldn't do it, so it's probably a lock. I don't see being bearish and short vol as complimentary here. Yeah, i think it may earn, but it's loaded with risk at 85-95.

 

[riskarb]

Quote from optioncoach:

What risk do you see at 85-95 at OCT expiration.

For example, looking at the NOV/DEC 1360 (ATM strike) assuming the OCT expired worthless at 1360, the backspread has a net credit of 11 points..

I don't see any risk to 95 at Oct expiration. I had posted before your edits. :eek:

 

[jychiu]

$35k is about 13% of the $270k and with a 20-25% return on average margin per trade, does not mean it just take you 1 month to recover ?

As a newbie following the thread, knowing the risk vs reward is good for me, could you post your SPX summary for the year ?

Thank you in advance.

Quote from optioncoach:

I estimate the loss to be about $35K on a $270K risk position. Not to gloat but first real loss since I started this thread . And I must repeat again for those newer to the thread, that amount does not wipe out past gains as those who have been following along for some time know my returns.

Well the YTD return on risk is in the managed retail account where I do my SPX credit spreads. Actually, current return to date on SPX credit spreads is about 20 - 25% based on average margin per trade of $250K - $300K. (I can post the OX SPX summary for the year)

 

[scoobie27]

Quote from jstancliff:

Please forgive my ignorance, but what is
the VIX call spread?: confused:

Hi im no expert but ill try to answwer your question. Vix is the volitility index. Lets say vix is currently at 11.5. You would buy a 13 call and sell a 14 call. Thats if you bullish on vix. ie thinking vols will increase sometime in the future. This is a debit spread. You would do the opposite for a credit spread.

scoobie

 

[El OchoCinco]

Well I first must make my boilerplate statements:

1. Newbies are welcome to follow along and participate but are strongly advised not to try the trades discussed here as they are more advanced in addition to requiring advanced skills in risk management and analyzing the index for strike selection. Newbies beware and please only paper trade, but I do advise against doing these strategies.

2. The risk/reward ratio of credit spreads suck. Those of us who choose them do so because we are looking at high probability positions but know that good risk management is needed to limit losses on those bad months.

OK, now that is done. First you are crossing my statements I made about the SPX credit spreads in the retail account and the diagonals I made in the prop futures account. Also 20 - 25% is the ANNUAL return to date on margin for the SPX credit spreads. I WISH I could make 20% a month lol. The 13% you mention was on the diagonal options on futures. The SPX return is separate account

I hope that clears up the confusion.

Quote from jychiu:

$35k is about 13% of the $270k and with a 20-25% return on average margin per trade, does not mean it just take you 1 month to recover ?

As a newbie following the thread, knowing the risk vs reward is good for me, could you post your SPX summary for the year ?

Thank you in advance.