SPX Credit Spread Trader

THank you for your input. My goal here is to simply collect premium month to month. Using OTM put spreads is a way I can do it without predicting the market for the month. In any given month, the market can move higher, sideways, or significantly lower and I still have a profit. In my view I am trading without concern over market direction except for a major crash lower.

The last few months given the sideways movement of the market I have added OTM call spreads at appropriate times for iron condors. Now I have large upwsing risk but given my strikes, the market can still move sideways, lower or higher and my positions are still profitable. I still view this as not caring about direction so much as I care about actual vol in the market. It is the major event causing price swings that would concern me.

For my trading style, delta hedging would require a lot of adjustments per month which would cost a lot in commissions. Market makers have the luxury of cheap transaction costs and market makers are trying to lock in a spread and therefore are in a much better position than me to hedge delta and lock in vol.

Using less than 40 days to expiration and the theta I have, I am not as concerned with deltas given that I can actually abosrb large price swings in either direction and it will not affect my position. Initial deltas do not hurt me. Only large price swings with expiration approaching and me close to one of my strikes. If I am close to one of my strikes, I simply roll out or adjust.

So within my system and approach here I do not see the benefit of trying to hedge delta given the costs associated with it. I think, and I may be way off here, that market makers are not as concerned with profiting from market moves as they are from making money off the spread and hedging against all market risk.

I hope I made myself clear :)

Phil


Quote from OptMarketMaker:

Thank you very much for starting and maintaining this thread. It is very useful and interesting.

I work as a market maker for a large firm on the floor of the CBOE. I am supervised to see that you are not delta-neutral. I would imagine that the best way to take advantage of the favorable IV skew would be to sell small delta puts (or put spreads) and sell the underlying to hedge delta risk. This would enable you to take a short vol. position without trying to predict where the market is going and trade more size with less margin. You could then hedge any delta's as a result of your negative gamma with the underlying or other options. The only negative aspect of this strategy that I can foresee is the commission associated with hedging your portfolio's deltas.

I guess if you are planing to leg into a iron condor by selling a call spread with your short put spread position you could deem it a waste to hedge your deltas?

I am obviously missing something here, and any feedback would be much appreciated.

Thanks again for sharing your trading expertise.

Steve
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On the nice upswings this week I decided to close one of my put spreads.

Remember I had the following:

60 JUL 1110/1125 Put Spreads @ $0.80


Today I closed it out for a net credit of $0.50 (BTC @ $0.30).

Net Credit = $3,000
Margin = $90,000
Return = 3.33%.


I CURRENTLY still have:

100 SPX JULY 1140/1145 Put Spreads @ $0.40

95 SPX JULY 1260/1270 Call Spreads @ $0.45


I will try and attach my OX activity sheet which shows all SPX trades for June.

Phil
 
What was the weighted average margin capital required over the period? Seems like it was in excess of $90K but probably less than $150K. This would indicate something like a 10% return -- using an average...Is that close?
 
Excellent question. I have not had a chance or kept track of average margin over the period. The most my margin was ever used in June was $250,000 so to be honest for right now, you can take the profit over that amount for a floor of what my monthly return was. There were days where cash was idle waiting for the next positions so the true average margin number is less but better to err on caution side to give most accurate picture.

Using those figures, I am up 5% for June right now at a minimum.

Phil

Quote from ssternlight:

What was the weighted average margin capital required over the period? Seems like it was in excess of $90K but probably less than $150K. This would indicate something like a 10% return -- using an average...Is that close?
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On a small dip day I added to my put side since I closed out one of the put spreads recently.

My new position is:

Sold 55 July SPX 1150/1165 Put Spreads @ $0.50

Net Credit = $2,750
Margin = $82,500
ROM = 3.33%


My Current Positions also are:

100 SPX JULY 1140/1145 Put Spreads @ $0.40

95 SPX JULY 1260/1270 Call Spreads @ $0.45


Phil
 
Quote from optioncoach:


1. I believe SPX is still the best given the volatility skew and liquidity. After that I like OEX/XEO and then options on E-mini S&P futures.

Phil
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These underlyings are either S&P 500 or S&P 100. Are there any particular reasons you don’t like NASDAQ options (e.g. options on NDX or MNX, or options on E-mini NQ futures)? Would you comment on NASDAQ options? Thanks.
 
The QQQQs have no significant premium moving more than one or two strikes out of the money. I like to go OTM and with the QQQQs I could not go far enough to feel comfortable. To me the QQQQs have the same problem the SPYs have, they are a fraction of the total index. So the strikes are close to the ATM value and premium drops off sharply. To do OTM spreads I would only have one or two strikes to c hoose from since the Qs are only at 37. With SPX I have many strikes 50 - 80 points OTM.

I also feel the S&P is more broad based while the QQQQs are naturally tech central.

Now doing this on the E-mini NQ futures may be more viable since they are the actual index and thus you would have the strike choices similar to the S&P. I do not follow the NDX or MNX so I cannot say how good the premiums are OTM.

Finally, I track the S&P charts daily and my comfort level is in trading them. I never followed the Qs specifically or the Nasdaq so I always stay stick with what you know. Basically the QQQQs might be better for put selling than doing OTM spreads but even then an AUG $36 Put is selling for $0.25- too small to be worth it.

That is why I primarily stick to the S&P indexes but if you can find similar spread situations on the options on futures, then it is certianly viable.

Phil


Quote from theTaoTrader:

These underlyings are either S&P 500 or S&P 100. Are there any particular reasons you don’t like NASDAQ options (e.g. options on NDX or MNX, or options on E-mini NQ futures)? Would you comment on NASDAQ options? Thanks.
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As I said, the options on the futures for the Nasdaq probably can work but I would avoid the QQQQs. As for me, S&P is what I know so I stick with it. Anyone regulalry trading the NDX or MNX can certainly work these strategies in quite easily.

Best of Luck!

Phil


Quote from vulture:

NDX options are pretty attractive for these types of strategies.
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