SPX Credit Spread Trader

[Cache Landing]

dagnyt,

You should realize that even if the number of contracts is the same, the risk is higher on the FOTM spread. Taking in less credit per spread results in higher margin requirements. By doing the same number of contracts you've effectively taken a position that risks more and gains less than a CTM position with the same size.

Really though, size is irrelevant. A losing strategy loses regardless of size, and a winning one also does so regardless. Reducing the size doesn't increase your chances of winning in the long run. It only serves two purposes.

1) Reduces your profit potential.
2) Prevents a blowup.

If you've found that you can make money consistently for 10 years with your strategy then it is a winning strategy. If you faced significant drawdowns during 3 sigma events, then it is a losing strategy and needs to be adjusted. I also do a further OTM credit spread on occasion, but not as a standalone position.

I would suggest to anyone who might be uncertain about the ability to manage a CTM spread. It is much easier than managing an FOTM spread that has gone wrong.

 

[TrendSailor]

Quote from Cache Landing:

I would suggest to anyone who might be uncertain about the ability to manage a CTM spread. It is much easier than managing an FOTM spread that has gone wrong.

All good stuff Cache. Thanks. Its refreshing to get level headed insight, knowledge and perspective devoid of the routine vanity, insults & superiority ego baggage that masquerades personal opinions as expert advise.

I have started experimenting with CTM/ITM SPX debit spreads. I am doing pretty good in my TA and macro trend projections. Thus I tend to call direction and short term trends fairly well. Lately I have got some very fast full theoretical profit underlying runs - sometimes in as soon as a day or even in a few hours of putting on a position (10-15 point spreads). My problem though is that even when the underlying runs well past my shorts to hit the max profit zone I then must wait for the extrinsic value of the options to whither away in time before I can realize anything close to my full theoretical profit. The curvature that makes the position easily manageable when it goes against me works against me in giving up anything remotely close to max profit till close to expiration. Of course in that extended time frame my short term favorable directional projections can retreat and reverse and "undo" the profits before I can strip them.

What in your opinion is the best way to lock full profit potential or extract the best profit one can in these kinds of CTM debit spread scenarios? My problem with putting on a butterfly around my shorts is that in a moderately trending market (that I have successfully projected/anticipated) it becomes a foot race between the directional trend rate vs the expiration schedule. That can eat a lot of profit if the trend races ahead of schedule. My inclination has been to buy back the shorts if volatility contracts significantly to let it run or to close the position at a major discount to full theoretical profit.

Thoughts?

TS

 

[yip1997]

Quote from Cache Landing:

A position that already had a slight negative expectancy now has a huge -expect.

Cache,

Did you meant that FOTM credit spread has a negative expectancy at the time of opening the trade? If thats the case, Can you long the vertical so to get a +ve expectancy?

Do you think that expectancy (CTM) > expectancy (FOTM)? Or do you think that expectancy(CTM) is neural or slightly +ve? If we can't generalize it to every stock, I like to use SPX for our discussion.

I always think the expectancy of every strategy is the same (almost zero). Otherwise you can devise a combo and receive a +ve expectancy.

I wish your insight can refine my trading strategy.

 

[dagnyt]

Quote from Cache Landing:

dagnyt,

You should realize that even if the number of contracts is the same, the risk is higher on the FOTM spread. Taking in less credit per spread results in higher margin requirements.

In reality, getting a higher credit from CTM positions would mean that I could do even more spreads. I don't want to do any more. I suppose I am not forced to be fully invested, but that requires a new mindset and I'm going to ponder this in detail.

By doing the same number of contracts you've effectively taken a position that risks more and gains less than a CTM position with the same size.

The 'gains less' part is easy for me to see. I agree. I don't see why I'm risking more by selling 100 spreads 6% out of the money than by selling 100 spreads that are 1% OTM.

However, as comfortable as I am with these spreads I do, I must admit that I am going to rethink the advisability of selling fewer spreads that are closer to the money. Not sure how well I'd do managing them, but I am going to consider it.

Really though, size is irrelevant. A losing strategy loses regardless of size, and a winning one also does so regardless. Reducing the size doesn't increase your chances of winning in the long run. It only serves two purposes.

1) Reduces your profit potential.
2) Prevents a blowup.

If you've found that you can make money consistently for 10 years with your strategy then it is a winning strategy. If you faced significant drawdowns during 3 sigma events, then it is a losing strategy and needs to be adjusted. I also do a further OTM credit spread on occasion, but not as a standalone position.

I have NEVER done well with 3 sigma events. I used to exclusively write covered calls. Then moved to naked puts when broker allowed it. Then OTM put spreads in equities. Then in indexes. Then added call spreads to the mix. Most recently, moved to double diagonals from verticals.

I am a believer that it is not so much the strategy that determines results - but management of money and risk. I have upside curvature, and am now seriously considering paying up for downside curvature as well.

I have been doing DD for only 7 months now and have done better than at any tme in the past with those other strategies. I also bite the bullet when necessary. I believe that discipline keeps me in the game. But that down 20% market is still a worry. (I'd lose about 20% of my portfolio if that were to happen today)

I would suggest to anyone who might be uncertain about the ability to manage a CTM spread. It is much easier than managing an FOTM spread that has gone wrong.

This is the part I don't see. If (in my case) I have the same number of spreads, what is the difference? If my short strike is in the money (to me, that means the spread has gone wrong) I have a problem. That would occur much more often with CTM spreads. I do agree that if one had many fewer spreads, then it would be easier to manage. To me the question becomes should I abandon what I like and move to a smaller number of spreads. The jury is out.

Thanks very much for a good, thoughtful reply.

Mark

 

[domestic]

i should really know this....does anyone know where i can chart an option (ie: spx put 1410) from its' inception to current, just as one can chart the underlying? no paid sites please. if this can be done in ib(am not adept with modeler), just acknowledge and i will try. thanks

 

[piccon]

Yip,

My CTM has lost some ground today due to the huge ramp up. What I am happy about is that I closed both wings

Yesterday I closed 810/820@0.10 and this morning I close 740/730@0.15

So I need to concentrate on the CTM spreads For me to lose money on this trade We must have the following at Expiration:

763 <RUT>797. So I will follow it the next couple days. With pratically 4 days left I don't want to close it right now for just 2K gain.

Quote from yip1997:

Congratulation on your good return. I am up only 2% so far.

I wish to learn from you and CTM traders in timing the entry so as to increase my return without a drop in my Sharpe ratio.

 

[yip1997]

Quote from piccon:

Yip,

My CTM has lost some ground today due to the huge ramp up. What I am happy about is that I closed both wings

Yesterday I closed 810/820@0.10 and this morning I close 740/730@0.15

So I need to concentrate on the CTM spreads For me to lose money on this trade We must have the following at Expiration:

763 <RUT>797. So I will follow it the next couple days. With pratically 4 days left I don't want to close it right now for just 2K gain.

piccon,

Can you show us how much you made with your OTM verticals, and how much premium is remaining for your CTM?

Be careful about the pin risk. Several months ago, my short was close to the money (around 2 point difference, i forget the exact no), and i didn't close it because i didn't want to leave some money at the table. At Friday expiration day, it gapped up over 10 points, and i lost most of my profit that month, and it reversed immediately. There was no way i could do but to see my profit vaporized.

As a trader, greed and fear are the emotion that we have to master.

 

[piccon]

My PUT wing gave me a net gain of 0.90 and the cal picks up 1.60 for a total of 2.50 about 7.9K. Right now I am up 2K on the CTM. I am ready to convert it into a butterfly by tomorrow.

If I do it right now, I will be guaranted a break even on the CTM because I can get $3 for 790/780 PUT.

But I am watching it.

Quote from yip1997:

piccon,

Can you show us how much you made with your OTM verticals, and how much premium is remaining for your CTM?

Be careful about the pin risk. Several months ago, my short was close to the money (around 2 point difference, i forget the exact no), and i didn't close it because i didn't want to leave some money at the table. At Friday expiration day, it gapped up over 10 points, and i lost most of my profit that month, and it reversed immediately. There was no way i could do but to see my profit vaporized.

As a trader, greed and fear are the emotion that we have to master.

 

[Cache Landing]

Quote from yip1997:

Cache,

Did you meant that FOTM credit spread has a negative expectancy at the time of opening the trade? If thats the case, Can you long the vertical so to get a +ve expectancy?

Do you think that expectancy (CTM) > expectancy (FOTM)? Or do you think that expectancy(CTM) is neural or slightly +ve? If we can't generalize it to every stock, I like to use SPX for our discussion.

I always think the expectancy of every strategy is the same (almost zero). Otherwise you can devise a combo and receive a +ve expectancy.

I wish your insight can refine my trading strategy.

What I mean is that almost every position you open has - exp because of slippage and commiss. Slippage is amplified the further OTM you go. That means greater -exp at the open. The -exp on the FOTM also grows faster with a quick adverse move. That is logical because an FOTM vertical is almost strickly a theta play. Movement is the enemy. The CTM version is more a delta play.

But in answer to your question, no you can't create +exp by buying the spread instead.

 

[TrendSailor]

gulp.

I could not resist the sudden upsurge action in SPX to pick up just a few credit spreads to the upside that I have had a bear of a time getting filled for weeks. I had to go less far out to find trading volume than I would have liked to get a reasonable premium for remaining front month trading days. But I went light on the number of contracts so this one ain't gonna bust the bank if it sours. But we are starting to get some up gapping that is intriguing. Could be an interesting run toward expiration week...

SPX Jan CALL 1445/1455 net credit .45
Risk $10,000
Possible return on Margin: 4.5%

The one thing I am worried about is the unwinding effect near expiration of all the puts being traded. That could push SPX up rapidly. Otherwise I think the sentiment is changing relative to FED action and expectation for interest rate cut looks like its reverting back to a possible hike. I am hoping that the market goes side-ways from here to consider possibilities. But then we have window dressing starting about now and the start of earnings season. Could be an interesting next few weeks...

TS