You are using an out of date browser. It may not display this or other websites correctly.
You should upgrade or use an alternative browser.
You should upgrade or use an alternative browser.
SPX Credit Spread Trader
- Thread starter El OchoCinco
- Start date
We had some discussion regarding these strategies in the past. However, in a higher IV environment, which one (CTM or OTM) is a "better" strategy in your opinion?
I don't have any experience in trading high IV environment, and so would like to get some ideas to see if I need to adjust my strategy based on the current environment.
Does IV play any role in your decision?
I don't have any experience in trading high IV environment, and so would like to get some ideas to see if I need to adjust my strategy based on the current environment.
Does IV play any role in your decision?
Quote from yip1997:
We had some discussion regarding these strategies in the past. However, in a higher IV environment, which one (CTM or OTM) is a "better" strategy in your opinion?
I don't have any experience in trading high IV environment, and so would like to get some ideas to see if I need to adjust my strategy based on the current environment.
Does IV play any role in your decision?
Here. my unsolicited take:
The argument on CTM vs OTM is not going to end. I'm convinced the evidence is overwhelming that CTM is the better statistical play. But, psychology counts and each trader has to be in a comfort zone to trade successfully. Right now, I am unable to get myself to sell CTM options (but I'm working on it by moving closer to the money than before).
Concerning IV: Higher IV means higher credits for vertical spreads. That means you can go a bit further OTM than you usually go and still get the same credit. Or you can sell the same strikes you would have sold in a lower IV environment and take in more cash.
When IV is high, and the markets are unsettled, a large move becomes more likley. thus, the case for selling CTM becomes even more powerful. Selling larger amounts of OTM spreads can bring big trouble at any time. But, if odds of a big move are higher than normal, seling bunches of OTM spreads is more dangerous than ever.
Mark
Quote from dagnyt:
Here. my unsolicited take:
The argument on CTM vs OTM is not going to end. I'm convinced the evidence is overwhelming that CTM is the better statistical play. But, psychology counts and each trader has to be in a comfort zone to trade successfully. Right now, I am unable to get myself to sell CTM options (but I'm working on it by moving closer to the money than before).
Concerning IV: Higher IV means higher credits for vertical spreads. That means you can go a bit further OTM than you usually go and still get the same credit. Or you can sell the same strikes you would have sold in a lower IV environment and take in more cash.
When IV is high, and the markets are unsettled, a large move becomes more likley. thus, the case for selling CTM becomes even more powerful. Selling larger amounts of OTM spreads can bring big trouble at any time. But, if odds of a big move are higher than normal, seling bunches of OTM spreads is more dangerous than ever.
Mark
Mark/Group;
I am very intrigued with ceetums vs. fotums and believe that that might be the better choice. However, it makes entry points even more critical.
I have spent hours pouring over stochastics, MACDs, McClellan Oscillators, Williams %R charts, etc. Also the dynamics of channel behavior. Haven't found the crystal ball yet but feel that these will/can improve ones odds.
If it is not getting off topic, may we have a discussion on which TA techniques are used by group members and what kind of results are they seeing?
Thanks,
Bob
Quote from TrendSailor:
I managed to call the market move into this range (1405'ish) properly but now am in a pickle on what to do. I was hoping to get a slower rise up and a coast into March SET in the 1405-1420 range . I put on some heavy CALL spreads closer in than I normally would (1420/1430) for good premium to mitigate some of the cash risk to the downside PUTS I was into (and in trouble with earlier). But volatility is still too high to make it cost effective to close out all positions simultaneously right here. Putting on long curvature also seems to be too cost intensive due to vol. Even the upside could be violent if puts unwind next week but that should drop vol a fair amount.
There are so many macro factors at play now (Yen, Put unwinds next week, and at least 2 major econ reports through SET formation). Anyone have any trading ideas short of taking steep exit losses that are currently not in the money or short of gambling on relative stability around this current level through SET?
TS
There is always the option (no pun intended) of an early roll to April. For that matter, perhaps a roll even further out . . . June, Sep, Dec etc.
AZD
I personally think rolling a vertical spread on the SPX ends up a loser(most of the time). Eventually the market catches up to you and you lose. Sometimes you can get away with it but I've had MUCH better success in fading the market and closing a spread when conditions are favorable and waiting for the market to rebound and get OS/OB then putting on the new spread.
Early in this thread both Coach and others of us would close a FOTM spread when it got close. Opening a farther OTM spread when it looked like the market was finishing the move. This works reasonably well when you have some volatility.
What I've been doing the last couple of months is putting on DEBIT spreads CTM (sort of) and that has worked out pretty well. I found myself uncomfortable with CTM credit spreads and since they are equivalent..what the heck.
Early in this thread both Coach and others of us would close a FOTM spread when it got close. Opening a farther OTM spread when it looked like the market was finishing the move. This works reasonably well when you have some volatility.
What I've been doing the last couple of months is putting on DEBIT spreads CTM (sort of) and that has worked out pretty well. I found myself uncomfortable with CTM credit spreads and since they are equivalent..what the heck.
Mark/Bob/Group,
It seems to me that the IV change has a bigger impact.
Like the example that Cache has indicated, selling a CTM call spread will have no loss if the spot increased by 10 points because of a drop in IV. What about a FOTM?
What about put spreads? A 10 points drop in spot will have an increase in IV, and your put spread will lose money faster than low IV environment. Does it mean a call credit spread has a better protection than a put credit spread?
Managing a CTM or ATM put spread is a lot difficult in the current environment because a drop towards your short will increase IV, and so you have to get out with close to max loss. Does it make sense to hold till expiration?
Mark, as a MM, you should know that it is bad to buy options at high IV, so closing out the put spread at a pump-up IV is really bad. What is the best strategy to manage a CTM put spread?
It seems to me that the IV change has a bigger impact.
Like the example that Cache has indicated, selling a CTM call spread will have no loss if the spot increased by 10 points because of a drop in IV. What about a FOTM?
What about put spreads? A 10 points drop in spot will have an increase in IV, and your put spread will lose money faster than low IV environment. Does it mean a call credit spread has a better protection than a put credit spread?
Managing a CTM or ATM put spread is a lot difficult in the current environment because a drop towards your short will increase IV, and so you have to get out with close to max loss. Does it make sense to hold till expiration?
Mark, as a MM, you should know that it is bad to buy options at high IV, so closing out the put spread at a pump-up IV is really bad. What is the best strategy to manage a CTM put spread?
I don't like rolling. IMHO
rolling = close out the current position + open a new one
If you think the market will go up, close out the position. But why will you want to open a new one if the market is predicted to go up? You should wait till you think the market has exhausted the run and then open a new one.
If you don't have a market outlook, you should have a plan before you open your position, and then trade according to your plan.
rolling = close out the current position + open a new one
If you think the market will go up, close out the position. But why will you want to open a new one if the market is predicted to go up? You should wait till you think the market has exhausted the run and then open a new one.
If you don't have a market outlook, you should have a plan before you open your position, and then trade according to your plan.
Quote from yip1997:
I don't like rolling. IMHO
rolling = close out the current position + open a new one
If you think the market will go up, close out the position. But why will you want to open a new one if the market is predicted to go up? You should wait till you think the market has exhausted the run and then open a new one.
If you don't have a market outlook, you should have a plan before you open your position, and then trade according to your plan.
Rolling also = buying more time.
If you roll the calls, you can increase or decrease the amount of calls you sell depending on your market outlook. You can also go further OTM (and further out with strike months) if you wish, and receive a credit.
Yes, it is closing out one position and opening another, but you are likely to be less susceptible to a huge move a few days away from SET or even during SET.
My 2 cents.
AZD
Quote from RichardRimes:
...
I've had MUCH better success in fading the market and closing a spread when conditions are favorable and waiting for the market to rebound and get OS/OB then putting on the new spread.
...
Thanks guys for ideas. I see no advantage to rolling a bad position forward here either.
I was deep in the money on one of my put spreads up through early this week and sweating the position waiting for a short term trend to reform. The initial market collapse was so sudden that there was really not much time to even take a partial early loss (less than 50%) since no one was trading inside the bid/ask spread at the volume/size I needed to exit. I would have had to pay a very large exit premium nearly as great as a total max loss. So it was pretty much a no-brainer to wait it out for a reversal and hope it would get me at least half way back into my penetraded spread. Early on I shifted physchology to a loss mitigation strategy with an initial objective formed on statistically taking only a 50% or less net total loss. At least I wanted to do this until conditions further stabilized to permit me to reform new Kentucky Windage on the busted technicals.
The considerable bull power at reversing one particular bad run down (3/1) convinced me that we were not in free fall or lacking conviction from large institutional money. So I predicted a sustainable upside bounce off an irrational oversell knowing we would have likely have high frequency ripples for a few weeks (as global markets rebalanced to safety).
At least one small advantage with the IC is that one side is always a pure winner in these black swan scenarios. That permitted me to early-close and bank my CALL side positions at near max win and to further reopen a larger CALL side block at 350% greater premium closer in. Again during considerable market weakness I was willing to take the risk of a spike up into the new CALL spread to net an overall loss of 50% rather than realize a near 100% loss to the downside. This also still gave me a fair to modest statistical shot at turning a profit in this period and a lot more trading options over closing at a huge loss. I also took advantage of some statistics on how high a re-bounce a correction might typically take us (based on Fibonacci ratios).
I think I just may do some at the money debit spreads here in and around the 1405/1410 area to open up a larger win zone for my net March position since I am still a bit vulnerable to the downside. I think enough traders are still shell shocked enough that we will not get a radical swing to the upside for at least through the remainder of the options period ( but I am respectful of a rush to short covering and put unwinds going through expiration).
A perfect scenario for me will be sideways motion at around 1407-1410 going into SET Thursday night with SPX at about 1410. The market is also now mostly within my trade space where I have the alternative to simultaneously close both PUT and CALL blocks together as a multi-leg order if exit premium/vol contract toward expiration. It's going to be a cliff hanger for me and I think I will have better options to reduce position risk by 50% or more as vol declines to the upside. In this one case I don't mind as much risking a favorable SET if I am slightly in the money to the upside going into expiration since I am still in a loss mitigation physchology.
TS
Sorry for being so verbose again - just have a lot to consider here.