SPX Credit Spread Trader

[rdemyan]

Coach:

I know that you typically use 10 to 15 points (distance between short strike and SPX price) as a trigger to consider adjusting.

In July after the London bombing I used 15 points to adjust and after the slingshot rebound my adjusted down bear call got into subsantial trouble. If I had used 10 points (esp. since there was only one week left) instead, my positions would have expired and I would have been profitable.

This month I again adjusted when the SPX got within about 10 points or so of my short strike. If I had used 5 points instead (as you and others did), I wouldn't have had to adjust and would have been more profitable.

The July experience, in particular, left me with the impression that as you get near ATM, the cost of getting out of a spread increases dramatically. Andy Smith has pointed out that it may not be as bad as I think, and the data he presented makes sense and is making me question my trigger strategy.

So what I would like to do is to plot theoretical values of credit spreads as a function of time to expiration, distance of short strike to SPX, volatility and maybe whether a 10 or 15 point spread was used. I'm hoping this might help refine the point (i.e. the distance between the short strike and the SPX price) at which adjustments should be considered as a function particularly of time to expiration and volatility (of course other factors will be involved in determining if an actual adjustment should be undertaken).

Before I do this, I wanted to get your advice and see if you had any suggestions; i.e. other factors to consider; how to present the results, etc. If people are interested in viewing the results, I'll post to the forum.

 

[El OchoCinco]

Sailing:

If I am reading your positions correctly you risked $10.00 total for month in your condors to make a total of $2.65 for a return of 26.5%?

Niiiiiiiiiiiiiiiiiiiice

Basically you turned the $10.00 over twice to make that return. Good job.


Phil

Quote from Sailing:

Phil,

Just posting results for Oct. as you requested.

SPX credit spread / iron condor established on different dates by legging.

1280/1290C : .60 credit
1140/1150 P : .60 credit

Closed both positions three weeks later for .05 each, then reopend new positions legging in on major market moves in the past week.

1140/1150 P : 1.10 credit
1220/1210 C : .45 credit

These expired worthless.

Total credit after adjustements was $2.65 less commissions.

Learned that patience on fills and filling on big down/up days brings in great premium.

Murray

 

[El OchoCinco]

9.4% return is great no matter what kind of month we had lol. Excellent job and I do recommend others look into Chris' site (which is free and has a lot of experienced traders) and his own journal of these trades as well:

Chris' style is slightly different than mine and it is always helpful to see how others trade the same strategy and their approach.

http://finance.groups.yahoo.com/group/OptionClub/?yguid=131635646

Phil

Quote from clslaw:

Phil,

As requested I'm posting my net results for trading October contracts on the SPX. The details of the month's trading are documented on my site, but the short version is that my final position after adjustments was a 1,155 / 1,140 bull put spread, a 1,145 / 1,130 bull put spread, and a 1,210 / 1,225 bear call spread, which produced a net credit after adjustments (but before commissions) of $1.30. That final position was held through expiration for a return of about 9.4% for the month, before commissions.

Considering the month we had, I'm pleased with the end result.

Chris

 

[El OchoCinco]

Still comes out to about 4.3% return on the position which is commendable. There is always time to enter spreads in teh next month so do not feel any pressure to get out of the current month and jump into the next one. Keep within your own pace.

Congrats on the return in a wild month.

Phil

Quote from Agyar:

For the record, I had the 1125/1140 put spread and received a credit of .65.

Lesson learned - Don't be greedy with your nickels when you have a good profit and are trying to get out. I could have gotten out at .15 a couple weeks ago before the big dive down and then I would have had the margin to enter some November spreads after the big dump (which would have been the perfect time to do so). Instead I held out for .10 and got no fill.

 

[El OchoCinco]

DId you hold all the way to expiration and have it expire worthless on the settlement? If you did then I found someone with bigger ones than me! lol.

Phil

Quote from pyhootie:

WOW - It's been a wild ride this week for me. I was busy traveling the back roads of East Texas and out of touch with the rest of the world during the day and only access the internet at night in the motel. I had a 10 Oct 1165/1180 spread on that saw some wild swings this week. I vowed that after this week I will only put credit spread trade on when I know that I will have access to the market and a computer. I have to say - its been exciting - but I prefer it to be boring and just rake in the 5 to 6% profit each month.
Hootie

 

[El OchoCinco]

Rdem:

One thing you have to be careful of is using a one time event to keep changing your risk management approach. I can understand if you decide that 15 points may be too much room to triggert an adjustment and you moved it to 10 points but be careful changing it to 5. I use 10 as my trigger point to reevaluate the position and make a decision based on time to expiration and what is happening in the market. I think you should always lean on the side of caution until you get more comfortable with the strategy. You did not make money after adjusting at 15 points but you still limited any loss you did have. At 10 point adjustment you did not make as much as you could have but in hindsight it looks easy. You are better off feeling good that you followed your risk management plan AND still made money. There may be a month where the market keeps moving against you and you will be glad you adjusted to stay in front of it.

I think the study idea you propose will be beneficial. AS someone who is familiar with adjustments I can tell you that because of the spreads, you are selling another spread at just 5 or 10 points lower so you are getting enough credit to offset the cost somewhat. Also, if you take profit and roll down on thye opposite side a little you are also bringing in more credit to offset the cost. As some have posted here, they have adjusted and still made money for the month. Will not happen everytime but adjustments do not mean automatic losses.

If you also place partial hedges when the market looks to run to your short strikes, many times the partial hedges will make profits to further offset the costs. You remember ithis month I placed several partial hedges and closed them for profits. Nothing WOW but they help offset the cost of adjusting somewhat.

When and how to add the partial hedges is based more on my own experience and feel and I am still studying better ways to do it so I cannot lay out a good blueprint for how I do it. Also there is no one right way to add those partial hedges here so self-exploration is the best way to learn it as they will come in handy one day. They came in handy for me bringing in at least $2,000 to finance my adjustments (in addition to rolling calls down). THis part I can only tell you what I am doing but I leave it to others to explore the best ways to hedge.

10 v. 15 point spreads have pros and cons. 15 point spreads bring in more credit but the long option does not offset the changes in the short option as quickly as with the 10 point spread. 15 point spread is more expensive to buy back but will take longer to hit maximum loss. Higer cost to buy back can be offset by higher credit received when rolling down so it could be a wash. It goes on and it comes down to personal preference.

Easiest way to do this is pick an index level and using B-S and VIX number derive prices for spreads 50 points OTM and 40 days to expiration. THen chage index level so that it is within 10 points of short strike and re price the spread as well as a spread 5 and 10 points lower to estimate net cost to roll down (this will be far from perfect since it does not take into acount b/a spreads and ability to split them but we ar elooking for general picture). If you do this you can play around with this move occurring with 15 days to expiration or 5 days to expiration and again price your spread and spreads 5 and 10 points lower for rolling. You can also at the begining price call spreads 50 points OTM and price them after a drop in teh index and roll them down as well using the pricer.

Phil

Quote from rdemyan:

Coach:

I know that you typically use 10 to 15 points (distance between short strike and SPX price) as a trigger to consider adjusting.

In July after the London bombing I used 15 points to adjust and after the slingshot rebound my adjusted down bear call got into subsantial trouble. If I had used 10 points (esp. since there was only one week left) instead, my positions would have expired and I would have been profitable.

This month I again adjusted when the SPX got within about 10 points or so of my short strike. If I had used 5 points instead (as you and others did), I wouldn't have had to adjust and would have been more profitable.

The July experience, in particular, left me with the impression that as you get near ATM, the cost of getting out of a spread increases dramatically. Andy Smith has pointed out that it may not be as bad as I think, and the data he presented makes sense and is making me question my trigger strategy.

So what I would like to do is to plot theoretical values of credit spreads as a function of time to expiration, distance of short strike to SPX, volatility and maybe whether a 10 or 15 point spread was used. I'm hoping this might help refine the point (i.e. the distance between the short strike and the SPX price) at which adjustments should be considered as a function particularly of time to expiration and volatility (of course other factors will be involved in determining if an actual adjustment should be undertaken).

Before I do this, I wanted to get your advice and see if you had any suggestions; i.e. other factors to consider; how to present the results, etc. If people are interested in viewing the results, I'll post to the forum.

 

[pyhootie]

Yes I held all the way - no adjustments - thats the reason for the wild ride of emotions. I was in a position that I had no computer or cell phone acess to call OX during the day. It's not that mine are bigger than yours, just lucky and I know that I was just lucky.
But I also had that gut feeling about 1180 being a very strong support level. I felt that the SPX would open 4 or 5 points above the close of 1178 on Thursday - when I saw that the SP futures was up Friday morning. ]

Phil, I want to say one thing about you and the journal - I'm gald to see it get back on track and all of the negative discussions behind use. I have truly learned a great deal on this board from yours and others discussions. Thanks
Hootie

Quote from optioncoach:

DId you hold all the way to expiration and have it expire worthless on the settlement? If you did then I found someone with bigger ones than me! lol.

Phil

 

[Agyar]

Quote from optioncoach:

Still comes out to about 4.3% return on the position which is commendable. There is always time to enter spreads in teh next month so do not feel any pressure to get out of the current month and jump into the next one. Keep within your own pace.

Congrats on the return in a wild month.

Phil

Thanks. I have no complaints about how things fell out, but there is always room for improvement. I am starting on more of the conservative side than many here it looks like. That's where I am more comfortable for now.

And I'll add a thanks again for this thread coach. This site could use more in the trenches threads like this.

 

[pyhootie]

Quote from Agyar:

Thanks. I have no complaints about how things fell out, but there is always room for improvement. I am starting on more of the conservative side than many here it looks like. That's where I am more comfortable for now.

And I'll add a thanks again for this thread coach. This site could use more in the trenches threads like this.

Hey Agyar, I think that I'm a lot like you - being on the conservative side - but that being said - the market almost caught up with me this month. I put the 1165/1180 spread on with about 15 days left and the SPX was at about 1225. Who would have thought that the SPX would drop 45 points in 15 days. Be safe my friend and good trading to you.
Hootie

 

[El OchoCinco]

TENTATIVE RESULTS!

Well you all are going through the trouble to put your results up so I decided to get out the calculator and do a preliminary total of all my positions in the SPX, XEO, OEX (partial hdege) and SPY (partial hedge)[SPX partial hedge is included in SPX numbers].


NET SPX PROFIT/LOSS: $2,898 (includes part. hedge profit of $1,100)

NET XEO P/L: (-$500) (reason for loss explained below)

NET OEX P/L: (-$452) (part. hedge- market ran higher before I could take my profit lol)

NET SPY P/L: $1,049



TOTAL NET PROFIT: $2,995

TOTAL MARGIN: $250,000

Net Return on Margin: 1.20%


I will certainly take it and quite happy after the interesting month we had. This return should be about $5,000 higher but remember I rolled my XEO 560 down to 555 for more premium and the market surged to 554 and I bailed prematurely right beofre the market tanked to 549! lol. It cost me to close out and eat the loss which significantly reduced my returns for the month. My returns would have been closer to 4% if not for this hasty mistake. But to my credit I recognized it and simply took the loss and got out before it snowballed and really killed me for the month. Pigs make money and hogs get slaughtered.... was oinking a little too much there....

When OX finally clears out the expired positions I will post the final numbers.


To put OCT in perspective I want to also run down my year numbers since APRIL when I was trading again full time (took off JAN through MAR for family issues and my company). This journal started in MAY after MAY expiration but APRIL is when my numbers begin.


TOTAL NET CREDITS (APRIL - CURRENT)[SPX, XEO, OEX and partial hedges using those symbols]:

$68,849.50


PARTIAL HEDGES ON SPY(most times not needed so cost of insurance):

(-$8,500)


NET PROFIT YTD:

$60,355.50


AVERAGE MARGIN USED MONTH TO MONTH OVER YEAR:

$250,000


RETURN ON MARGIN-YTD:

24.1%