SPX Credit Spread Trader

I don't have all of the answers, but I'll share a few thoughts.

Although I have most of my days free currently, I have zero desire to sit at the screen and watch squiggly lines all day. I currently check the market when I wake up then 2 or 3 more times during the day to keep my finger on the pulse of what's going on. This strategy is well suited to how often I want to trade.

I also agree with something I saw Maverick post once about the more times you have to adjust a position, the more chances you have to screw something up. I want to minimize adjustments. Also, every time you adjust you take another bid/ask spread hit and another commission hit. The way I trade this is more conservative than some here (looking like about 3-4% per month right now) because I REEEALLY want to avoid adjustments.

The black swan I also have respect for. This is the reason I use less than half my account for this strategy. If the SPX gets cut in half tomorrow, I'll lose about half of my account. But I would have lost it if I had my money sitting in an index fund too. Not much difference there.


Quote from rdemyan:

Andy:

The same thoughts have crossed my mind. I would like to pose two counter points:

1) The less obnoxious professional traders that have posted here
I think may have realized that credit spreads, if properly managed (which is what Coach strongly advocates), are not as bad as they first thought. Still, I don't believe that they would trade these positions, themselves.

2) Professionals can constantly monitor and adjust their positions. For me as a retail trader, I can't do that, so credit spreads are easier to trade. Also, I believe I've seen posts from a professional trader (Michael) in another forum, which you belong to, that essentially say (if I got this correct), that you can literally put on any trade you want. Ultimately, it's the adjustments that matter and rolling with the punches until you can get out with some profit or a minimal loss. But again, he's a professional and has the time, knowledge and experience to do that.

My only reservation about credit spreads, is the black swan event. Other than that, I feel totally comfortable with trading the SPX credit spreads (but not stocks, under any circumstance).

...

Finally, you say that the risk/reward seems very out of balance. Shouldn't we factor probability of success into that "equation"?
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I haven't been able to follow the market the last two days. But I was looking at some December call spreads:

1275/1285 Nov bear call at maybe $0.75 to $0.80.

With another up day tomorrow, I might put some money into this or a higher spread.
 
I just wanted to add to your good points and those by rdeyman. Unfortunately there is no risk-free pill. Strategies have risks with rewards and it is up to the individual investor to decide whether a given strategy meets their risk/reward requirements and trading style. But it does not stop there because the strategy alone is not everything. How you manage your risk and positions is the true key to success. I am not good trading straddles and gave it up after meager results a few years ago. I doubt it was the strategy, but had everything to do with the way I traded them. The strategy just was not for me. But I would not advocate against the use of straddles.

I have spoken to professionals who DO trade credit spreads on the indexes and do so in different ways. Professionals are like political experts, you will find great viewpoints on each side and it is up to you to decide for yourself. You cannot be persuaded just because someone says the strategy is not good. You need to do your own thorough analysis and make your own determinations. Every strategy has pros and cons and simply highlighting the cons should not be enough alone to dissuade you. If teh strategy makes you uncomfortable or you do not feel good with the types of hedges or adjustments needed, then the best risk management approach is to find a better strategy more suited to you.

The black swan event is a danger for all traders. But it is not a scary thing for me because I do not put 100% of my trading capital at risk in this strategy. I accept risk and do not turn my back on it or ignore it. But I cannot trade waiting for it to happen. Credit Spreads are not the only way I invest my money, they are one way. My insurance from being wiped out is simply to not use too much capital. My other approach is be proactive in strike selection to put the odds and edge in my favor as much as possible. I cannot forsee a 9/11 event, but who can? Why is this strategy different than others? Many traders would take large losses in a 9/11 event. I still feel safer since I am in the indexes and therefore not prone to individual stock risk.

So there is no final answer to make your portfolio 100% safe from black swan events. If there were then it would be practically risk-free. But you have to be realistic. My time horizon is a long time. I am not trying to live month to month. So if I have to take a limited loss in a month then it is part of trading but I look ahead and will be fine year to year because I work hard to control my risk and avoid being wiped out. 25% this year to date is great but on January 1st it becomes meaningless and I start all over again. But at the same time I am thinking long-term goals of income and growth and capital preservation.

I cannot make the strategy fit your investment style and risk aversion. It is the other way around. I constantly talk about the risk here and we have a lot of discussions about the risk. It is not to be taken lightly and should be swallowed whole heartedly if you choose to use this strategy in your arsenal. It should NOT be your only strategy and should not encompass 100% of your capital.

So if you are awake constantly with spreads open, then pass. I am quite happy day to day knowing I do not need to trade or stress. I simply watch the market and only jump in when one of my warning fences is close to being breached. For me it is less strssful than picking stocks and trading in and out. I leave that approach for my futures trading which I do with an even smaller portion of capital.

Hope this helps, but in the end, trading is a self-evaluation test and you are NOT to follow anyone blindly or without question. It is YOUR money and you alone are responsible for it so YOU alone must make the decision.

Best of luck to all my traders in arms!

Phil

Quote from Agyar:

I don't have all of the answers, but I'll share a few thoughts.

Although I have most of my days free currently, I have zero desire to sit at the screen and watch squiggly lines all day. I currently check the market when I wake up then 2 or 3 more times during the day to keep my finger on the pulse of what's going on. This strategy is well suited to how often I want to trade.

I also agree with something I saw Maverick post once about the more times you have to adjust a position, the more chances you have to screw something up. I want to minimize adjustments. Also, every time you adjust you take another bid/ask spread hit and another commission hit. The way I trade this is more conservative than some here (looking like about 3-4% per month right now) because I REEEALLY want to avoid adjustments.

The black swan I also have respect for. This is the reason I use less than half my account for this strategy. If the SPX gets cut in half tomorrow, I'll lose about half of my account. But I would have lost it if I had my money sitting in an index fund too. Not much difference there.
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Since we are in NOV I am expecting sideways to upwards movements and thereofre wanted to grab the time value premium while I can at the strikes I did. I left margin open specifically for the event that we do have a pull back. But I feel some strength came back when we breached 1200 to the upside. I feel confident for now as long as it holds. If it does not hold, I still have 60 points of room and potential for hedges and adding more premium. Should be a better month than OCT lol.

Phil


Quote from Agyar:

Notice it is only a 5 point spread, so still 6% credit as Coach states. But I kinda agree with you. I really don't want to open a put position on an upday myself. I'd rather miss out on some action than to get in on the wrong side of the swings. Maybe I am spoiled by this non-trending market though. If we have started an uptrend, getting into some puts here is a great idea.
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As you know for NOV I was wary about call spreads and with the SPX hitting 1215 still wary and have pretty much passed on it. For DEC I am even more wary with this much time left. Even though 1275 is a ways off compared to past resistance levels, just use some extra caution adding call spreads at a time when the market usually does quite well.

Phil



Quote from rdemyan:

I haven't been able to follow the market the last two days. But I was looking at some December call spreads:

1275/1285 Nov bear call at maybe $0.75 to $0.80.

With another up day tomorrow, I might put some money into this or a higher spread.
More...
 
Productivity numbers really turned the futures around...was thinking of selling at least 1/2 my contracts on the call side but will hold off at least another day. I do think, and have thought, we would be up just don't know how high:eek:
 
Coach,

What hedging factor should I use to protect me against this bad trade?


I have th 1650/1660 NDX Call Spreads. The reasoning was 1629 is the two years high. I thought that it could back off. The market is so hot now. I could buy the MNX to protect it. What should be the Hedging factor (number)?

Thanks in advance.
 
Well I do not follow the NDX but it is currently at 1622 which gives you room to either roll the spread up or add partial hedges. There is no direct hedging factor because you cannot fully hedge such a position with long calls as you would wipe out all credit and possible take on a bigger loss. One way to provide a partial hedge is to take a % of your credit and put it in long calls or long call spreads below your short strike. This way if the market continues to move higher you have some profit to offset a possible adjustment or closing of the position.

I am not aware of the scale of moves on the NDX so I do not know if 28 points is close or far from your short strike relative to past moves. Also I do not know any support or resistance like I do with SPX, i.e., 1225 is a resistance level where the market may pause or retrace some.

Sorry but since I am not familiar with that index I do not want to give you bad advice. If the index looks to you like it could easily blow through your short strike then adjusting higher to give you more room and take advantage of last 2 weeks of decay on a pause or pullback may be reocmmended. Adding partial hedges using MNX or other Nasdaq options could also cushion the blow. It is always better to take a small loss by choice then be forced to take a large one. Again, I am not sure if 1622 is close or far to 1650 according to moves on that index.

Phil

Quote from piccon:

Coach,

What hedging factor should I use to protect me against this bad trade?


I have th 1650/1660 NDX Call Spreads. The reasoning was 1629 is the two years high. I thought that it could back off. The market is so hot now. I could buy the MNX to protect it. What should be the Hedging factor (number)?

Thanks in advance.
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