SPX Credit Spread Trader

I'd bet you can split the traders on this board into two distinct camps: the ones that are using their lunch money for trading and the ones that are using some real coin. And I'd bet the latter have taken the time to know SET and everything else inside out.

Quote from momoneythansens:

LOL. I'm inclined to agree with your analogy but perhaps not in quite so strong terms.

It does perplex me a little when people seem to be unaware of some of the fundamental aspects of what they are trading, like whether it is European or American exercise, what time the products trade, what exchanges they are traded on and CRUCIALLY how the product is settled. Aren't these fundamental things to know?

No one is perfect, we all make mistakes and are all ignorant of some things, but there is very little reason for being unaware of the basics.

Please at least visit: www.cboe.com

At the risk of being extremely patronizing lol, the best skill you can hope to learn is to be able to research for yourself and develop your own ideas rather than just following like a sheep. If Phil were to get run over, what would you do without him banging on about risk management and closing out positions before expiration etc.?

More importantly, what would I do without his sure-fire contrarian indicators? :D

More than perplexing, it worries me, because I don't want people to lose their money and I tend to get more nervous about other people's positions than my own!

Although Donna made out like a bandit this month (congrats Donna!) I was extremely dubious when she first put on her IC. I realise she is testing out weekly plays specifically, so fair enough.

Similarly, I've read of other people putting on ICs or spreads close to expiration but also relatively close to ATM in the hopes of getting a quick buck but perhaps not realising the atrocious risk to reward and low probability nature of those trades.

I have alluded in the past on this thread to the suspicion that SET risk can inflate the premiums of OTM options, especially close to expiration, and thus to the untrained eye make it look like you are getting a bargain, or rather selling something cheap for more than its worth. The reality is that due to SET, options have a higher probability of being ITM than one might suspect and that can only be contributing factor to their price.

Lastly, I believe it is important not to throw the baby out with the bathwater or suffer from a knee-jerk reaction. Although, I myself do not trade the SPX, the SET risk is not a reason to abandon trading the SPX if you were happy trading it before.

I sensed a similar knee-jerk reaction to last months higher volatility action resulting in people abandoning put spreads in favor of call spreads (probably came out worse this month) or going further OTM (for even worse risk/reward IMHO) etc.

I do trade the XEO and as Phil has mentioned it has its own problems so know that before you jump ship. Do your research.

It's easy to snipe from the sidelines but I strongly urge people to become more self-reliant and get smarter. I'm genuinely horrified and sorry for people that lost money this month as there is no real reason for that to have happened when doing FOTM credit spreads except in extreme black swan scenarios.

Lecture over. Prosperous trading!

Momoney.
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What do I think? I think if we are gonna sell jets to China we should demand that such transfers of technology should... oh you were referring to the 1275/1280. I have slight concerns but glad I bought the 127 SPY partial hedges. I am hoping it is a quiet week leading into Thanksgiving and we get a pullback for more room. Will have to take it day by day.

Phil


Quote from rdemyan:

Coach:

What's your current analysis on the 1275/1280 position. I'm a little concerned particularly after the two expected announcements on sales of Boeing jets to China and UAE.

What do you think?
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Coach (and anyone else who feels like responding).

I want to run this analysis by you to see if I'm missing something:
My current SPX position is:
20X 1265/1275 bear call spread for a credit of $1800 (.9)

I've been looking at rolling it up, clositing it out or rolling it up and "doubling down".

In looking at the current options prices, it looks like if I the SPX was 7 points away from my short (so if it were at 1258), and I were to roll up 10 and double my position, I would get a net gain of $100 (assuming worst case of sell at bid and buy at ask). Commissions would cost me about $150, so I'd have a net loss of $50-- with a new position of 1275/1285/1295

I have enough margin left that I could afford to roll up and double down a total of 3 times (allowing me to do this up to 1295/1305).

That seems like a good deal; I can wait until the SPX is within 5-7 points of my short strike to roll, and I can do it up to 3 times; and if I did do it 3 times, I'd be left with a loss of only about $350. If I subtract taht from the $1800 that I got for writing the intial spread, I still finish w/ a profit.

Now, if the SPX were to get too close to 1295 for comfort, I'd have to buy back the position for about $15000 (-1800) for a total loss of $13200. That would be pretty bad, and would take a while for me to recover given that I like to tkeep my margin req to about $20000/month-- so it would take about 6 or 7 months of wins to make it back. Then agian, we've had a good run to 1248, and it seems highly unlikey that the SPX would gain another 40 points betweeen now and expiration.

ALternatively, I could close out the spread on MOnday for a net oss of about $5000. If I waited until the SPX got with 5-7 points of 1265, I figure it would cost me a total of about $8000. These numbers could be a little lower given the effect of theta by the time the SPX would reach these points.

I looked into creating an iron condor, but the premiums on the puts right now don't seem worth the risk. I guess I could also buy some 126 SPYs using my $1800 to partially hedge; but I"m not sure if that's worth it at this point.

Another possibility would be to keep rolling up, but not doubling down. I figure it would cost me about $2300/roll if I watied till the SPX was 5-7 points away from my short. Then, I could re-evaluate at sometime closer to expiration and decide if I wanted to increase my position to make up for some or all of the losses. Or maybe take the losses in Dec and try to make them up later.

In summary, my current analysis says to sit tight until the SPX gets within 5-7 points of my short (1265) and then to roll up (probably the best idea) or to roll up and double down (tempting, but riskier). There's a good possibility that the SPX drops or stagnates for the next week or so; another reason I' rather stick to a "wait and see" approach at this point.

What are your thoughts on all this? Am I missing anything? THanks in advance. I realize this isn't really specific to this month or to my specific position; but this is fhte frist time that I've had to face decisions about adjusting, so i'm trying to put together the stuff I've learned in this thread- and trying to have a plan before I need to act. Of corurse, I should've done all ths analyssi before I even put on the position.... :)

(Its Nice to have the weekend to think about all this).
I'm gong to be more rigorous about stick with farther OTM spreads from now on!:)
 
Quote from andysmith:

I'd bet you can split the traders on this board into two distinct camps: the ones that are using their lunch money for trading and the ones that are using some real coin. And I'd bet the latter have taken the time to know SET and everything else inside out.
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OH REALLY? WHICH CAMP ARE YOU IN?

I've been monitoring this thread from the beginning and have noticed your questions from time to time appear to be coming from someone that not only is new to trading, but also tends to trade scared.

And that's ok, except when you make a statement that you hope will elevate you to the level of the top trader "camp," especially when I suspect you aren't quite as high level as you hope to appear.

It seems that with your statement you are hoping to put some traders down who make mistakes in order to make yourself appear more knowledgeable.

I suggest that if you feel that you can help those who make mistakes, then offer some constructive advice. Otherwise, I also suggest that you stop trying to categorize other traders until you truly are a trader that truly "knows SET and everything else inside out."
 
You say you like to keep your margin requirement at $20,000 but you also say you have enough room to roll up three times. Isn't your current margin at $20,000 if you have 20 contracts of a 10 point credit spread? So, are you planning to potentially take this double down bet with even more margin?

I guess another possibility is to roll up early this next week and not just get out of the spread. Based on closing prices for the SPX as of Friday, 11/17/05, it looks like it could cost $3.05 to close the 1265/1275 and you might be able to sell the 1275/1285 for $1.60. If this could be realized, then the net loss from adjustment only would be $2900. Overall loss would be $1100.

The loss could be reduced further by putting on a bull put. I believe Coach recommended not going higher than 1180 with the short strike, but even the 1180/1170 has little value. It might be possible to go higher with the short strike.

Will rolling up to 1275/1285 be enough? Who knows. I can tell you that I'm a little concerned about my 1275/1280 that Coach has as well.

Just some caution about doubling down. I did this on CME back in June (except I tripled down) and I'm still trying to recover the loss on that one.

In that case I rolled up to the next train stop with the runaway locomotive barrelling down on me. The train didn't stop at that station and I got crushed.

Good luck.



Quote from rjg96:

Coach (and anyone else who feels like responding).

I want to run this analysis by you to see if I'm missing something:
My current SPX position is:
20X 1265/1275 bear call spread for a credit of $1800 (.9)

I've been looking at rolling it up, clositing it out or rolling it up and "doubling down".


Now, if the SPX were to get too close to 1295 for comfort, I'd have to buy back the position for about $15000 (-1800) for a total loss of $13200. That would be pretty bad, and would take a while for me to recover given that I like to tkeep my margin req to about $20000/month-- so it would take about 6 or 7 months of wins to make it back. Then agian, we've had a good run to 1248, and it seems highly unlikey that the SPX would gain another 40 points betweeen now and expiration.



(Its Nice to have the weekend to think about all this).
I'm gong to be more rigorous about stick with farther OTM spreads from now on!:)
More...
 
Sounds like you're having a bad day, so let's clear this up.

1) I'm nowhere near to being in the "top trader camp" as you put it. I'm learning, just like most here.

2) I'm not scared although I've learned a few scary lessons along the way. They were very valuable.

3) If someone is trading a large sum of money without understanding SET, I have no pity for them. The world of business (where I am from) -- and trading is no different -- is absolute war and Darwinism is the only rule. My competitors would kill me and my family if it helped their business. That market maker who will not let you out on expiration day as your short strike goes ITM is thinking of *his* kids' college education. He couldn't care less if your kids couldn't afford health insurance. That's the way it is. Zero sum all the way.

So I guess I'm going to have to spell out the constructive advice you're asking for, and here it is: don't trade large until you've done all your homework or you will lose your money to folks who have, OK?



Quote from nlslax:

OH REALLY? WHICH CAMP ARE YOU IN?

I've been monitoring this thread from the beginning and have noticed your questions from time to time appear to be coming from someone that not only is new to trading, but also tends to trade scared.

And that's ok, except when you make a statement that you hope will elevate you to the level of the top trader "camp," especially when I suspect you aren't quite as high level as you hope to appear.

It seems that with your statement you are hoping to put some traders down who make mistakes in order to make yourself appear more knowledgeable.

I suggest that if you feel that you can help those who make mistakes, then offer some constructive advice. Otherwise, I also suggest that you stop trying to categorize other traders until you truly are a trader that truly "knows SET and everything else inside out."
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Rdemyan,

Yeah, what he said. :)

Comparison based on relative percentages.

You have a very small window of opportunity in my experience for establishing FOTM credit spreads on XEO if you are going to adopt a similar strategy to Phil's.

On current volatility levels 40-35 days out seems to be the sweet spot, though this depends on what risk/reward and probability characteristics you are after so adjust accordingly.

As Phil points out, premium can evaporate pretty quickly leaving you nowhere to run (adjust to) the closer you get to expiration. This is partly due to the minimum adjustment, if you were doing butterflies, being 5 points which is more equivalent to 10 points on SPX.

Test it out. You may find that it is better for doing closer to ATM credit spreads/ICs where you are more prepared to let spreads go ITM occasionally before expiration and adjust and manage the position more actively...but this is a different kettle of fish and a different strategy.

Momoney.

Quote from optioncoach:

What I think momoney means and what I meant is that the XEO premiums drop off sharply after 10 or 15 strikes away. Now using general analysis, the XEO moves about 1/2 as much as the SPX in most cases. So for me a 10/15 point move in the XEO would be the same as about a 20 - 30 point move in the SPX and I find that it is not enough cushion for the market moves over 45 days or less. Now the XEO and SPX do not move in a perfect 1:2 relationship but if you measure over the year it has a correlation or regression close to that. So for me I will look at XEO only when the deeper OTM strikes happen to have some premium. In general though, it might be tough to do the same month after month with little adjustments. Just my opinion though on XEO and how it moves in relation to SPX. Best way is to look at a chart and compare the two movements and look at the current strikes for DEC and what premium is available.

Phil
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There is another alternative, but it is risky. I hesitate to post it, but I don't recall seeing Coach respond to this alternative (but with over 2000 posts, he probably did somewhere).

So here it is, but it can be risky.

If the market keeps moving up and you're convinced it will keep moving up, you can buy back the short and let the long run. Truthfully, I considered doing this with the CME spread I mentioned earlier. What happened then was that in the last hour of trading CME was up 12 points and severely threatened my short. It closed at the high. I considered closing the short and letting the long run because it looked like it had momentum and had closed at the high of the day. The next day I had the opportunity and missed it. If I had done that, I would have at worst broken even.

But that was a stock and this is a relatively slow-moving index. The situation was different and regardless it's risky. But on the other hand if one were to try it with the idea that if you by back the short and the index drops a certain percentage afterwards, then you throw in the towel and sell the long to minimize any further losses.

This is not an adjustment strategy that we discuss much on this thread, so I'm curious as to what others think. Also, to be clear, I'm not recommending it, but am throwing it out for consideration and discussion.

However, Coach, now that I think about it, since our position is only a 5 point spread, this strategy might actually be tryable, with the strong provison that a stop loss has to be put in place. In other words, after buying back the short, one holds on to the long but will sell the long if the SPX drops by a certain amount. Since we have 5 point spreads this may be a more viable strategy because the long position could readily catch up with the sold short on even a mediocre up day or two.

Thoughts, comments, experience?



Quote from rdemyan:

You say you like to keep your margin requirement at $20,000 but you also say you have enough room to roll up three times. Isn't your current margin at $20,000 if you have 20 contracts of a 10 point credit spread? So, are you planning to potentially take this double down bet with even more margin?

I guess another possibility is to roll up early this next week and not just get out of the spread. Based on closing prices for the SPX as of Friday, 11/17/05, it looks like it could cost $3.05 to close the 1265/1275 and you might be able to sell the 1275/1285 for $1.60. If this could be realized, then the net loss from adjustment only would be $2900. Overall loss would be $1100.

The loss could be reduced further by putting on a bull put. I believe Coach recommended not going higher than 1180 with the short strike, but even the 1180/1170 has little value. It might be possible to go higher with the short strike.

Will rolling up to 1275/1285 be enough? Who knows. I can tell you that I'm a little concerned about my 1275/1280 that Coach has as well.

Just some caution about doubling down. I did this on CME back in June (except I tripled down) and I'm still trying to recover the loss on that one.

In that case I rolled up to the next train stop with the runaway locomotive barrelling down on me. The train didn't stop at that station and I got crushed.

Good luck.
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I'm in a similar situation (1270/1280) and am also looking at options. What I've decided is to first figure out if we're done with the rally or we have more to go -- i.e. to do nothing until we get much closer to 1270. Reasons? I think we're overbought, the lack of a real pullback in the last few days does not bode well for the market continuing higher, SPX is known to rally during expiration week, we're due for a correction. Of course, we're at a 4.5 year high which is scary as hell. As rdemyan said, roll to where? Don't know. I think the short week next week and the following week will tell a lot. If there's a major pull back I'll do nothing. If it keeps moving up, I'll take the position off and take a loss.


Quote from rjg96:

Coach (and anyone else who feels like responding).

I want to run this analysis by you to see if I'm missing something:
My current SPX position is:
20X 1265/1275 bear call spread for a credit of $1800 (.9)

I've been looking at rolling it up, clositing it out or rolling it up and "doubling down".

In looking at the current options prices, it looks like if I the SPX was 7 points away from my short (so if it were at 1258), and I were to roll up 10 and double my position, I would get a net gain of $100 (assuming worst case of sell at bid and buy at ask). Commissions would cost me about $150, so I'd have a net loss of $50-- with a new position of 1275/1285/1295

I have enough margin left that I could afford to roll up and double down a total of 3 times (allowing me to do this up to 1295/1305).

That seems like a good deal; I can wait until the SPX is within 5-7 points of my short strike to roll, and I can do it up to 3 times; and if I did do it 3 times, I'd be left with a loss of only about $350. If I subtract taht from the $1800 that I got for writing the intial spread, I still finish w/ a profit.

Now, if the SPX were to get too close to 1295 for comfort, I'd have to buy back the position for about $15000 (-1800) for a total loss of $13200. That would be pretty bad, and would take a while for me to recover given that I like to tkeep my margin req to about $20000/month-- so it would take about 6 or 7 months of wins to make it back. Then agian, we've had a good run to 1248, and it seems highly unlikey that the SPX would gain another 40 points betweeen now and expiration.

ALternatively, I could close out the spread on MOnday for a net oss of about $5000. If I waited until the SPX got with 5-7 points of 1265, I figure it would cost me a total of about $8000. These numbers could be a little lower given the effect of theta by the time the SPX would reach these points.

I looked into creating an iron condor, but the premiums on the puts right now don't seem worth the risk. I guess I could also buy some 126 SPYs using my $1800 to partially hedge; but I"m not sure if that's worth it at this point.

Another possibility would be to keep rolling up, but not doubling down. I figure it would cost me about $2300/roll if I watied till the SPX was 5-7 points away from my short. Then, I could re-evaluate at sometime closer to expiration and decide if I wanted to increase my position to make up for some or all of the losses. Or maybe take the losses in Dec and try to make them up later.

In summary, my current analysis says to sit tight until the SPX gets within 5-7 points of my short (1265) and then to roll up (probably the best idea) or to roll up and double down (tempting, but riskier). There's a good possibility that the SPX drops or stagnates for the next week or so; another reason I' rather stick to a "wait and see" approach at this point.

What are your thoughts on all this? Am I missing anything? THanks in advance. I realize this isn't really specific to this month or to my specific position; but this is fhte frist time that I've had to face decisions about adjusting, so i'm trying to put together the stuff I've learned in this thread- and trying to have a plan before I need to act. Of corurse, I should've done all ths analyssi before I even put on the position.... :)

(Its Nice to have the weekend to think about all this).
I'm gong to be more rigorous about stick with farther OTM spreads from now on!:)
More...
 
Mo, correct me if I'm wrong, but I think I've seen you post, more than once, that you don't trade the SPX.

Under the assumption that you trade credit spreads, what do you trade?


Quote from momoneythansens:

Rdemyan,

Yeah, what he said. :)

Comparison based on relative percentages.

You have a very small window of opportunity in my experience for establishing FOTM credit spreads on XEO if you are going to adopt a similar strategy to Phil's.

On current volatility levels 40-35 days out seems to be the sweet spot, though this depends on what risk/reward and probability characteristics you are after so adjust accordingly.

As Phil points out, premium can evaporate pretty quickly leaving you nowhere to run (adjust to) the closer you get to expiration. This is partly due to the minimum adjustment, if you were doing butterflies, being 5 points which is more equivalent to 10 points on SPX.

Test it out. You may find that it is better for doing closer to ATM credit spreads/ICs where you are more prepared to let spreads go ITM occasionally before expiration and adjust and manage the position more actively...but this is a different kettle of fish and a different strategy.

Momoney.
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