SPX Credit Spread Trader

Thanks Mo Donna and Labib. Admittedly I read everything on the surface and it did not enter my brain so I want to absorb it slowly and let it sink in. Always nice to review different ways to skin the same cat. Makes it easier to adjust to market swings or to play the SPX differently if I have a bias based on technical analysis.
 
In response to TradeKing.com

It doesn't cost anything to open an account at tradeking.com

The site does have a much nicer, but similar interface than OXs.

What I like most so far is the volatility graph they impose from ivolatility.com, the option strategy scanner from ivolatility.com, the 'chains' show IV and delta on the same page as the b/a, the order placing screen is much cleaner, the entire web-based platform runs faster, you also get earnings events, dividends, and splits in graphical form, the financial and fundamental information is real nice, and the insider trading is in visual as well as numerical.

For free... it's worth signing up for... in fact... I'm transfering my OX account to them next week. I'll let you know the spread fills and customer support soon.

For those of you who have not tried speedresearch.com, it's awesome. Even if you have TA software, etc... you can use all your software simultaneously in multiple windows.. with unlimited stocks open.. all at once... it's brillant software. it's like having an assitant to all the timetasks... allows you to make the decisions. My entire investment group uses it... once people see you use it, they think you have more information than them... but you really just have it faster, quicker, and organized... all with one click. You get a free 30-day trial... I strongly recommend giving it a shot. Any questions... let me know.

Enjoy the weekend.... off to ski,

Murray
 
This morning I was trying the following trade online :

Buy to open SPX DEC 1600 P
Sell to open SPX DEC 1550 P

I got the following message from OX:

ATTENTION
To place trades on securities with inverted pricing, please contact our trading desk at (888) 280-6505.

when I contacted them, they said that there should be no problem placing such order. I kept trying and I kept getting the same message.

Did anybody have similar experience?
I cannot get an answer from OX.


Labib Imtanes
 
Well a deep ITM bear put spread.. how much was the net debit? Mus thave been pretty pricey lol. I do not understand OX's message.


Quote from labib52:

This morning I was trying the following trade online :

Buy to open SPX DEC 1600 P
Sell to open SPX DEC 1550 P

I got the following message from OX:

ATTENTION
To place trades on securities with inverted pricing, please contact our trading desk at (888) 280-6505.

when I contacted them, they said that there should be no problem placing such order. I kept trying and I kept getting the same message.

Did anybody have similar experience?
I cannot get an answer from OX.


Labib Imtanes
More...
 
I checked these strikes on ToS and assuming you mean Dec 2006, there was no put option listed with a strike of 1600.

Quote from optioncoach:

Well a deep ITM bear put spread.. how much was the net debit? Mus thave been pretty pricey lol. I do not understand OX's message.
More...
 
Quote from optioncoach:

Well a deep ITM bear put spread.. how much was the net debit? Mus thave been pretty pricey lol. I do not understand OX's message.
More...

Yes it is Dec 2006

it was around $ 46.50 but I was trying GTC with a debit of $44
if it's filled will be $600 return on margin $4400 = %13.6 for 11 months and extremely low risk . I don't think the SPX wil hit 1550 by Dec. 2006
Labib Imtanes
 
I have had this problem. Apparently, there has been some abuse trying to capture the "negative" time value in the DITM SPX puts--using this to raise cash. Therefore, OX has put a flag on any trades using these DITM puts.

I had my account reviewed by the margin department and they have ok'd this kind of trading for me. Whenever, I want to use the DITM puts, I e-mail someone in the margin department and they set my account for "ignore buying power". This can be a little dangerous since it also takes away the flag that checks if you really want to sell what you don't own and I am prone to typos.

This method is somewhat cumbersome and I have complained that this should be easier. I would think that this should be relatively easy to solve, but I am not a software engineer. Perhaps more complaints will help.

I would ask to talk to the margin department and they can probably help.

Chip







Quote from labib52:

This morning I was trying the following trade online :

Buy to open SPX DEC 1600 P
Sell to open SPX DEC 1550 P

I got the following message from OX:

ATTENTION
To place trades on securities with inverted pricing, please contact our trading desk at (888) 280-6505.

when I contacted them, they said that there should be no problem placing such order. I kept trying and I kept getting the same message.

Did anybody have similar experience?
I cannot get an answer from OX.


Labib Imtanes
More...
 
Well well well, we closed right at support in the upward pricing channel. We are looking at make or break time here folks. Are we continuing the upward channel or are we going to confirm a top has occurred and we head lower all next week....
 

Attachments

Quote from Chipper7:

I have had this problem. Apparently, there has been some abuse trying to capture the "negative" time value in the DITM SPX puts--using this to raise cash. Therefore, OX has put a flag on any trades using these DITM puts.

I had my account reviewed by the margin department and they have ok'd this kind of trading for me. Whenever, I want to use the DITM puts, I e-mail someone in the margin department and they set my account for "ignore buying power". This can be a little dangerous since it also takes away the flag that checks if you really want to sell what you don't own and I am prone to typos.

This method is somewhat cumbersome and I have complained that this should be easier. I would think that this should be relatively easy to solve, but I am not a software engineer. Perhaps more complaints will help.

I would ask to talk to the margin department and they can probably help.

Chip
More...

I think this case is different , I'm buying the 1600 and selling the 1550 put. This is a debit spread , paid in cash . They deduct the amount from your account and no margin involved.
 
I use a slingshot hedge as well as a (slightly OTM) strangle hedge. All put on at the same time along with the main spread. Lots of back testing has shown this to yield the largest profit but more importantly, keep losses controlled to a minimum.

Hint: The slingshot protects against large moves that happen very soon after the main spread is put on, and the strangle protects against moves that happen much closer to expiration.

The next step to maximize profit/control risk would be to hedge with futures (which I am not doing).

Vega risk is still an issue with this structure.


Quote from momoneythansens:

I think it's all a variation on a theme. Often with different objectives and intent but sharing similar characteristics nonetheless. I was going to summarize the approaches more formally but will do a quick summary here for everyone's benefit for folks that are interested.

I will restrict discussion mostly to the treatment of credit spreads for simplicity of terminology but the same principles can be extracted for application to ICs

Concept
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I personally think about it in terms of a play on sigmas. Banking on the 1 sigma move. Assuming it will almost definitely move and capitalizing on that move. At the same time betting that it won't move enough to make your spread a loser.

To hedge the short positions on your spread or speculate on direction opposite to your short positions.

Whether you think about it as a hedge or as speculation is probably moot though your perspective could very well influence position sizes and timing etc.

Same Instrument vs. Different Instrument
-----------------------------------------------------

This strategy can be applied on the same instrument e.g. SPX and SPX or can be applied on similar instruments e.g. SPX for credit spread and XSP/SPY for the hedge as per Coach.

Single vs. Debit Spread
-----------------------------

Buying long singles vs. long verticals. Obviously the long vertical "costs" less at the expense of capping profit potential and also capping off the gamma hedging capabilities for your credit spread.

Legging in to the long vertical or not
----------------------------------------------

One may be inclined to have conviction in the direction that favors the hedge and then leg into the long vertical as movement allows. This is sometimes referred to here and elsewhere as "building up free hedges" as per Coach on SPY hedges and Andy Smith amongst others.

Considering legging into the PREGO fly is also an option to reduce the cost basis. The PREGO fly is simply a wider long vertical opposite a narrower short vertical. Need to pay attention to the ratio's though.

ATM vs OTM
---------------

Putting on the hedge ATM, in the case of an IC this would mean putting on a straddle to hedge the IC as per Riskarb. OTM would mean a strangle for the IC example.

The ATM hedge obviously costs more than the OTM hedge which could quite easily decimate any credit from the credit spread and thus the ratio could end up being quite steep. However, one has to look at the gamma hedging capabilities of ATM vs OTM to make this decision.

Furthermore, if you go too far OTM with the hedge then there is every chance you make no money on the hedge and significantly reduce the credit received for no benefit.

Proactive vs Reactive
---------------------------

One can choose to put the hedge on at the same time as the credit spread and thus accept the hedge as a cost of doing business or alternatively the hedge can be placed reactively as per the Slingshot or PREGO butterfly approach.

It's important to realize that some people would not see the hedge as a cost but as a way to make more money. So again, perspective plays a large part in the approach.

I've simplified the above for the sake of brevity but I believe I've covered the main factors there are for consideration when employing this strategy.

Food for thought. Prosperous trading.

MoMoney.
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