SPX Credit Spread Trader

Just wanted to add a chart of the SPX to let you know what I am seeing. We are in an upward prince channel since the end of MAY when the SPX bottomed out at around 1140. A few days ago we bounced off the bottom of the price channel at around 1223 and have resumed the upward movement.

Should this trend continue we could be well near 1260 by the end of AUGUST and therefore I am not looking to jump in with the call side of my SEPT spreads. I will wait a bit to get more upward movement and then look at the 1280 strikes to sell which is outside the 1260 point I foresee. Right now I will just let my AUG options expire worthless as I do not see us hitting 1260 in one week which is expiration. But I will watch closely. The SEPT puts are alreayd showing slight profits and will see what happens over the next week as I free up margin.

The graph of the SPX with my trendlines drawn in is below:


Phil
 

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hi coach,

thanks for referring me to your journal. i have read it in its entirety. congratulations on your successful summer! since creating the journal you have initiated 3 partial hedges.

1. 5/26/05 bto #85 june spy 123c @ 0.15

2. 6/27/05 bto #50 july debit bear put spread 118/117 @ 0.3

3. 8/3/05 bto #45 aug spy 126c @ 0.45

I am currently unable to download the excel spreadsheets (it may be addressed there)
could you discuss if, when, how you choose to close out these positions?

thanks again for the thread,
newbie
 
Thank you and welcome. Yes this summer was wonderful and I am looking forward to keeping it going through August although I do not expect Aug to be like July.

To me hedges are all or nothing insurance plans. I open them with an amount of money in the debit that still leaves with me a good profit if the hedge is never needed. They are small compared to my credits collected. SO I open them and pretty much let them run to expiration unless one has a nice profit which I never mind taking. Insruance policies are sunk money and that is the way I approach them. I want to avoid getting into the game of knowing the exact best moment to take off the hedge because that usually leads to the market whipsawing and I want to please the whipsaw gods ;).

Sometimes the partial hedges allow me to clear my head since I have added some initial protection to better analyze my adjustment possibilities. A clear mind is worth its weight in gold when analyzing open positions. I have not needed the hedges in hindsight but at the time I made the decision to enter them, I felt it was prudent to add them at that time and I want to stick with my risk management plan as best I can.

In the end the hedges cost very little compared to the profits but the real reward is how they allow me to better approach and handle my risk.


Phil

Quote from newbie463:

hi coach,

thanks for referring me to your journal. i have read it in its entirety. congratulations on your successful summer! since creating the journal you have initiated 3 partial hedges.

1. 5/26/05 bto #85 june spy 123c @ 0.15

2. 6/27/05 bto #50 july debit bear put spread 118/117 @ 0.3

3. 8/3/05 bto #45 aug spy 126c @ 0.45

I am currently unable to download the excel spreadsheets (it may be addressed there)
could you discuss if, when, how you choose to close out these positions?

thanks again for the thread,
newbie
More...
 
Rdemyan, you can request option strikes to be opened by calling 888OPTIONS, the Options Industry Council. I called and asked for the SPX 305,310,315 and 320 Sep strikes be opened. They put the request through and said to check tomorrow and see what the MMs were willing to open.
 
You sure that was the SPX you requested?

Phil

Quote from jplatsky:

Rdemyan, you can request option strikes to be opened by calling 888OPTIONS, the Options Industry Council. I called and asked for the SPX 305,310,315 and 320 Sep strikes be opened. They put the request through and said to check tomorrow and see what the MMs were willing to open.
More...
 
Just wanted to remind everyone that if you are in the D.C. area to come over and see me at the Money Show on Friday at the Trader's Press booth where I am signing books purchased there from 4:00 to 4:30. It is free and Fontanills and McMillian are there giving free seminars.

http://www.dcmoneyshow.com/ms/dcms/main.asp

Lots of free stuff in the exhibit hall as well (I took EVERYTHING!)

Phil
 
Took some profit today on a huge downward movement. I closed my AUG call position:

Closed 115 SPX AUG 1260/1275 Call Spreads for net credit of $0.45.

Credit = $5,175
Return = 3%

Now just have the following put positions:

115 SPX AUG 1165/1180 Put Spreads @ $0.35

110 SPX SEPT 1165/1175 Put Spreads @ $0.95


May add more put positions for Sept since I am not ready to add any call spreads yet, especially with such a large down day.

Phil
 
Quote from optioncoach:

I do not have a specific preference for any spread between the strikes although I mainly focus on 10 and 15 point spreads. 5-point spreads are harder to split the b/a at times and also reach maximum loss faster on a large price swing. 5- point spreads do not necessarily limit your loss more so than a 10 or 15 point spread because most people use the same margin amount and simply sell more 5-point spreads. If you are gonna do a fixed contract number no matter the spread then of course the risk is lower but so is the premium. This is the normal risk/reward trade off that each trader has to analyze before entering a position.

I personally feel I have more flexibiltiy with a 10 or 15 point spread since I can either roll the whole spread up or simply move the short strike up. What I do depends on the the premiums for the strikes and which action would lead to to the best adjustment for me. I do not have a preset rule on which I would do first. As always, it requires monitoring the market and the stirkes to make the adjustment when necessary. I rarely adjust because my goal is try and select strikes which are expected to expire worthless. However if I must, then it all comes down to premium and time to expiration. A lot of it comes from experience and familiarity with the strategy to make such a determination, not to mention personal preference. One is not more right than the other.


I think that this topic is worth analysing...My experience is:
*5 pt spreads provide the greatest premium per dollar of margin
*Phil adds a caveat that 5 point spreads tend to be filled "further" away from midpoint of B/A however.
*larger spreads (greater than 5 pts) show significantly less premium per dollar of margin however, more likely to get filled closer to midpoint.
*larger spreads means less number of contracts which equals much less commish.
*5 point spreads tend to maintain their value longer (BAD). for example, a large drop in the market (or large rise) results in more equal changes in the individual legs of the spread. This can be frustrating as you are trying to close your position because the welcomed decay occurred on the short side BUT it also occurred proportionately on the long side.
*Conversely, the decay is more rapidily noticed in larger spreads (GOOD).

I have been in spreads close to expiration perhaps 15 points away from my short leg with SIGNIFICANT decay of the short leg premium (GOOD) but I couldn't close because the long leg was equally decayed. That got me thinking after reading these pages, about changing to larger spreads.

If anyone knows of any software that can instantly compare various spreads (premium vs margin), please share.

Since Phil's strategy is to sell spreads that have significant likliehood of expiring worthless, picking the BEST longside leg is critical to maintain more nickles and more dimes all of those thousands of times!!:)
More...
 
Part of the margin issue is related to reg-t vs. SPAN. Optioncoach is using reg-t products. Under SPAN he would have half the margin...so the software would have to differentiate between securities and commodities.

I did some of the same analysis and found some of the same things. At IB, margin is about $50 per 5 point ES spread and about $100 for every 10 point spread. With ES, you also only pay for one side. If you are filled at the midpoint, it doesn't seem like you would receive 2X the premium for a 10 point spread. The other thing to keep in mind is margin as it relates to overlap. If you are waiting til expiration, you will likely want to start a few positions for the following month prior to expiration, so you'll need margin to do so. Commish is a bit higher on SPAN products. In the case of an ES spread, commish is 6.6 cents to get in and another 6.6 cents to get out. 13.2 cents can be hard on profits when the inital goal may be 40 or 50 cents (per pair).

SPY and IWM are fine for hedging, but you have to put 5 or 10 of them together to hedge 1 ES or Russell futures contract.

It's an interesting method. I'm still kicking the tires to see if I can make some of this work for me.
 
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