SPX Credit Spread Trader

I am looking into the use of OTM long options on futures to increae profits where the market swings somewhat but not enough to force an adjustment. For example, one can sell the 1150/1165 put spread and purchase the 1190 E-mini puts still resulting in a significant net credit. If the market has any nice dips you may be able to take some profits on the 1190s. THis is just one example. I am also working on intraday futures trading on the index.

The point is that once you become extremely comfortable with the underlying and the strategies you can find ways to add to it and open other complimentary positions. Futures as a hedge is only viable in huge swing days near the short strikes as a temporary hedge, not a long-term hedge holding. For example, if I am 25 points out and some bad news hits and the market stops crashing, I could short futures as an immediate temporary hedge to profit from the drops and give me a cushion to make any necessary adjustment. If the market bounces and then recovers I can close the futures position and take any profits or take a small loss as the price of insurance. But I would not open a futures position to hold for a long-period of time as a hedge since a price swing the other way could cost a lot of money.

Phil


Quote from andysmith:

Phil,

"I am studying the use of futures and options on futures on the S&P as not only hedging tools but also to increase my returns."

-- So am I. So far, I've found that using futures as a hedge is not good because your losses can grow to well beyond the amount you were trying to hedge. But options on futures provides a great hedging mechanism.

But how will you actually increase returns?
More...
 
"For example, one can sell the 1150/1165 put spread and purchase the 1190 E-mini puts still resulting in a significant net credit."

-- Super post Phil. Too bad this is not a live forum.

1) What's the benefit of using the 1190 e-mini put as opposed to a 1190 SPY or SPX put.

2) Even without e-mini, I've been thinking about your hedging strategy. I'm looking at possibly putting on a spread, selling half (or 20% or whatever) the moment I get a 20% (or 10% or 30% or whatever) profit, and using that to hedge the position, possibly locking in profit.

For example, we both put on a 1165/1175 put spread for around $1 credit. Three days later the spread was $0.60 cents. Even with slight slippage there was profit that could be used to pay for a hedge to lock in future profit... whadya think?
 
Andy:

1) In my opinion, the futures options have better moves than the SPY options since the SPYs are just 1/10th of the SPX. Therefore the index needs a large move to budge the bid/asks of the SPY. OptiosnXpress does not have futures or options on futures so I use the SPY. I am bringing in new funds and will be choosing IB or ThinkorSwim because OX is too slow in implementing futures trading. It may be a personal preference thing but I would like to try using the E-minis instead of the SPY.

2) As for profit taking it is a personal risk management decision. I choose to get at least 70% or more before closing unless I need some margin cleared up and I settle for less. I am not looking to flip trade so frequently so I do not mind letting time decay do some more work for me. It is up to you to develop a trade management system that works for you. I like milking the spreads for as much as I can but I do not like holding all the way until expiration unless it is a last minute scalp.

Phil


Quote from andysmith:

"For example, one can sell the 1150/1165 put spread and purchase the 1190 E-mini puts still resulting in a significant net credit."

-- Super post Phil. Too bad this is not a live forum.

1) What's the benefit of using the 1190 e-mini put as opposed to a 1190 SPY or SPX put.

2) Even without e-mini, I've been thinking about your hedging strategy. I'm looking at possibly putting on a spread, selling half (or 20% or whatever) the moment I get a 20% (or 10% or 30% or whatever) profit, and using that to hedge the position, possibly locking in profit.

For example, we both put on a 1165/1175 put spread for around $1 credit. Three days later the spread was $0.60 cents. Even with slight slippage there was profit that could be used to pay for a hedge to lock in future profit... whadya think?
More...
 
Hi Phil,

I have been reading your book and consider it a MUST HAVE for any options investor. It has already paid for itself with the insights it provides.

A question for you regarding forecasting:

"When choosing put/call spreads on the SPX for a credit, how do you forecast the direction of the underlying S&P 500?" (I know it is more than just finding spreads 50 points OTM with acceptable credits.)

Thanks for continuing a valuable thread,

modegolf
 
MGolf:

Thanks for the kind words and I am glad you found the book useful.

As for the SPX, I really do not forecast the market specifically since I can make money on the credit spreads without picking a specific market value. Basically I use chart patterns and moving averages to get a sense of support and resistance and overall direction. I also look at the market as a whole to determine fundamental aspects to give me a better snapshot. Using these togethers I can narrow down a general range of strikes I wish to start looking at and then I start to focus on the risk/reward depending on the premiums available.

For example right now, I am not forecasting anything because the market can go up, sideways or down and I still make money as long as the down movement is not severe enough to threaten my short strikes. I follow the SPX a lot so after some time you get to know it well and your instincts help in selecting strikes based on past movements.

So bottom line, technical analysis with some fundamental market overview and my experience is what I use to help me determine strikes. There is no magic formula as I adapt to the market, not the other way around. For example, I was more inclined to do the Iron Condors in the summer when the market tends to be flat than in the Fall where volaitlity may creep back in. I will still do some ICs in the coming months but may be more selective perhaps.

Phil


Quote from modegolf:

Hi Phil,

I have been reading your book and consider it a MUST HAVE for any options investor. It has already paid for itself with the insights it provides.

A question for you regarding forecasting:

"When choosing put/call spreads on the SPX for a credit, how do you forecast the direction of the underlying S&P 500?" (I know it is more than just finding spreads 50 points OTM with acceptable credits.)

Thanks for continuing a valuable thread,

modegolf
More...
 
Phil,

I've been putting in some time related to futures education. I have accounts at OX (closing it shortly), TOS (love it) and IB.

TOS has just added e-mini futures for S&P500 and that is it for now (please double check with them to be sure). Their main purpose in adding the e-mini, I believe was to provide a hedging capability after one beta-weights their portfolio with the S&P e-mini. They don't have options on futures. IB has the whole suite.

Have you considered doing the same types of ICs/spreads with options on futures instead of SPX options? The reward/risk is quite different. Plus you can diversify across 5 or so markets instead of one market only (SPX). This is what I'm looking at now... would love to hear your thoughts.
 
"In my opinion, the futures options have better moves than the SPY options since the SPYs are just 1/10th of the SPX. Therefore the index needs a large move to budge the bid/asks of the SPY. "

-- But why would you use SPX futures options over SPX options? Is it because the futures options move faster in the event of a fast, sudden market move?
 
This is a fantastic thread. Thank you phil.

Has anyone noticed insane put buyers today. Skew is being killed (more negative). The 1050 puts started the day trading around .25 cents and closed the day at .85!!! These puts are almost 200 bucks out of the money!

I would imagine this would be the optimal time to sell some premium in September, unless someone somewhere knows something I don't. There must have been a net purchase of 3,000,000 puts during the last three days (mainly in Sept and between the 1050 to 1140 strike range).

Is there something I am not seeing?

-Steve
 
Phil, Thanks for letting me look over your shoulder. Your generosity should help you sell loads of books.

I am wondering how you plan to handle the next few months. The markets traditionally make their best gains of the year from Sept to Dec. and we would expect a bias toward put spreads. However in the past we have seen big moves down in Oct. especially.

Would you change your strategy in the near future or are those big autumn selloffs too far in the past to be concerned about?
 
Quote from OptMarketMaker:

This is a fantastic thread. Thank you phil.

Has anyone noticed insane put buyers today. Skew is being killed (more negative). The 1050 puts started the day trading around .25 cents and closed the day at .85!!! These puts are almost 200 bucks out of the money!

I would imagine this would be the optimal time to sell some premium in September, unless someone somewhere knows something I don't. There must have been a net purchase of 3,000,000 puts during the last three days (mainly in Sept and between the 1050 to 1140 strike range).

Is there something I am not seeing?

-Steve
More...

The closing price of dotm options is really irrelevant. The bid-ask spread for those things is very, very wide. The closing price is merely the last transaction price.

1050 puts have so little delta and, at this point, gamma that it would take a big move for them to increase greatly in value. That is why Phil and others sell them; they probably will expire worthless.
 
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