SPX Credit Spread Trader

Quote from piccon:

I told you to not panic. That's the nature of the market. Today was a big reversal day. Going up big and close down big. I like it. I believe it will continue tomorrow and maybe I will start putting some bull put or Condor. I already have 3 major Call Spreads.
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I don't have anything for Apr yet. I wasn't in a huge hurry because there's 5 weeks between MAR and APR expiry. I didn't get into anything today because SPX finished close to today's low. I'll be looking for a good fill tomorrow, although probs not an IC. Even if it starts heading south I think it has a few upward sprints left in it. I think I'll try to get lucky on one of those.:D
 
Quote from ChrisM:

Not sure if I understand clearly - you bought 1215p first to build spread on it ?

1200/1215 - it is always easier to get out of such position if market makes little reverse north. You have a lot of space to hedge if this correction would be brutal.
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I currently am holding the 1200/1210 put spread (legged into it a couple of weeks ago)...tried to get out of it but wasn't filled so am keeping it. In addition I bought 1215's as the backstop to another spread...was regretting it but went out to run errends when spx was +5 bucks and happy to see it now down over 7...so probably tomorrow will look to sell either 1225's or 1230's. Thanks coach!:p
 
Coach,

We've added a little 'PUNCH' to the diagonal you entered.

Since the ratio diagonal calendar is less margin intensive than say a credit spread of the same month same strikes in your current position, ie, you're only short 8 contracts instead of 10, your overall margin requirement is less.

So... you can actually buy and sell more positons with the same initial amount of funding for that position. This inturn creates a more postive delta on the longer May contracts as the market moves up.

Now the KICKER.... if you would have sold the remaining 2 contracts which you didn't short... and sold them in the current month of April against your 10 long May contracts.... there would be no increase in margin requirement... and you would have taken in an additonal .55 (only on two contracts) to either add to the credit or pay for commissions. It's nice because you're not selling a spread, you're just selling the 1375 April call off of mid.

Give that some thought.

Murray




Quote from optioncoach:

Wanted to re-list all my spread positions for APRIL now after adding a partial hedge for my short put spread:

SPX CALL DIAGONAL SPREAD:

- 8 SPX APR 1340 Calls @ $4.70
+ 10 SPX MAY 1375 Calls @ $3.10

Net Credit = $660


SPX BULL PUT SPREAD:

- 350 SPX APR 1225/1235 Put Spreads @ $0.35

Net Credit = $12,250


PUT SPREAD PARTIAL HEDGE:

+ 100 SPY APR 126/125 Put Spreads @ $0.10

Net Debit = $1,000


( BANANA search word to find for future reference)
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One point though on the diagonal is that it is treated as 8 credit spreads by OX so it is a margin of $28,000 but I am also long 2 extra MAY 1375 Calls at $3.10 which are a debit so the real max risk is $28,620 if I lost on all contracts. The correct margin + plus risk is really the amount of credit spreads plus the additional debit of the long calls.

Also, for me it is more margin intensive since I need to do wider strikes to make it work. I just did a 10 * 8 as opposed to my usual 200 or 300 contracts because the margin would be almost triple what I normally do. Since you need to do wider strikes for the diagonal, the margin is higher per spread.

If I sell the additional 2 calls, I would have additional margin of two additional diagonal credit spreads. So instead of 8 credit spreads and 2 long calls I would have 10 diagonal credit spreads at $3,500 each for $35,000. I would just be legging into the last 2 so the margin requirement would still be there. This is higher than the margin/risk of the 10 x 8 diagonal spreads.

So I do not see the Punches as you described them. My view of these is to be able to put on small positions and adjust if needed for significant returns, i.e. 15% on margin. Great additions to my spread arsenal. The diagonal gives me great flexibility. Even if the market moves against the short strike I can roll it up or out to MAY and still be covered and have so many choices.

Quote from Sailing:

Coach,

We've added a little 'PUNCH' to the diagonal you entered.

Since the ratio diagonal calendar is less margin intensive than say a credit spread of the same month same strikes in your current position, ie, you're only short 8 contracts instead of 10, your overall margin requirement is less.

So... you can actually buy and sell more positons with the same initial amount of funding for that position. This inturn creates a more postive delta on the longer May contracts as the market moves up.

Now the KICKER.... if you would have sold the remaining 2 contracts which you didn't short... and sold them in the current month of April against your 10 long May contracts.... there would be no increase in margin requirement... and you would have taken in an additonal .55 (only on two contracts) to either add to the credit or pay for commissions. It's nice because you're not selling a spread, you're just selling the 1375 April call off of mid.

Give that some thought.

Murray
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Kar,

Try looking at the OEX....

Yesterday we sold 5 April 605c, bought 10 May 620c for even, then sold additonal 5 April 620c for .30 against the unbalanced calendar for no additonal margin requirement.

Overall positon is a credit of $150 on 5,000 margin.... with tremendous profit potential. If the market trades down, stays the same, or moves up... this trade is profitable. Calculate your risk analysis on this trade..... it will shock you.

You're going to like this!

Murray


Quote from kartik_subbarao:

I've been thinking some more about the ratio diagonal spreads approach discussed by Murray. In order to put on the spread for even money or a credit, it seems that the separation between the strikes needs to be fairly wide (30+?)

I'm curious how one would manage risk in a scenario like the October-December timeframe. With SPX around 1180 at the end of October, if one had done a diagonal call spread for breakeven or credit, and wanted to go way OTM, you'd need to choose something like the Nov 1220/Dec 1250.

At November expiration, SPX closed around 1240. Looking at the historic SPX option prices (I've been collecting my own daily data for the last several months), I couldn't find an easy way to adjust where you wouldn't be out a good chunk of change. SPX moved very rapidly higher in that timeframe, and volatility/time weren't enough to compensate.

Any thoughts on when and how one would best adjust in this scenario? From Murray's original post, calendars look quite rosy and I'm wondering if there's something that I'm not seeing. Because during Nov/Dec of last year, I see a possible worst case scenario for calendars which could easily repeat itself when volatility increases in the future.
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You are gonna have to walk me through this. Even though you legged into it, you still have 10 APRIL 605/10 MAY 620 diagonal credit spreads for a margin of $15,000 minus credit received.

Quote from Sailing:

Kar,

Try looking at the OEX....

Yesterday we sold 5 April 605c, bought 10 May 620c for even, then sold additonal 5 April 620c for .30 against the unbalanced calendar for no additonal margin requirement.

Overall positon is a credit of $150 on 5,000 margin.... with tremendous profit potential. If the market trades down, stays the same, or moves up... this trade is profitable. Calculate your risk analysis on this trade..... it will shock you.

You're going to like this!

Murray
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Coach,

Selling an additional 2 April 1375 against your May 1375 has no spread... no additonal margin.

Murray


Quote from optioncoach:

One point though on the diagonal is that it is treated as 8 credit spreads by OX so it is a margin of $28,000 but I am also long 2 extra MAY 1375 Calls at $3.10 which are a debit so the real max risk is $28,620 if I lost on all contracts. The correct margin + plus risk is really the amount of credit spreads plus the additional debit of the long calls.

Also, for me it is more margin intensive since I need to do wider strikes to make it work. I just did a 10 * 8 as opposed to my usual 200 or 300 contracts because the margin would be almost triple what I normally do. Since you need to do wider strikes for the diagonal, the margin is higher per spread.

If I sell the additional 2 calls, I would have additional margin of two additional diagonal credit spreads. So instead of 8 credit spreads and 2 long calls I would have 10 diagonal credit spreads at $3,500 each for $35,000. I would just be legging into the last 2 so the margin requirement would still be there. This is higher than the margin/risk of the 10 x 8 diagonal spreads.

So I do not see the Punches as you described them. My view of these is to be able to put on small positions and adjust if needed for significant returns, i.e. 15% on margin. Great additions to my spread arsenal. The diagonal gives me great flexibility. Even if the market moves against the short strike I can roll it up or out to MAY and still be covered and have so many choices.
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TIME OUT.... IDIOT ALERT..

OK the strikes of the additional sold calls are the same as the long month not the short month.....

SORRY FOR MY IDIOT MOMENT MURRAY!
 
Coach,

Calculate your margin:

-8 April 1340c
+10 May 1375c

now, sell additional -2 April 1375c

You only have a spread requirement for the -8 short contracts between your 1340 and 1375 strikes.

As you would look at it:

-8 April 1340c / +8 May 1375c, with margin
-2 April 1375c / +2 May 1375c, no additional margin

Hope this helps,

Murray
 
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