SPX Credit Spread Trader

Quote from optioncoach:



there is no perfect hedge for credit spreads. You have to adjust on small moves and get the heck out of the way on major moves. But even converting to a FLY or BOXing the position if you can get a better fill than closing are ways to reduce the risk so that you never take the max loss.

I will post later with more info :D
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Coach, as I have had few questions about, we need to emphasize this - ideal hedge means (more or less) no profit both for spreads and nakeds. Whole game is about taking advantage of gamma/theta diminishing through the time, so if you develop (and budget well!) technique allowing you to stay with your position over a period of time...then the market will do the job for you.
 
coach,

i am aware that there is no perfect hedge because the spread is too wide thus anything you do with spy or options will only bring you some money that u can use if you have to close the spread.

What i am thinking is along those same lines but uses delta neutral positioning. Maybe it was mentioned before but here are two ways i have in mind.

1) Used to make money on a sharp move up.

Buy SPYs and ITM puts(about 2-3 points ITM where the theta is zero).

Cost: virtually zero not counting commissions and b/a spread on the away in/out. Only real cost is the reduced margin but i am sure you can play with that or size the position accordingly.

Pros: once the market moves up, your puts delta decreases and theta increases thus it will lose less value than the long SPYs. Past the put strike is pure profit. if the market goes down or stays the same, you close out at breakeven since u bought nothing but intrinsic values.

2) Used to make money on a move up or down. Come to think of it, you can hedge your call and put spreads simultaneously.

Buy ITM SPY straddles.

Cost: you will have to pay some theta here because of the call/put price disparity and you wont be able to find any calls without theta in them. But, you already pay theta when u buy calls/puts anyway so this might be an alternative.

Pros: makes you money on a sharp move up or down, and more money past the strikes. ideal place would be purchasing it with SPX in between your call and put short strikes.


I personally like the first one better because it virtually costs nothing but the reduced margin value. Comments?
 
I am not following exactly. If I have 100 SPX put spreads, to get delta neutral I may have to purchase close to 1000 SPY puts which has a huge cost, even in risk-based haircut, I still need to put that money on the line and it is a lot. Especially with ITM puts. If the market keeps running, the cost of hte puts is much higher than the spread credit so you create a loss.

You have to lay it out to be clear. If I have the 1225/1235 SPX put spread and the SPX is at 1302 then you would buy SPY puts at 131 or 132? If the market goes up you have a net lose if you buy enough puts to get to delta neutral. SPY is 1/10 so you need to buy 10x as many put spreads in a way.

I do not think you can work on delta neutral using SPYs. Also I do not understand how buying even 500 SPYs would not involve a cost. All long options have to be paid for upfront.

Quote from rallymode:

coach,

i am aware that there is no perfect hedge because the spread is too wide thus anything you do with spy or options will only bring you some money that u can use if you have to close the spread.

What i am thinking is along those same lines but uses delta neutral positioning. Maybe it was mentioned before but here are two ways i have in mind.

1) Used to make money on a sharp move up.

Buy SPYs and ITM puts(about 2-3 points ITM where the theta is zero).

Cost: virtually zero not counting commissions and b/a spread on the away in/out. Only real cost is the reduced margin but i am sure you can play with that or size the position accordingly.

Pros: once the market moves up, your puts delta decreases and theta increases thus it will lose less value than the long SPYs. Past the put strike is pure profit. if the market goes down or stays the same, you close out at breakeven since u bought nothing but intrinsic values.

2) Used to make money on a move up or down. Come to think of it, you can hedge your call and put spreads simultaneously.

Buy ITM SPY straddles.

Cost: you will have to pay some theta here because of the call/put price disparity and you wont be able to find any calls without theta in them. But, you already pay theta when u buy calls/puts anyway so this might be an alternative.

Pros: makes you money on a sharp move up or down, and more money past the strikes. ideal place would be purchasing it with SPX in between your call and put short strikes.


I personally like the first one better because it virtually costs nothing but the reduced margin value. Comments?
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Quote from optioncoach:

I am not following exactly. If I have 100 SPX put spreads, to get delta neutral I may have to purchase close to 1000 SPY puts which has a huge cost, even in risk-based haircut, I still need to put that money on the line and it is a lot. Especially with ITM puts. If the market keeps running, the cost of hte puts is much higher than the spread credit so you create a loss.

You have to lay it out to be clear. If I have the 1225/1235 SPX put spread and the SPX is at 1302 then you would buy SPY puts at 131 or 132? If the market goes up you have a net lose if you buy enough puts to get to delta neutral. SPY is 1/10 so you need to buy 10x as many put spreads in a way.

I do not think you can work on delta neutral using SPYs. Also I do not understand how buying even 500 SPYs would not involve a cost. All long options have to be paid for upfront.
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you totally lost me with this one. My strategy was meant to be considered independently from your spreads and not mix deltas between the two positions. Here is what i was talking about. Let's take the first strategy that i mentioned.


Currently the SPY is at 129.85 and the APR 133 SPY puts are at 3.10/3.20 fot the B/A. If you split the B/A and buy the puts at 3.15 you are getting into a no loss position. So say you buy 1000 SPY and pay $129k, then you go ahead and buy 10 puts for $3150. you cant lose with this position no matter what as they will atleast offset each other when the market moves.

So say we go to SPX 1330 which is SPY 133, you will make anywhere between $0-$1000 based on how much theta will be left in the puts. Once it goes past $133 you make $1000 for each point or 10 SPX points minus the theta decay on the puts.

Say we reverse and go down, every point that your puts gain will offset the point you lose on the SPYs, so like i said, virtually no risk as you only pay for intrinsic values.

When i said it cost nothing i meant the risk was virtually nothing as you are paying for intrinsic only and no theta when you buy the puts. Of course it will still cost you to get into the two positions, which in this case is $129K half of which as you said you can still use for margin plus the $3150 for the puts.

The only $s lost on this position will be commissions, b/a spread on your way in/out and the interest rate you could've earned on the cash during the time you are in the position.

It isnt meant to hedge you, but just like what you do it will make you some money with virtually no risk.
 
The position you are talking about, buying SPY stock & buying In the Money puts, can be looked at as a "synthetic call".

The position you are describing is the same EXACT thing as buying the 133 Call.

look at the P&L profit potential of your spread and the P&L profit of owning the 133 call, they are the same
 
I would have to agree that this is a stock + protected put scenario which is the same as a synthetic call but with extra commissions. I doubt you will be able to buy the long put at the exact intrinsic value since a MM would not want to sell an ITM put at the intrinsic value afew strikes away. If you could, then where is the profit. Anywhere between $0 and 133 is a breakeven trade plus loss of commissions.

The only way a protected put makes money is if the stock moves above the breakeven point. Here a 3.15 gain in the SPY would be offset by the 3.15 loss in the puts.

I am very sleepy today so I am sorry if the math is wrong, but I do not see any profit unless the SPY gets over 133 by expiration. It might be the same thing as buying a 129 or 130 Call.



Quote from rallymode:

you totally lost me with this one. My strategy was meant to be considered independently from your spreads and not mix deltas between the two positions. Here is what i was talking about. Let's take the first strategy that i mentioned.


Currently the SPY is at 129.85 and the APR 133 SPY puts are at 3.10/3.20 fot the B/A. If you split the B/A and buy the puts at 3.15 you are getting into a no loss position. So say you buy 1000 SPY and pay $129k, then you go ahead and buy 10 puts for $3150. you cant lose with this position no matter what as they will atleast offset each other when the market moves.

So say we go to SPX 1330 which is SPY 133, you will make anywhere between $0-$1000 based on how much theta will be left in the puts. Once it goes past $133 you make $1000 for each point or 10 SPX points minus the theta decay on the puts.

Say we reverse and go down, every point that your puts gain will offset the point you lose on the SPYs, so like i said, virtually no risk as you only pay for intrinsic values.

When i said it cost nothing i meant the risk was virtually nothing as you are paying for intrinsic only and no theta when you buy the puts. Of course it will still cost you to get into the two positions, which in this case is $129K half of which as you said you can still use for margin plus the $3150 for the puts.

The only $s lost on this position will be commissions, b/a spread on your way in/out and the interest rate you could've earned on the cash during the time you are in the position.

It isnt meant to hedge you, but just like what you do it will make you some money with virtually no risk.
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Quote from knucklehead:



The position you are describing is the same EXACT thing as buying the 133 Call.

look at the P&L profit potential of your spread and the P&L profit of owning the 133 call, they are the same
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I am aware of that. but when you buy the 133 call you will be buying theta of .10-.15 per put which will decrease when the market moves down or stays the same. Even though it looks small, when you get into a larger position which you will need in light of the actual strategy we are trying to hedge, the pennies add up to alot.

In my suggestion you are breaking even as you are buying intrinsics ONLY.
 
The position you describe is not a synthetic 133 Call, it is more like a synthetic 129 Call or 130 Call or so. Depending on where SPY is at when you buy the stock and put.
 
Quote from optioncoach:

I would have to agree that this is a stock + protected put scenario which is the same as a synthetic call but with extra commissions. I doubt you will be able to buy the long put at the exact intrinsic value since a MM would not want to sell an ITM put at the intrinsic value afew strikes away.
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Well, the prices i quoted you were real time, if you aplit the bid/ask between the 3.10 and 3.20 which is very possible, then you ARE buying intrinsics.



Quote from optioncoach:


The only way a protected put makes money is if the stock moves above the breakeven point. Here a 3.15 gain in the SPY would be offset by the 3.15 loss in the puts.

I am very sleepy today so I am sorry if the math is wrong, but I do not see any profit unless the SPY gets over 133 by expiration. It might be the same thing as buying a 129 or 130 Call.
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Dont forget the theta, which will certainly exist after a sudden move up(which is exactly what you dont want with your spreads). I am not saying its perfect but it costs alot less than buying a straight out call with theta in it which you will definitely lose on if market stops or reverses. Of course it won't make you as much either but we cant have it both ways now can we?

Good discussion nevertheless.
 
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