SPX Credit Spread Trader

Ryan:

With a large price swing in the SPX, the options get a little out of whack and the bid/ask spreads widen making it look like a large loss on paper. However, the spreads are still just under 20 points OTM and with 7 trading days left to go. Moreover, 1245 is a strong resistance level and today's rally can be seen watching the market absorb the worst of Katrina and hold up so some strong "patriotic" shopping today with momentum. Do not forget that a lot of money came back from vacation too!

Time decay will kick in and a few retracement days will help smooth out those wide spreads. However, if the market moves higher and triggers your adjustment point, then you will be rolling up to options which also have good premiums and this only taking a small bite on that adjustment.

It is hard to pull the emotion out with days like these but you have a good plan in place so have confidence in it!

Phil


Quote from ryank:

I have a bear call spread on SPX at 1250/1260. With the strong move up today we are very close to my "Warning" level of 1235, if we continue on the upward direction tomorrow there is no doubt we will hit that level. Right now my spread is showing a good loss but SPX showed resistance around 1245 before. With 9 more days to go I have to weigh out closing at a loss, buying SPY calls as a hedge or sitting tight.

Decisions, decisions, decisions...
ryan
More...
 
I placed some limit orders for SEPT call spreads but did not get filled so I took the opportunity to open some OCT spreads in my other account. This account which is where I am journaling the trades is filled with two large ICs so no room. I am just gonna let time decay to its thang!. My puts are deep deep OTM but one call spread is at 1250/1260. However, right now I still see 1245 as overhead resistance so I will most likely hold until expiration or at least 50% profit to get out since it is the strikes closest to the underlying index.

By next week I will most likely have sufficient enough profit to start rolling this account into OCT positions.

For those that are interest in my other account I opened some 1290/1300 for $0.60 ;).

Phil

Quote from pyhootie:

Coach,
With the spike up on the SPX - are you looking to squeeze some profits out of a call spread before expiration or will you start looking at Oct spreads.
Things are really quite here on the journal. Is everyone holding there breathe? lol
Pyhootie
More...
 
many kudos coach..for me, it is real nice to have a place to go with someone who will put the time in to mentor. i have daytraded and option traded, i much prefer options. can the theta decay in writing be considered an "edge"? if you believe so, why has not the market eliminated this? is it because options are more complex because of the large amount of possibilities inherent in credit spreads? or all we all doomed to a wipe-out in that account dedicated to options? i certainaly hope not myself,i have for years sold at say, 1 and bought back at .5. this has worked even when the market went against me, i guess it has not gone enough for a wipeout. sorry for the philosphy, but where else can i get this off my chest?

ps: i did oct spx 1280/1290 for 1.10 today
 
I'm more inclined to sight tight for now. I think we had some good news coming in over the weekend concerning the situations down south and a drop in oil. You are right, alot of money is coming back from vacation and the bid/ask spreads are a little wacky right now on the calls. We will have to see how volume goes this week to support the moves as well. I have already closed out a call spread for a profit this month so if I can get back to even or break even on this spread I am well ahead for the month.

ryan


Quote from optioncoach:

Ryan:

With a large price swing in the SPX, the options get a little out of whack and the bid/ask spreads widen making it look like a large loss on paper. However, the spreads are still just under 20 points OTM and with 7 trading days left to go. Moreover, 1245 is a strong resistance level and today's rally can be seen watching the market absorb the worst of Katrina and hold up so some strong "patriotic" shopping today with momentum. Do not forget that a lot of money came back from vacation too!

Time decay will kick in and a few retracement days will help smooth out those wide spreads. However, if the market moves higher and triggers your adjustment point, then you will be rolling up to options which also have good premiums and this only taking a small bite on that adjustment.

It is hard to pull the emotion out with days like these but you have a good plan in place so have confidence in it!

Phil
More...
 
Many people talk about the edge in selling credit spreads with respect to time decay. But for every OTM credit spread there is an equivalent ITM debit spread which also benefits from time decay. So time decay alone in a vacuum is not an edge solely reserved for credit spreads. Time decay is something that cannot be taken out of the market because options are wasting assets and more time means more value and less time is less value.

The key is not that time decay gives you an edge, it is that you use time decay to your advantage. If you are long a straddle, then time decay is not an edge at all but a negative. So it is not time decay alone that matters but how you use it.

I use it in selling OTM spreads with 45 days or less to expiration so that even if the market goes nowhere my spread will slowly become profitable. Also evne if the market is moving against me but time is real short, then time decay balances out negative deltas to an extent. I am using time decay as sort of a risk management tool. Avoiding selling spreads with long time periods to expiration means that I can allow time decay to work for me.

As for your OCT spread, nice grab!

Phil


Quote from domestic:

many kudos coach..for me, it is real nice to have a place to go with someone who will put the time in to mentor. i have daytraded and option traded, i much prefer options. can the theta decay in writing be considered an "edge"? if you believe so, why has not the market eliminated this? is it because options are more complex because of the large amount of possibilities inherent in credit spreads? or all we all doomed to a wipe-out in that account dedicated to options? i certainaly hope not myself,i have for years sold at say, 1 and bought back at .5. this has worked even when the market went against me, i guess it has not gone enough for a wipeout. sorry for the philosphy, but where else can i get this off my chest?

ps: i did oct spx 1280/1290 for 1.10 today
More...
 
Hey there coach,

Just listened to your radio program from DC 700, and it was very interesting. I've been trading CS's and IC's for about 1.5yrs now, and agree with everything you have to say. I just finished reading the *entire* 85 pages of this thread...wheew I my eyes need a break. Anyway, early on you mentioned that you look at the Delta's when finding spreads as well as market conditions. How do you calculate the deltas for a spread position? I use OX and I know where they list the delta's for the option, but I want to get the calculation for the combined delta correct.


I'm not a "greek" follower, just thought I could add another tool to the shed.

Also I trade the OEX/RUT/SPX a lot and I threw on this IC trade between today/yesterday. I'm thinking about consolidating though around the SPX/RUT and looking at the NDX.

10 OEX OCT 590/600 Bear Call
10 OEX OCT 520/530 Bull Put
Credit of $1.35

Thanks,
Shawn
 
Is it possible to hear the radio program on internet?

Quote from skdoyle1:

Hey there coach,

Just listened to your radio program from DC 700, and it was very interesting.
More...
 
Quote from skdoyle1:

...Anyway, early on you mentioned that you look at the Delta's when finding spreads as well as market conditions. How do you calculate the deltas for a spread position? I use OX and I know where they list the delta's for the option, but I want to get the calculation for the combined delta correct. ...
More...

Just add up the individual Deltas and you have the spread's Delta. For example, long call Delta 0.3, short call Delta 0.5. Spread Delta is -0.2 (0.3-0.5=-0.2).
 
Shawn

Gald you tuned into the show. I did a basic show because I was gonna have a lot of newbies in so I hope it did not drag for ya! But showing people why options, when used correctly, are not too risky and actually can be used to reduce your risk and increase your returns will get a lot of newbies interested. I will work in mroe advanced topics and Q & A segments as well so that everyone can get something out of the show.

As for delta, I actually focus only on the delta of the short strike since that is where I want to manage my risk. I use the delta as a general estimate of % probability of finishing ITM and for risk control so I do not look at the delta of the entire spread. Nothing at all wrong with looking at it on a spread basis and just add the deltas of the spread together to get your net delta of the position.

I did credit spreads on OEX last in MAY but have not touched them since. Just found my groove with the SPX but will add some OEX spreads when I can. good luck with that position.

Phil

P.S. If you are interested in the radio show, it is every Wednesday from 12:30 - 1:00 PM EST and you can tune in on line at www.washingtonbusinessradio.com


Phil

Quote from skdoyle1:

Hey there coach,

Just listened to your radio program from DC 700, and it was very interesting. I've been trading CS's and IC's for about 1.5yrs now, and agree with everything you have to say. I just finished reading the *entire* 85 pages of this thread...wheew I my eyes need a break. Anyway, early on you mentioned that you look at the Delta's when finding spreads as well as market conditions. How do you calculate the deltas for a spread position? I use OX and I know where they list the delta's for the option, but I want to get the calculation for the combined delta correct.


I'm not a "greek" follower, just thought I could add another tool to the shed.

Also I trade the OEX/RUT/SPX a lot and I threw on this IC trade between today/yesterday. I'm thinking about consolidating though around the SPX/RUT and looking at the NDX.

10 OEX OCT 590/600 Bear Call
10 OEX OCT 520/530 Bull Put
Credit of $1.35

Thanks,
Shawn
More...
 
You must log in or register to reply here.
Back
Top