SPX Credit Spread Trader

Quote from IV_Trader:

Mav , what about diff vols on diff strikes ? Both cannot be "placed" fairly , something has to give. If one can gamma scalping it , isn't an small edge ? And any large move in any detection is very welcome here.
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You'll simply hedge less size on the skewed-vols assuming implied vols are indicative of realized stat-vol. The edge, or lack thereof, will be reflected in the hedging frequency.

What concerns me of this "FairVal" talk is the guy who is proven right on vol, but misses that long gamma hedge by a few ticks. A buddy was long 30 Cu futures into the rally and missed his sigma-point by 4 ticks. It reversed to neutrality. Happens ever single day in every crowd of locals.

There is no difference in the expectancy of the long/short vertical. I am sure we're aware of that and the fallacy of models as well.

What makes the long spread "better" is gap-risk... if you're long the spread and spoos open down 100 on some event risk you're rich, at the expense of the seller. There is no analog for the short 2sigma credit spreader. Throw vols out the window. It's pure distribution risk. Can someone go 10 years or more selling upside gamma? Sure.
 
Mo:

Of course I think you're good for a lot more than just research. :) You're just really good at navigating, searching, threading, etc. this site.

I posted a question to Mav regarding program trading. I'd be curious to know what your opinion is on program trading and how it affects the markets, if at all.

Quote from momoneythansens:

Just curious on why you seem convinced of people's lack of understanding and more interestingly why it irks you so LOL.



Never fear, your long diatribe on this topic is well replicated on many other threads for those that are interested! (including this thread some 7 months ago). For those that aren't - they wouldn't have read it anyway.





That poor spiel. Hope you don't weigh too much.
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Quote from optioncoach:

What I do not understand is why if your argument is that they are the same, you argue for doing the debit over the credit?

Also, in the past year, my results show FOR ME only, not in general, that the debits would have been a loser just going on intraday swings of the spread, not holding to expiration. (I cannot assume I would have gotten out at the top of the spread value). I think the strikes I select are not conducive for debit spreads. If you took the other side of all my trades you would be flat more or less. I do not think we can discuss this in a vaccuum without looking at the SPX and IV skews and distance of strikes OTM.

This is not self-destructive as you say. If the debits are not self-destructive, then how could the credits, which you say are equivalent, then be self-destructive. If you can sell a debit spread before expiration, why cannot one get out of a credit spread before expiration if it is moving against you. You cannot assume a credit spread always goes to maximum risk when against you. It can be partially hedged quite easily and no one would sit in a spread as the market approached your short strike and watch it pass you by.

You present clear aguments why credits and debits are equivalent in theory but in practice they operate differently in a portoflio depending on how the positions are managed.

I already guaranteed that I will never blow up, never wipe out my capital account, never tkae my broker down with me and never be forced out of the trading game no matter what happens like a naked put seller would be (Niederhoffer). I also know my threshold for losses and what I can absrob and when to get out. Even a 9/11 event would not wipe me out, even less so if the futures market stays open.

The strategy is not the key, but how it is managed. Someone who feels more comfortable doing debit spreads and just waiting for the big bang (Taleb) can certainly do so if they have deep pockets but does it make his approach the right way? I can take a piece of my portfolio and generate monthly income year in and year out and manage my losses where appropriate.

Am I a good trader or just lucky? It would be wrong to assume it is pure luck since the risk is managed. Moreover, luck or skill are words people use to define others. The market has plenty of opportunities to make money and I am just taking mine :D.
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Phil,

My posts are not directed at you per se, you can relax now. LOL. I'm trying to express some general thoughts. Let me clarify something. Why are you assuming the long debit trader needs a big move. Can I not make .40 to .50 on a debit spread on a nice one day move in the SPX? Why do I need a 200 pt move to make money. I think some of you are confusing the idea of making long shot bets with debit spreads. We are not talking about the same thing. I am not refering to what many of you think Taleb does, that is buy puts 500 pts OTM waiting for a crash. I am refering to any spread that is long premium. I just wanted to make that a little more clear.

Phil, you skipped over what I said about p&l distribution. Debit spreads and credit spreads are both equal and in that the sum of their probabilities will be the same. The difference is in the p&l distribution. And that can be huge.
 
I understand what you are saying. I still think what you propose would work better on SPY or XSP for those that are interested because the SPX spreads will eat all of the $0.40 you can make.

One thing that is in line with what you are saying is that I am playing the VIX long call hedges on the notion of a fat tail spike in VIX. Assuming the VIX options move as I expect them to on a volatility spike (assumption which as of yet cannot be proven according to JA), then I could potentially make significant profits on such a spike even with the put spreads in place. This "hedge" is sort of playing the fat tails from the IV standpoint.

P.S. Why did you go back and edit and BOLD your last sentence LOL.....

P.S.S. Preferred sucks LOL

Quote from Maverick74:

Phil,

My posts are not directed at you per se, you can relax now. LOL. I'm trying to express some general thoughts. Let me clarify something. Why are you assuming the long debit trader needs a big move. Can I not make .40 to .50 on a debit spread on a nice one day move in the SPX? Why do I need a 200 pt move to make money. I think some of you are confusing the idea of making long shot bets with debit spreads. We are not talking about the same thing. I am not refering to what many of you think Taleb does, that is buy puts 500 pts OTM waiting for a crash. I am refering to any spread that is long premium. I just wanted to make that a little more clear.

Phil, you skipped over what I said about p&l distribution. Debit spreads and credit spreads are both equal and in that the sum of their probabilities will be the same. The difference is in the p&l distribution. And that can be huge.
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Short answer: I doubt I have any value-add on this topic but.....

Progressively tighter markets with the possible consequence of greater brittleness? Pure conjecture! Your guess is as good as mine.

Quote from rdemyan:

Mo:

Of course I think you're good for a lot more than just research. :) You're just really good at navigating, searching, threading, etc. this site.

I posted a question to Mav regarding program trading. I'd be curious to know what your opinion is on program trading and how it affects the markets, if at all.
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Hey Phil,

You like to demonstrate the validity of different strategies using real money. Why don't you run credit/debit spreads side by side, say 10 contracts a piece. Let's see which one does better. LOL:D
 
Uh oh, the last time a suggestion of doing a contra journal was raised, it didn't go too well :D Coincidentally (or not) it was about the same time that Maverick asked that special question LOL:

http://www.elitetrader.com/vb/showthread.php?s=&postid=870792#post870792


Quote from Cache Landing:

Hey Phil,

You like to demonstrate the validity of different strategies using real money. Why don't you run credit/debit spreads side by side, say 10 contracts a piece. Let's see which one does better. LOL:D
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I will get to it right after..

[pulling out list of 100 things to do by July!]

:D

I do not think the SPX is the best vehicle for the debit spreads so I would rather not put some of my duckets to test it ;)


Quote from Cache Landing:

Hey Phil,

You like to demonstrate the validity of different strategies using real money. Why don't you run credit/debit spreads side by side, say 10 contracts a piece. Let's see which one does better. LOL:D
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Did I prove you wrong at least about those "con-man" and "shill" cracks and how I had an alterior motive :D

Besides you made up for it with VT lol....
 
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