SPX Credit Spread Trader

[BoSox1962]

That's what I thought, just wanted to clarify. Question, why only20%? If you are going far enough OTM and you have a proactive adjustment / hedge strategy, seems you have room to increase the allocation and still have enough to made adjustments.

Not intented to be crictical, just wanted to understand your thought process

Quote from rdemyan:

About 20% of the account amount is what I meant. So the margin is about 20% of the account (I trade round lots so it's not exact).

 

[El OchoCinco]

I cannot answer for him naturally but I cna explain why I recommend a % of your portfolio for this strategy. First, in his example, he can use 20% to 40% of his portfolio to earn 10 - 15% perhaps on the entire portfolio and take advantage of the leverage. He also could have the 100% invested in other assets adding to the overall portfolio return. So if you take the lowest form and put the 100% in t-bills you make about 4.5% a year. Add using up to 40 or 50% of your portfolio for another 20% perhaps and you get close to 25% on the year. If the spreads take huge hits, you do no wipe out your account and at least have 4.5% in interest to partially offset some losses.

You could also put the portfolio in closed-end funds or dividend stocks and eanr a separate return their (with its own individual risks of course) and combine it with credit spreads.

Lots of choices here but keeping the credit spread risk margin less than 100% of your total portfolio is a good idea for others to follow. Whether that is 20% or even 90% is up to you really.

Quote from BoSox1962:

That's what I thought, just wanted to clarify. Question, why only20%? If you are going far enough OTM and you have a proactive adjustment / hedge strategy, seems you have room to increase the allocation and still have enough to made adjustments.

Not intented to be crictical, just wanted to understand your thought process

 

[rdemyan]

I blew up my non-IRA account last summer, so my strategy has become much more conservative than it was back then. The 20% amount is just for this month. After May expiration it will go up to 40% because I expect to also have a July position to go along with the June position.

I suspect that a lot of traders here have not experienced a huge loss (30% of the portfolio). At least for me, once that happened, it changed my whole perspective on trading spreads.

Also, I think I'll take this opportunity to probe Coach's response on posts regarding black swan events. It seems that all of Coach's responses on how he'll manage black swan events include shorting futures. Yes, he's started doing VIX options as well as a hedge, and I've joined him on this, but it still sounds like he'll rely mostly on shorting futures to mitigate black swan events.

What if you don't trade futures? Does everyone here who puts on bull put spreads trade futures as well or is everyone prepared to short futures if the black swan hits?

I know I'm not and I also know that when I'm facing huge losses my emotional state causes me to make mistakes. For me that would not be a good time to learn about shorting futures.

Quote from BoSox1962:

That's what I thought, just wanted to clarify. Question, why only20%? If you are going far enough OTM and you have a proactive adjustment / hedge strategy, seems you have room to increase the allocation and still have enough to made adjustments.

Not intented to be crictical, just wanted to understand your thought process

 

[andysmith]

spreader, when you have to roll, how often do you roll to the next month (and of course further away from the money)?

Quote from spreader2:

Thinking the same Donna. Since 1240 is below the 200 dma and we're 22 days out, I thought I'd give it a try. Plenty of strikes open for June now to roll too, so if we get a substantial break, that's where I'm headed. I may also use the SPY's to hedge off some of that risk if it starts to get carried away.

Thanks for your input Donna. Holler if you decide to bail to June. I'll be watching...

 

[rallymode]

Quote from optioncoach:

So if you take the lowest form and put the 100% in t-bills you make about 4.5% a year. Add using up to 40 or 50% of your portfolio for another 20% perhaps and you get close to 25% on the year. If the spreads take huge hits, you do no wipe out your account and at least have 4.5% in interest to partially offset some losses.

I agree. That's the same thing i do. I think its a great diversification for a conservative account such as an IRA account.

rdemyan,

one question on your strategy, why go 2 months out? Yea, its a better credit but what about exit. Are you going to close the spread after one month or will you hold till expiry?

 

[rallymode]

Quote from rdemyan:



I suspect that a lot of traders here have not experienced a huge loss (30% of the portfolio). At least for me, once that happened, it changed my whole perspective on trading spreads.

My aggressive account was cut in half in 2001, that was big wake up call to educate myself further in risk management.

 

[spreader2]

Quote from andysmith:

spreader, when you have to roll, how often do you roll to the next month (and of course further away from the money)?

Basically, when rolling to the next month, I'm buying time. I try to do it for a credit if possible, but it is certainly cheaper to roll out because of the time value premium involved vs. rolling up/down within the same month. A lot of it has to do with the market behavior at that point in time too. I don't rule out just closing out the position either, but first I look for opportunities to roll. The end result is that after I roll, I should be in a better overall position than before the adjustment. If not, I cut my losses and walk. Since my spreads tend to be far OTM, I don't have to roll often, but every once in a while the market gets too close for comfort and I have to either roll or bail. It's a judgement call at that point.

 

[ChrisM]

Quote from rallymode:

My aggressive account was cut in half in 2001, that was big wake up call to educate myself further in risk management.

Another thread on ET was about certificates (what financial certs are being used).

My favorite certificate was BTA ...(here number e.g. 1) which means: blown trading account (once).

 

[rdemyan]

My initial plan is to get out of these spreads if at any time I can buy them back for $0.10 or less and assuming we are still a couple of weeks from expiration. However, i am prepared to hold on until expiration.

Two months out is because I want to go really FOTM and with bear calls the credit received is less than with bull puts. So I'm attempting a strategy that puts on the spread 7 to 8 weeks ahead of expiration in order to get more credit. To mitigate the increased risk, I'll go further FOTM and I'm going to restrict the % of my portfolio devoted to credit spreads. But I have no intention of putting on the two month out spread before the two month prior expiration. So I won't put on a July spread until the May options expire.

Do I have all of the answers. No. Do I have mounds of quantitative analysis supporting all of my numbers. No. And, let's face it the concept of FOTM really only applies at the moment you put the spread on. A week after it might not be so far out of the money anymore.

I'm just looking for a conservative strategy that doesn't require that I know with a great degree of certainty which direction the market is headed, will give me a fairly good return and hopefully cause me not to sweat. Further, I'm fully prepared to sit out if the market appears to be making a strong move up.

Finally, I do follow Mike Parnos' trades (he's been mentioned a couple of times on this thread; he has a subscription service), and he does seem to have success when he puts SPX trades on 7 weeks in advance (rarely 8 weeks). I believe in the 14 months I've watched his trades, he hasn't had to adjust once or lost any money on an SPX trade put on 7 or more weeks till expiration. He also goes quite FOTM.

I'll have to see how it goes.

Quote from rallymode:

I agree. That's the same thing i do. I think its a great diversification for a conservative account such as an IRA account.

rdemyan,

one question on your strategy, why go 2 months out? Yea, its a better credit but what about exit. Are you going to close the spread after one month or will you hold till expiry?

 

[El OchoCinco]

I got my BTA in the mid 1990's lol.....

Quote from ChrisM:

Another thread on ET was about certificates (what financial certs are being used).

My favorite certificate was BTA ...(here number e.g. 1) which means: blown trading account (once).