SPX Credit Spread Trader

[Cache Landing]

Quote from rallymode:

30% in 5 months is not bad you guess?

You are being modest. Cache, you've said this before i am sure but what is your max risk per position and your max drawdown so far?

What do you mean? I don't have drawdowns!

How's that for modest? LOL No seriously, are you referring to the journal or my real account?

By risk I'm assuming you mean the point where I will exit or adjust the position, not the amount of margin at risk. My max risk is different for each position. I don't have a strict standard that I follow, but I do have a general guideline. Of course, my biggest realized drawdown so far was when I lowered my stop on BAC. Lost about 2.5% of "journal" capital. As far as unrealized losses go. They are kind of the nature of the beast, so I don't know how accurate I could be if I tried to estimate.

 

[rallymode]

Quote from Cache Landing:

What do you mean? I don't have drawdowns!

How's that for modest? LOL No seriously, are you referring to the journal or my real account?

By risk I'm assuming you mean the point where I will exit or adjust the position, not the amount of margin at risk. My max risk is different for each position. I don't have a strict standard that I follow, but I do have a general guideline. Of course, my biggest realized drawdown so far was when I lowered my stop on BAC. Lost about 2.5% of "journal" capital. As far as unrealized losses go. They are kind of the nature of the beast, so I don't know how accurate I could be if I tried to estimate.

Well i asked about the journal account, unless you want to share your real account performance.

I didnt mean your margin risk, i meant the max risk you will take per trade before you adjust or close as a % of port value. Do you have a set amount per position or an average or anything at all?

By drawdown i meant the max cut that losses have taken out of your port value as % of total. It could be after a single loser or a sequence of losers and winners.

30% gain in 5 months with only 2.5% drawdown is a great return. :eek:

 

[dagnyt]

Coach,

I notice you own VIX calls as a hedge against OTM SPX put spreads. Question: Is this really a good hedge? What happens in VIX soars due to a big market decline - but by the time your European calls expire, the VIX has returned to it's pre-decline levels?

What I am really asking is: mustn't you own American style options to guarantee being able to sell them at a large profit?

Mark

 

[knucklehead]

Quote from rallymode:

knucklehead,

just saw your post and no disrespect but me could care less about losing up value on a potential FLY.

I couldnt disagree more with ya and here is why:

Per my previous example.

1340/1345 bear call spread for $1
1340/1350 bear call spread for $2

You open 2 1340/1345's and collect $200.
I open 1 1340/1350 and collect $200.

The SET on expiration Fri is at 1341. You break even, i make $100. So who got the better spread? You see my point?

Hi RallyMode,

No disrespect taken,

I liked your example but you had me buy the wrong 5 point call spread.

The example should have had me buy the 1345/1350 call spread.

This is SUPER important, because I would rather own the 1340/1350 call spread 1 time rather than 2 of the 1345/1350 call spreads.

Assuming $2 was paid for the 10 pt spread and $1 was paid 2 times for the 5 point spread the following p&l occurs at expiration:

below 1340 both lose $200

1342 10 point spread breaks even 5 point spreads loses $200

1244 10 point spread makes $200 5 point spreads loses $200

1246 10 point spread makes $400 5 point spreads breaks even

1248 10 point spread makes $600 5 point spreads makes $400

1250 and above 10 point spread makes $800 5 point spreads make $800

Based on this it is ALWAYS better to own 1 10 point spread rather than 2 5 point spreads because between 1340 and 1350 you will make more money (you own a "synthetic" butterfly).

That is my logic in determining what the 10 point spread is worth. 2 times the five point spread + the butterfly.

That is why I was saying in my previous post that if you can sell 2 5 point spreads for $1 then DO NOT sell the 10 point spread for $2! Sell it for $2 Plus what the butterfly is worth.

Your argument was based on the wrong 5 point spread. I see your logic and it makes sense you came up with your conclusion but go back and you'll see that you shoud be looking at 2 of the 1345/1350 call spreads.

Sorry for the long post,

Knucklehead

 

[El OchoCinco]

Welcome MARK! No monkey poop here just options and JA pics

The goal is that if the VIX options behave as expected I would sell the calls on the surge and pocket the profits as a hedge against losses in the spreads. For example, I have 75 of the MAY 15 Calls at $0.65. If they jumped to $10.00 on the bid, it would be a profit of $70,000 to close. Assuming I have an unrealized loss of about $100,000 it would go a long way to reducing the potential loss. The real expectation is that if VIX spikes to 30 and the 15 Calls are worth close to intrinsic with a wide b/a spread then I could possible get out for $13.00 maybe and a profit of $92,000. I am basically looking to make a significant dent in the unrealized loss in the spread which I would adjust down if time was on my side and I fellt the move was down or get out entirely and take the smaller net loss and live to trade another day.

In this VIX example I have about $5,000 in VIX options using the 15 and 20 strikes which could be worth about $150,000 on a large VIX spike-assuming the operate as expected (major assumption underlying this hedge). The overall goal is to sell them and pocket the proceeds to use against the potential loss in the spreads.

Quote from dagnyt:

Coach,

I notice you own VIX calls as a hedge against OTM SPX put spreads. Question: Is this really a good hedge? What happens in VIX soars due to a big market decline - but by the time your European calls expire, the VIX has returned to it's pre-decline levels?

What I am really asking is: mustn't you own American style options to guarantee being able to sell them at a large profit?

Mark

 

[Cache Landing]

Quote from rallymode:

Well i asked about the journal account, unless you want to share your real account performance.

I didnt mean your margin risk, i meant the max risk you will take per trade before you adjust or close as a % of port value. Do you have a set amount per position or an average or anything at all?

30% gain in 5 months with only 2.5% drawdown is a great return. :eek:

Well, it is hard to specify a single percentage for my max risk because it really depends on the strategy for the trade. The max risk is created during analysis when I am formulating a contingency plan for the trade. I don't just expect that the trade will go my way. I also have to decide at what point I will conclude that the trade has turned against me. This is usually not based on a percentage loss, but when s/r has been broken. I use all the tools at my disposal to determine a theoretical exit price at that point in time. If the r/r is favorable then I will open the trade with that stop in mind.

As far as my real account goes; I don't think it is necessary to share the results here. The only reason that I share the results from the journal is that I try to post the trades very close to real time, so the PnL there is public knowledge. I keep the journal as practice for something else and had originally intended for it to be somewhat hypothetical, but OC inspired me to put my money where my mouth is. So I ended up creating a 10K account and have actually made all the trades that I've posted. Conveniently it also serves as a place where credit spreads on equities can be discussed without littering Coach's thread.

Anyway, back to SPX spreads now....

 

[rallymode]

Quote from knucklehead:



Your argument was based on the wrong 5 point spread. I see your logic and it makes sense you came up with your conclusion but go back and you'll see that you shoud be looking at 2 of the 1345/1350 call spreads.

Sorry for the long post,

Knucklehead

It's all good. I was talking about the two spreads having the same short strike which would be 1340 in the example. I wouldnt even compare 1340 short strike with a 1345 short strike for the sake of my strategy as they would have completely different odds. Again, i see your point about the free fly and thank you for bringing it up as i havent thought of it that way before.

 

[rallymode]

Quote from Cache Landing:

Well, it is hard to specify a single percentage for my max risk because it really depends on the strategy for the trade. The max risk is created during analysis when I am formulating a contingency plan for the trade. I don't just expect that the trade will go my way. I also have to decide at what point I will conclude that the trade has turned against me. This is usually not based on a percentage loss, but when s/r has been broken. I use all the tools at my disposal to determine a theoretical exit price at that point in time. If the r/r is favorable then I will open the trade with that stop in mind.

As far as my real account goes; I don't think it is necessary to share the results here. The only reason that I share the results from the journal is that I try to post the trades very close to real time, so the PnL there is public knowledge. I keep the journal as practice for something else and had originally intended for it to be somewhat hypothetical, but OC inspired me to put my money where my mouth is. So I ended up creating a 10K account and have actually made all the trades that I've posted. Conveniently it also serves as a place where credit spreads on equities can be discussed without littering Coach's thread.

Anyway, back to SPX spreads now....

thank you for your comments, keep up the good returns

EDIT: i guess those May SPX bear call spreads might be safe after all

 

[dagnyt]

Hi Coach,

Glad to be here with the grownups.

My point is that the VIX options might not jump to $10. They might not even move to $2. (I was not suggesting that you hold them until expiration.)

I'm concerned because they are European options and frequently trade under parity. What if 'everyone just knows' that the panic selling was simply a panic and that the market volatility will 'return to normal' very quickly? If that happens, there might be NO BUYERS for your VIX calls.

Farfetched? Perhpas, but all I am saying is that I am concerned that those options might turn out to be a poor hedge under the scenario I describred.

Mark

 

[Sailing]

Coach,

May/June Diagonal Update:

Original Position for small credit (no downside risk):

Long 500 SPX June 1375c
Short 300 SPX May 1340c


One of our club members on the recent run-up in the SPX, decided to sell his remaining shorts left from his original diagonal position above. What was nice, is he took in a substantial credit by selling the remaining 200 calls. I believe he sold 100 May 1350s & 100 May 1360s, yesterday.... as the market has gone up 25 points since his intial inception of the trade.

He is now deciding if he should use the additional credit as profit for May expiration, or buy additional June 1375 longs for added upside protection, (and potential profit should the SPX move up from here).

Adjustment:

Short 100 May 1350s
Short 100 May 1360s



Summary to Date:

The position was put on for a small credit. (1% profit if market closes below 1340 in May) Original breakeven was around 1345, pending on the volatility in the June 1375c. As the market has moved up, the shorts are looking to expire worthless, while the longs for June have increased 18% to date. The original profit potential was around 25%. With the additional shorts added to the original position, profit potential has increased to over 35%, pending on the value of the long June 1375 calls.

Phil, The comfort level of this Diagonal Strategy is completely different than that of a Condor. Just removing the risk associated with the 'Black Swan" event is so inviting..

Also, the ability to adjust, roll into a Condor and then into a double Butterfly for free (pending volatilty) is also a great asset. The return on risk and the overall portfolio adjustment capabilities really make this strategy unique. Sure hope you're experiencing the same.

Your thoughts appreciated,

Murray