SPX Credit Spread Trader

Phil,

When you choose the strikes, I know you look at support, resistance, trend lines,.... all the TA stuff. But do you also look at probability (other than the short strike deltas) in the way it's used on the TOS platform (prob cones, prob of touching, prob of expiring, all based on current front-month ATM vol)?

I'm asking because it seems that TA-based short strikes sometimes are quite different than prob-based short strikes.... which do you use to determine your short strikes?
 
This link will give you some idea of the gaps in the S&P 500 during large events:

http://storage.msn.com/x1pmAkndzHuO...6B1udMlMM6YB7ThOqQTn7iXnTHC_ovshLlKb8Jz_B0GF6

Quote from andysmith:

SmilingSynic,

I think Phil has a valid point. If you're warning readers that a black swan can end a trading career after years of profitability then suggest a constructive risk mitigation plan (simultaneous spreads on currency, index, soybeans, corn, and energy for diversification?) instead of just saying "beware, stay away".

Present some historical data of when and how much the SPX has gapped (my point being the SPX is resilient to multi-percentage gaps) and how one might have controlled damage.

Suggest some guidelines on the "right" market conditions for credit spreads (in your experience when vol exceeded such-and-such, credit spreads did not work)...
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I mainly use technical analysis and I use delta of the strikes as a quick snapshot probability calculation (not perfect but good theoretical estimate). ToS's probabilities may depend entirely on the inputs so it is hard to say how they derive their probs. I use the probs as an initial guide but as the market moves around those probs can change daily. So it is just an initial screening tool for more information.

Support and resistance and current trends are the main factors I use. I also look ahead for the month to see what catalysts are out there. For example Elections are coming up, post Katrina clean-up costs and issues, Fed meeting where they may take a break from rate hikes, etc... Economic reports such as jobs reports and the market reaction give me a sense of market sentiment. If the market shoots out of the box on good news but it fades throughout the day and ends flat, then I know that the bulls do not have enough stength and there is still downside weakness.

basically, you need to take in the whole picture with as many tools as you feel comfortable using in order to select the strikes.

The more you follow the S&P or the Nasdaq or RUT or whichever index you do this one, the more familair you will become with the patterns and swings to make better decisions.

Phil

Quote from andysmith:

Phil,

When you choose the strikes, I know you look at support, resistance, trend lines,.... all the TA stuff. But do you also look at probability (other than the short strike deltas) in the way it's used on the TOS platform (prob cones, prob of touching, prob of expiring, all based on current front-month ATM vol)?

I'm asking because it seems that TA-based short strikes sometimes are quite different than prob-based short strikes.... which do you use to determine your short strikes?
More...
 
I opened 127/128 Bear Call spread w/ 5 contracts. So, I have put up $500 in margin. If I were to open another Bear Call spread let's say a 129/130, I would have to put up another $500 margin, right?

Thanks.
 
Ryan,

Your link is quite eye opening. The gaps have not been as large as I imagined.

Nevertheless, a modern day event such as 9/11 can cause a 5% gap (around 60 points). If it a) happened near expiration and b) the index was already close to the short put strike and c) there was a huge increase in vol (as is expected), it would be very expensive to get out. Frankly, I doubt one would be able to get out at any price; I understand liquidity just disappears in cases like this. OK, this would be a disaster.

The question is, what does one do? I'm looking at diversification, i.e. trading 4 or 5 uncorellated instruments.

That said, I'm not sure if it's worth spending more time thinking about this. I live in California. The three disasters that will change are lives are predicted to be a) a terrorist attack, b) a hurricane, c) an earthquake in CA. Well, looks like it's time to shake rattle and roll. But I'm not going to leave even though some say we'll be part of the Pacific soon.
 
I understand that Gamma, is the first derivative of delta, and Vega is the amount change with a 1% change in the underlying's volatility.

But, what do you guys mean when you are shorting, Vega and/or Gamma??

Thanks.
 
2 different bear call spreads so 2 different margin requirements.

Phil

Quote from daytrader85:

I opened 127/128 Bear Call spread w/ 5 contracts. So, I have put up $500 in margin. If I were to open another Bear Call spread let's say a 129/130, I would have to put up another $500 margin, right?

Thanks.
More...
 
Andy:

Which instruments have you found that are not correlated in the event of a disaster. I'm not experienced in differing types of investments, but maybe commodities would not react the same as stocks. With a major disaster, it seems like all stock indices would correlate and would drop sharply.

Personally, I would like to hedge all of my bull put credit spreads on the SPX somehow, but it looks like nothing will provide a 100% hedge (when entered into at the same time the bull put spread is entered) and still provide an overall net credit.

Quote from andysmith:

Ryan,

Your link is quite eye opening. The gaps have not been as large as I imagined.

Nevertheless, a modern day event such as 9/11 can cause a 5% gap (around 60 points). If it a) happened near expiration and b) the index was already close to the short put strike and c) there was a huge increase in vol (as is expected), it would be very expensive to get out. Frankly, I doubt one would be able to get out at any price; I understand liquidity just disappears in cases like this. OK, this would be a disaster.

The question is, what does one do? I'm looking at diversification, i.e. trading 4 or 5 uncorellated instruments.

That said, I'm not sure if it's worth spending more time thinking about this. I live in California. The three disasters that will change are lives are predicted to be a) a terrorist attack, b) a hurricane, c) an earthquake in CA. Well, looks like it's time to shake rattle and roll. But I'm not going to leave even though some say we'll be part of the Pacific soon.
More...
 
Quote from optioncoach:

Just avoid the thread so the rest of us can focus on the topic. It is not a strategy for you. We understand.

Thank you

Phil
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I said "it is not a bad strategy."

I make valid criticisms of the strategy, and do so in a nice way, and you respond by telling me to go away.

How mature.
 
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