SPX Credit Spread Trader

[domestic]

Quote from rallymode:

domestic,
one could argue that following one's standard risk management rules goes hand in hand with being in the comfort zone or piece of mind. Those two arent necessarily mutually exclusive

Still whether i agree with it or not, props to phil for adjusting and posting about it.

all of us can explain our points better. what i really meant is.......comfort zone or piece of mind is part of the definition of his risk management rules...among i am sure many other criteria to make the whole.

i also see the point that ivtrader is making. i still like oc's angle better. macro view vs micro view.

 

[dagnyt]

Quote from optioncoach:


Don't forget... profits already banked on my JUNE positions.

Coach, I don't believe banked profits are relevant. That's like the blackjack player saying that he has taken his initial stake off the table and is playing with house money.' Once he has won the money, it belongs to the player, not the house.

 

[El OchoCinco]

Well I am not referring to banked profits in general, the puts are the second piece of the Iron Condor I put on. I track my spreads month to month and these are my June positions. I look at my collective positions each month to help me make decisions on adjustments or hedges.

Quote from dagnyt:

Coach, I don't believe banked profits are relevant. That's like the blackjack player saying that he has taken his initial stake off the table and is playing with house money.' Once he has won the money, it belongs to the player, not the house.

 

[smilingsynic]

Quote from rallymode:

Yep, love them too. Margin benefits are incredible, low liquidity though so you must be good at legging in if you want nice fills on multi leg positions. Friend of mine trades through ox and told me they were working on adding them to their platform, i am somehow dubious that would happen anytime soon though. So IB might be the only retail provider for a while.

EDIT: I think tradestation has them too if i am not mistaken.

ES options actually have pretty good liquidity. The spreads are a bit rich, though they are better than they used to be.

 

[rallymode]

Quote from domestic:



i also see the point that ivtrader is making. i still like oc's angle better. macro view vs micro view.

I am not sure i understand the implication of having a macro vs micro view on this one. I would tend to agree with IV_trader regarding treating the two positions as stand alone positions. In my opinion combining positions PnL's like that is detrimental to one's success. Here is my view and it is somewhat derived from Cottle's approach with respect to adjustments and building of positions. When you consider the gain from one position(in this case the call side) to offset losses on another position(in this case the put side) you are doing one thing for certain. You are NOT being properly compensated for the initial risk you took on the first position. I don't think many here will disagree that in this business it's important to get paid for the risk you take. When you dont get paid or you get paid less, over the long term, you are as good as dead.

In my opinion it is prudent to distinguish the two positions as independent from one another. After all the IC wasnt put on at one time. Risk was taken with the first side at the outset and you are getting paid squat for it since your gains went to cover your put side trade. While it appears you are better off since you lost nothing, it is just an illusion. You did lose and thats the profit on the first trade which was already as good as booked. Again, i am sure i am in the minority with this one too.

 

[jeffm]

Quote from rallymode:

Yep, love them too. Margin benefits are incredible, low liquidity though so you must be good at legging in if you want nice fills on multi leg positions.

Quick example on ES vs SPX options. The strike below isn't FOTM, but its illustrative regardless. SEP ES currently has about 10 pts of premium; I'm ignoring that for the examples below. Margin requirements are from IB.

ES ~ 1237
ES JUL 1200 Put 18 bid 18.75 ask
Margin to sell naked the 1200P: $2200
-1200/+1190 spread 1.5 x 3.0
Margin to sell the 1200/1190: $930

SPX ~ 1227
JUL 1200 Put 18.5 bid 20.10 ask
Margin to sell 1200P naked: $18758
-1200/+1190 spread 0.9 x 3.9
Margin to sell 1200/1190: $1858

ES is $50/pt, versus SPX $100/pt. So doubling the ES spread margin makes it similar to SPX.

On ES, the market you see on your screen *is* the market. So while the ES spread is much tighter, you won't be able to play around in between the spread. If you put your order inside the spread, *your* order becomes the new bid or ask. With ES, you give up a bit in that regard. However, you also don't have the huge execution risk you encounter on SPX. I.e. if the market hits your price...you're filled. No calling the order desk and hoping they can get their buddy in the pit to work your order. No haggling over the midpoint. If you like the number on your screen, make the trade and you're done.

SPX certainly has a ton more volume, not that the extra volume is reflected in the wideass spread. ES usually has 200 to 400 contracts listed on each side. I don't trade size on ES, so I can't comment on how easy the fills are for orders over the size listed. SPX you can trade as big as you want. Same is true for SP options, but then you're back in a pit same as SPX.

 

[rallymode]

Quote from jeffm:

Quick example on ES vs SPX options. The strike below isn't FOTM, but its illustrative regardless. SEP ES currently has about 10 pts of premium; I'm ignoring that for the examples below. Margin requirements are from IB.

ES ~ 1237
ES JUL 1200 Put 18 bid 18.75 ask
Margin to sell naked the 1200P: $2200
-1200/+1190 spread 1.5 x 3.0
Margin to sell the 1200/1190: $930

SPX ~ 1227
JUL 1200 Put 18.5 bid 20.10 ask
Margin to sell 1200P naked: $18758
-1200/+1190 spread 0.9 x 3.9
Margin to sell 1200/1190: $1858

ES is $50/pt, versus SPX $100/pt. So doubling the ES spread margin makes it similar to SPX.

On ES, the market you see on your screen *is* the market. So while the ES spread is much tighter, you won't be able to play around in between the spread. If you put your order inside the spread, *your* order becomes the new bid or ask. With ES, you give up a bit in that regard. However, you also don't have the huge execution risk you encounter on SPX. I.e. if the market hits your price...you're filled. No calling the order desk and hoping they can get their buddy in the pit to work your order. No haggling over the midpoint. If you like the number on your screen, make the trade and you're done.

SPX certainly has a ton more volume, not that the extra volume is reflected in the wideass spread. ES usually has 200 to 400 contracts listed on each side. I don't trade size on ES, so I can't comment on how easy the fills are for orders over the size listed. SPX you can trade as big as you want. Same is true for SP options, but then you're back in a pit same as SPX.

Great summary, i am sure you've noticed it too but i would like to add one more thing for those interested in ES options. Sometimes it's possible to "play" between the bid and ask and get a fill but you have to be willing to watch the quotes continuously and wait for a smaller player to split them and hope they are taking the opposing side. Of course, you cant do size. My experience is a 10-20 lot position can be filled mid point if you are willing to sit and watch the screen all day. Now, whether that's worth it, i will let you decide

 

[rallymode]

phil or anyone else reading along,

question regarding a fill i just got. I wont mention the trade or instrument but it was a debit spread that was ITM though not relatively deep and i was trying to get out of. The max profit was the $2 spread and i was filled at $2 on a limit order to sell at $1.95 which was the mid. Position size was 10 contracts.

I guess my question is, why would anyone take the opposing side of that trade? A MM trying to be get flat will certainly have better options than filling me. Anyone with MM experience willing to shed some light as i am puzzled. 2nd time this has happened to me this year.

 

[dojiboy007]

Coach;
I seem to recall your mentioning a long while back that you knew someone at a hedge fund who was trading very wide credit spreads, ie 10x100pt spreads instead of 100x10pt spreads. I am curious to know how his positions have fared these last few weeks what steps he has taken to manage/adjust. Appologies in advance if it was not you who said this.
Thanks

 

[El OchoCinco]

It was me who said that and I was thinking of him actually. He is the one who described the VIX hedges to me. I think he might have had the 1200 strike but knowing his approach he probably bought thousands of the JUNE 20.00 VIX Calls at around $0.40 or so. Given the huge volume he buys and the large open interest on those calls and the fact that they are worth about $2.00 on the bid. I assume that the absolulte worst case scenario he adjusted down the short strike for a small debit and made a killing on the VIX calls. Have to give him a call....

Quote from dojiboy007:

Coach;
I seem to recall your mentioning a long while back that you knew someone at a hedge fund who was trading very wide credit spreads, ie 10x100pt spreads instead of 100x10pt spreads. I am curious to know how his positions have fared these last few weeks what steps he has taken to manage/adjust. Appologies in advance if it was not you who said this.
Thanks