SPX Credit Spread Trader

[MTE]

Quote from rdemyan:

I saw this example trade and am wondering what it is called and if anybody has made similar trades or has some comments on this type of trade.

XEO at 585

Sell 1 XEO August 565 calls @ $24.25
Sell 1 XEO August 605 puts @ $20.25
Profit potential: Max of $450 if the XEO is between 565 and 605. This max profit is presumably just the difference between the two premiums $44.50 and the difference in the spread of $40.

Note that Deep In-The-Money options are being sold here.

Of course any number of contracts can be sold. Margin is a problem but can be managed by buying OTM long positions (example the 625 call and the 545 put). This would be a 60 point spread. The approximate cost of the longs would reduce the profit potential from $450 to about $300. ROI would be about 5%.

Comments, anyone?

It's called a Gut, i.e. ITM strangle. It is the synthetic equivalent of an OTM strangle (in this case 605 call and 565 put). The only difference is that you tie up more funds in ITM one, the intrinsic value of $40. In fact, I bet the OTM strangle was selling for 4.5, give or take a dime. Generally, the bid-ask spreads are tighter in OTM options so trading ITM syntetic equivalents means more slippage, but occasionally you can get a better fill. However, then you have to take into account the extra capital tied up in the trade.

The max profit is the same in both trades and is the time value, i.e. 4.5.

 

[rdemyan]

Thanks, MTE.

After reading Cottle two weeks ago, I thought that it was the synthetic, but I'm still new to those concepts so I wasn't sure.

The parameters for adjustment are 565 and 605. The advantage is supposed to be that if the XEO reaches either 565 or 605 it will be so deep in the money that very little time value will remain to be bought back. Thus as long as you close the position if either of those parameters are touched, the risk is supposed to be less.

I don't think I buy this. I've never really given any thought to time premium on really DITM options.

Quote from MTE:

It's called a Gut, i.e. ITM strangle. It is the synthetic equivalent of an OTM strangle (in this case 605 call and 565 put). The only difference is that you tie up more funds in ITM one, the intrinsic value of $40. In fact, I bet the OTM strangle was selling for 4.5, give or take a nickle. Generally, the bid-ask spreads are tighter in OTM options so trading ITM syntetic equivalents means more slippage, but occasionally you can a better fill. However, then you have to take into account the extra capital tied up in the trade.

The max profit is the time value, i.e. 4.5.

 

[MTE]

Quote from rdemyan:

Thanks, MTE.

After reading Cottle two weeks ago, I thought that it was the synthetic, but I'm still new to those concepts so I wasn't sure.

The parameters for adjustment are 565 and 605. The advantage is supposed to be that if the XEO reaches either 565 or 605 it will be so deep in the money that very little time value will remain to be bought back. Thus as long as you close the position if either of those parameters are touched, the risk is supposed to be less.

I don't think I buy this. I've never really given any thought to time premium on really DITM options.

If XEO reaches either 565 or 605 the OTM option will have just as little time value left. Besides the bid-ask spread will be even wider on ITM.

So I don't buy that argument either.

 

[rdemyan]

I'm trying to get out of my July SPX 1355/1370 bear calls in order to free up margin.

I'm offering $0.05 to buy back the 1355. I've generally found that it is easier to close just the short and not the spread when the position is this far OTM with only a week and half or so left to expiration.

The bid/ask on this is $0.00 to $0.50. The two strikes above and below the 1355 are either $0.00 to $0.10 or $0.05 to $0.10.

Are the MMs inflating the b/a on my strike because they see that I have an order in and want me to pay dearly to get out? Or are there other factors at play here?

 

[El OchoCinco]

Quickest way to find out is to cancel the order and not any changes in the b/a spread. I have done that before.

 

[augiedixit]

Scoobie27

If I may ask, which broker are you using to trade ES options. OptionXpress does not have that capability yet. I am seriously considering trading ES options.

Thanks,
Augiedixit

 

[vedanta]

Quote from augiedixit:

Scoobie27

If I may ask, which broker are you using to trade ES options. OptionXpress does not have that capability yet. I am seriously considering trading ES options.

Thanks,
Augiedixit

I trade ES options through IB. Comm is $1.65 one way

 

[Sailing]

Coach,

Haven't heard you talk much about the diagonal spreads !!

They have been extremely profitable as of late, especially with the VIX popping up and down.

Are you still trading them?

We're looking to enter a put diagonal here shortly, 1200p/1225p, and possibly a Credit spread on the upside !

We're also considering a further out month on the diagonal... DEC, instead of SEP... for VEGA reasons.....

Congrats on the additional tax write off. Hope you're getting some sleep!

M~

 

[Aardvark]

Murray...I forgot to ask are these ratioed diag spreads?

 

[rallymode]

Quote from optioncoach:

Decided to add a partial hedge to my position today just in case moving average supports do not hold today and we fall further.

I am thinking of starting a system where i will fade coach's hedges. In fact, phil, PM me everytime you open them up so that i can provide the liquidity, we will meet up half way , i will just take the other side - Fair?

System has 90%+ win ratio, over the last year. This should make mo's system look like a charity case