SPX Credit Spread Trader

This trade was done on 9/27 and comes from another service I subscribe to. Something to take a look at for all you credit spreaders. I haven't put on the trade, it's just what was reccommended, so use at your own risk.

Sell 10 SPX November 1140 puts
Buy 10 SPX November 1130 puts
Credit of about $.80 ($960)

Sell 10 SPX November 1280 calls
Buy 10 SPX November 1290 calls
Credit of about $60 ($720)

Also, I watched a great webcast today about order execution at the CBOE. It was very funny and informative. This guy is also going to be in the Santa Clara, CA area on the 12th/13th of OCT. I think I'm going to see him, it's only $40, for 4 hours. I spend more than that on pizza each week.

http://www.cboe.com/LearnCenter/webcast/archive.aspx
Better Fills...How Market Makers Get Trades Filled OFF the Floor
Description: From single leg positions to multiple leg trading campaigns, execution savvy can mean much higher net returns over the long-run. Tune in, and learn from one of the best, as 20+-year veteran market-maker Dan Sheridan shares his wisdom and insight on getting your trades executed

Quote from daytrader85:

I totally agree with you. I have been thinking about doing the same thing for past few days. But I haven't seen any good premiums for those strikes (e.g. 1280-1300)
More...
 
Shawn, I did some comparisons of selling spreads 30 days out versus selling 90 days out. The 30 day spreads' returns won hands down (I divided the 90 day spreads by 3 to come up with a monthly return).
 
Quote from skdoyle1:

This is exactly what a friend of mine does, he put's on the bear call about 6-8 weeks early. He always get's a much higher credit than I do putting on the spreads the monday after expiration. I tried to argue the point that time decay occurs at a much quicker rate the closer we get to expiration and therefore it would make sense to wait, but he has proven me wrong for the last 3 months in a row. Where I get a .50 credit, he is bring in about 1.25-1.50 credit, and only taking on the risk of 2-4 weeks extra on a upside break out. I'm no master of the greeks, but it doesn't really make sense to me.
More...

By selling options with more time, he is taking greater VEGA risk, in addition to the obvious gamma risk. Those of us who sell shorter-term options have less to worry about vega. In a strong move, up or down, vega is often the Achilles heel.
 
Andy,

I look at this a little differently. For me the questions is do I want to start putting on my November positions 6 to 7 weeks early. So I wouldn't for example hold only December spreads in the month of September or October. As you point out this is not worth it. Instead I'm talking about holding the current month credit spreads and then at some point during the current month start placing the next month's credit spreads before the current month expiration.

I think that I can probably do this safely with bear calls. Then the main question is, do I want to risk more margin beyond my usual percentage. This additional risk would typically be for two weeks out of every month so it is essentially 50% of the time. So instead of 33% of my portfolio in credit spreads during those two weeks per month it could be 50 to 60%. But by avoiding bull put spreads during this 2 to 3 week period, I should be able to avoid the increased risk of a wipeout scenario. Bull put spreads have a higher skew so premium spreads are higher.

I think this is worth considering, but at the same time I want to limit my risk as much as possible. To that end, I, personally, will only put on the subsequent month spreads on way OTM spreads. For example, I would not consider the 1270/1280, but more like the 1285/1300 or 1290/1300. My goal is to try to position myself such that I have the least likelihood of needing to adjust but at the same time get a reasonable credit.

If and when we ever start getting good premiums again, then my strategy would probably change accordingly to only hold current month spreads.



Quote from andysmith:

Phil,

Oct 1270/1280 spreads are $0.25, Nov are $1.35

Think it's worth considering the latter?
More...
 
Andy,

I look at this a little differently. For me the questions is do I want to start putting on my November positions 6 to 7 weeks early. So I wouldn't for example hold only December spreads in the month of September or October. As you point out this is not worth it. Instead I'm talking about holding the current month credit spreads and then at some point during the current month start placing the next month's credit spreads before the current month expiration.

I think that I can probably do this safely with bear calls. Then the main question is, do I want to risk more margin beyond my usual percentage. This additional risk would typically be for two weeks out of every month so it is essentially 50% of the time. So instead of 33% of my portfolio in credit spreads during those two weeks per month it could be 50 to 60%. But by avoiding bull put spreads during this 2 to 3 week period, I should be able to avoid the increased risk of a wipeout scenario. Bull put spreads have a higher skew so premium spreads are higher.

I think this is worth considering, but at the same time I want to limit my risk as much as possible. To that end, I, personally, will only put on the subsequent month spreads on way OTM spreads. For example, I would not consider the 1270/1280, but more like the 1285/1300 or 1290/1300. My goal is to try to position myself such that I have the least likelihood of needing to adjust but at the same time get a reasonable credit.

If and when we ever start getting good premiums again, then my strategy would probably change accordingly to only hold current month spreads.

I'm sure I've heard Coach mention in the chats at TheOptionClub.com that he starts looking to put on next month's credit spreads about 45 days before expiration. I guess we'll just wait for him to chime in on this.


Quote from andysmith:

Phil,

Oct 1270/1280 spreads are $0.25, Nov are $1.35

Think it's worth considering the latter?
More...
 
Pete Najarian (filling in for Dr. J yesterday on cboe tv) said that volatility has dropped considerably on the SPX. He said it is because a lot of people are selling spreads and have driven the volatility out. Maybe we are getting too popular :D

ryan
 
Just to chime in. November expiration is 49 days away. I usually like to focus on 45 days or less. If you want to do 50 days or less and add another trading week then you can certainly do so. Therefore, entering November spreads now is not a bad idea. However, remember that more time should mean that you go further OTM for protection. So do not choose strikes in November that you would consider for October unless you have some good TA or other reasons.

Next week is when I will start looking to November myself. What happend to my with September expiration is that I loaded up to my personal margin limit and I could not really close any spreads for a profit since the market bounced around so much so I decided to let them ride to expiration. I have some margin room open now for November spreads but would like to close my OCT put spreads for profits to have even more space. However, since I am put loaded, I needed a nice market surge to squeeze out the premium in my put spreads and we have not had it yet. As of now there is also not sufficient profit (at least 50%) for me to close them so I am still letting theta do its job. I certainly would like to roll as much as I can, but I also have no problem holding until expiration and making the full credit. The monthly returns are slightly lower, but 2-3% is still more than enough to make me smile.

Nickles and Dimes A Thousand Times...

Phil
 
Phil,

"However, remember that more time should mean that you go further OTM for protection. So do not choose strikes in November that you would consider for October unless you have some good TA or other reasons."
-- Makes a lot of sense, but when it comes to strike selection, sometimes I find that TA tells me something different than the probability approach. Do you recommmend just going with the most conservative, or trusting one over the other?

For example, I'd be happy with OCT 1270/1280 call spreads (if they were available for a decent credit) because I believe the major resistances at 1245 and 1253 will not be broken anytime soon. By that logic, NOV 1270/1280 should work as well, but if we look at time to expiration and probability, we'd chose 1290/1300 or something thereabouts....
 
I agree that TA support and resistance are not dependent on time so 1245 and 1253 resistance are resistance for now until that is broken whenever it may be. SO in that case you are right that you can go with 1270 as a short strike in NOV if you decided to. I guess it depends more on where the index is now. With the index at 1213 or so, 1270 seems like a safe strike for OCT and perhaps NOV.

It comes down to a balancing of risk/reward where sometimes the fact that time adds more risk in general that you can offset it slightly going further OTM. I do not think there is a wrong answer as long as you stay within your comfort zone. I think I have said this before but one good approach is to place the spreads 10 to 15 points outside of a strong support/resistance area. So with resistance at 1245 and I believe you said 1253, then 1265 would be as low as I would venture to go. And being a little more conservative I would probably start higher than 1265 since I also really do not want to make any adjustments.

phil



Quote from andysmith:

Phil,

"However, remember that more time should mean that you go further OTM for protection. So do not choose strikes in November that you would consider for October unless you have some good TA or other reasons."
-- Makes a lot of sense, but when it comes to strike selection, sometimes I find that TA tells me something different than the probability approach. Do you recommmend just going with the most conservative, or trusting one over the other?

For example, I'd be happy with OCT 1270/1280 call spreads (if they were available for a decent credit) because I believe the major resistances at 1245 and 1253 will not be broken anytime soon. By that logic, NOV 1270/1280 should work as well, but if we look at time to expiration and probability, we'd chose 1290/1300 or something thereabouts....
More...
 
You must log in or register to reply here.
Back
Top