SPX Credit Spread Trader

Now... this is a great litttle kicker.... you actually pay for the break even trades commission or profit for unlimited downside movement.... and have little risk with very nice profit potential in every direction.

The trick is the Put side....

We're consider just playing the upside.... if ratioed properly... there is no risk for any market direction.

In your position, you have a slight degree of risk on a market breakout to the upside, but it's very limited... and based on the volatiity premium in MAY... after such a move.... you're probably going to be profitable.

:)
 
Also, diagonals present so much room for adjustments that the risk really exists if you do absolutely nothing. I could roll the strike up and sell up to 10 contracts, I could roll the strikes to MAY into a bull call spread, I could roll to MAY credit spread, I could convert the short to a FLY of sorts and add more short strikes to keep the diagonal at higher short strikes...

I see a lot of adjustment potential here..
 
Coach,

With calculated returns from 2-20% per month using this ratioed diagonal calendar trade.... and no risk to the downside under any 'swan' event.... we, our investment club, are considering making this our main trading vehicle going forward. We've analyzed what we think is every conceiveable possible outcome. And not having money at risk is very appealing.

Off to Ski.... see you all next week.

Murray
 
Quote from Sailing:

Coach,

With calculated returns from 2-20% per month using this ratioed diagonal calendar trade.... and no risk to the downside under any 'swan' event.... we, our investment club, are considering making this our main trading vehicle going forward. We've analyzed what we think is every conceiveable possible outcome. And not having money at risk is very appealing.

Off to Ski.... see you all next week.

Murray
More...

This strategy becomes even more enticing in a market with increasing volatility, correct?
 
Quote from Sailing:

Now... this is a great litttle kicker.... you actually pay for the break even trades commission or profit for unlimited downside movement.... and have little risk with very nice profit potential in every direction.

The trick is the Put side....

We're consider just playing the upside.... if ratioed properly... there is no risk for any market direction.


:)
More...

sooooo WHY is it tricky on the PUT side?tia
 
Quote from Sailing:

Coach,

With calculated returns from 2-20% per month using this ratioed diagonal calendar trade.... and no risk to the downside under any 'swan' event.... we, our investment club, are considering making this our main trading vehicle going forward. We've analyzed what we think is every conceiveable possible outcome. And not having money at risk is very appealing.

Off to Ski.... see you all next week.

Murray
More...
I see how this trade works if it stays under the Apr lower short (in your OEX trade it would be the 605 call). It is the adjustments if the market moves higher that I still have to get my head around. That 605 call is going to be expensive to buy back and rolling into a bull call spread or a bear call spread for May could still leave you open for a good sized loss if you pick the wrong one couldn't it?

I ran your OEX trade through the analyzer on TOS (love the analyzer), the guaranteed profit on the downside is very appealing. Just need to get a handle on the upside adjustments as the market moves.

ryan
 
I took a look at the equivalent OEX spreads from the October/November timeframe. Going from SPX to OEX cut the width down from 30 to 15, but the price still seemed to move too fast and too much for the ratio to offer any compensation.

I guess I'll just have to watch how you trade these to see the tremendous profit potential being realized :-) If you or anyone has any profit/loss graphs that you can share on the diagonals with various price/volatility scenarios, that'd be great.

-Kartik

Quote from Sailing:

Kar,

Try looking at the OEX....

Yesterday we sold 5 April 605c, bought 10 May 620c for even, then sold additonal 5 April 620c for .30 against the unbalanced calendar for no additonal margin requirement.

Overall positon is a credit of $150 on 5,000 margin.... with tremendous profit potential. If the market trades down, stays the same, or moves up... this trade is profitable. Calculate your risk analysis on this trade..... it will shock you.

You're going to like this!

Murray
More...
 
Quote from Sailing:

Coach,


-8 April 1340c / +8 May 1375c, with margin
-2 April 1375c / +2 May 1375c, no additional margin
More...

Very interesting..........

So you have 2 calendars at 1375
And 8 embedded spreads =
8 calendars at 1340
8 bear calls 1340/1375 which basically pays for your calender with some additional credit or breakeven maybe.....

I put this trade in TOS,
Looks like your short strikes are > 1 std. dev. with profit increasing as you near the short strike.
However, if the index moves up beyond a certain point (1344.50 with current prices) you will have a loss unless you roll.

If volatility increases, you benefit. But, volatility decreases as the market moves up.

Great trade though!!!!!!!



Another thought:

Would a put calendar + put diagonal be better, as these trades benefit much more as volatility increases on the way down.....


So, instead of an iron codor.....
put calendar + put diagonal + bear call.

This is the kind of spread discussed at the TOS class.
(actually they said
put calendar OR put diagonal + bear call)



We need more discussions on how to adjust diagonals............
 
Kartic,

Analysis graphs are not accurate due to the time frame, horizontal time frame, April to May.

What you can do though is manually calculate, or use an options pricing calculator based on this months prices which differ from what next months would be today.

For example... assume the market doesn't through next expiration... your shorts will expire worthless, and since you entered the trade for even, no return is generated from the shorts. But... the longs still have time value within them. So.. look at how far OTM the long position is for MAY. Say it's coaches May 1375c he has right now. The value of that call a month from now, would be approximately what the April 1375 call is worth today, give or take what volatility will do.

So coach's call would be worth say .35 or better, because we've had some downside since the position was initiated... He took in some credit, and he could have sold his additional 2 contracts for more credit.... but let's say the total position nets .50. That's 5% for no movement.... and if the market nears his short position on the upside.... the profit potential will rise because of the May long 1375c value. Should volatility increase to the upside, just imagine what that 1375 might be worth.

It's not hard to manually calculate your prospective return... and it's good practice once in a while to deviate from the mechanical analysis systems.... good for the brain!

Hope this Helps....

Murray

Off to the Hot Tub now~

Quote from kartik_subbarao:

I took a look at the equivalent OEX spreads from the October/November timeframe. Going from SPX to OEX cut the width down from 30 to 15, but the price still seemed to move too fast and too much for the ratio to offer any compensation.

I guess I'll just have to watch how you trade these to see the tremendous profit potential being realized :-) If you or anyone has any profit/loss graphs that you can share on the diagonals with various price/volatility scenarios, that'd be great.

-Kartik
More...
 
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