SPX Credit Spread Trader

Remember, at expiration, there will be no time value left in the 605 short position... and you only shorted 5 contracts. So.. as the shorts become 100% intrensic, you May longs continue to increase delta as well as gamma and hopefully some vega... and you have 10 contracts (much greater total delta) making money to offset the loss of 5 605c shorts.

Hope this helps..

Murray



Quote from ryank:

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
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First I'd like to say thanks to Phil and everyone for a truly amazing forum. I'm glad I ran across this forum it's been an amazing learning experience.

I finally did my first trade and got filled today at $0.60 credit on 1240/1250 bullish put spread April 2006 options.

I'm looking to leg into a full Iron Condor but with the SPX going down I'm trying to find the right point for a bearish call spread April 2006 options ...hopefully sometime this week before time decay starts setting in. :)
 
Quote from Sailing:

Remember, at expiration, there will be no time value left in the 605 short position... and you only shorted 5 contracts. So.. as the shorts become 100% intrensic, you May longs continue to increase delta as well as gamma and hopefully some vega... and you have 10 contracts (much greater total delta) making money to offset the loss of 5 605c shorts.

Hope this helps..

Murray
More...

I understand that part, just worried about adjustments.

I'm running some rough numbers to see what the profit/loss would be approaching 620 with 5 days left to April expiration. It looks like a good profit if I am figuring things right, even with losses on the April 605 and 620 calls. The losses look to be offset and then some by the May 620 calls.

I just ran rough numbers for what would happen with OEX at 625 with 5 days to expiration. It is slightly negative but who knows what volatility would be. It affects the outcome quite a bit.

These diagonals really got my brain going ever since I went to the TOS seminar and was introduced to them. A big benefit Murray pointed out is that with a Black Swan event you still make money, makes it that much easier to sleep at night. I'm glad Murray brought them up as he seems to have good experience with them (at least more than me :D). Just need to get him off the slopes long enough to run through some adjustment scenarios his group came up with for the OEX trade they just did :D.

ryan
 
I will treat the adjustments just like in my vertical spreads. With the index approaching the short strike within 15 points or so I will go through possible adjustments depending on time to expiration. There are a lot of possibilities.

The bad side of the puts is that the put skew makes the further OTM longer term puts more expensive so it is harder to get the credit as it is with the puts.

I think if i like this trade I may go 75%/25% with verticals/diagonals. if I can do 30 or 40 spreads and get left with a long at expiration worth $4 or $5... cha CHING!

My approach may be to do vertical put and call spreads and only call diagonals.
 
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
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According to my analysis you start to lose money if OEX passes 610 with less than a week to APR expiry. Is that what you are thinking. If so, how do you plan on adjusting for this?
 
Hold to expiration.... and now reconfigure your profit loss. The advantage you have... is NO time premium left at expiration, but the long hardly loses any those 5 days... and you can pick up some warranted VEGA to help along the way.

Check it Out

Murray



Quote from Cache Landing:

According to my analysis you start to lose money if OEX passes 610 with less than a week to APR expiry. Is that what you are thinking. If so, how do you plan on adjusting for this?
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Now... let's make it even more interesting....

Let's say you ratio 5:10..... and you don't sell the additional 5 contracts agains the current spread. The market moves up.... now those 5 additional contracts can be sold at a much greater price..... more credit.

Then the market drops... for a couple days... buy them back. Wait for another run up....

You may not get one... but what are you out? Nothing.

In otherwords... with those additional contracts... you could sell them right away.... sell them later to help bring in even more credit... or SCALP them through out the month.

So many decisions... and they are all profitable ones.

Murray
 
Question on Adjustment,

Why adjust as it moves up.... you want it to move up. The 605 strike would be maximum profit....

Of course above that becomes a draw-down... but not all at once.... and if it really.. really takes off... that would be great too.

As compared to the Credit Spread.... as it moves up, you're screwed. With the diagonal, you're making money... and if you get greedy and ratio more aggressively, your losses are minimal because you have the TIME factor in the next month's out long position.

Credit Spread = risk with big movement
Diagonal = profit with big movement or small loss depending on ratio

Murray
 
I was playing with an option calculator and if the index moves up significantly with plenty of time to expiration there is a loss marked to market in the spread. However, it does not mean the position is a loss, just at that moment it is an unrealized loss.

If the ratio of longs to short is less than 2:1 then you have a lot of positive deltas in the longs to help. If you do 10*8 like mine, then the paper loss can be large (not compared to verticals, but it came in around $10,000 or so unrealized loss on a $28,000 spread). But it is unrealized so no worrues really when you are not forced to take the loss using European options.

At that point there are many things you can do to reduce that loss significantly or simply let theta eat out the time premium to make the loss narrow and give you more options in APR or MAY strikes.

A huge move higher is not necessarily a blessing but it can make it easier to adjust for a profit if your ratio is 2:1 or better in favor of the shorts (i.e., 10:5, 10:4, 8:3, etc...) Anything more than that, like a 10:8 means the short deltas are greater and you approach it slightly different.

Since these are credit spreads, I will place my trades here for you to follow along and see adjustments etc.... When I move to prop I will do them more and we all can follow along.

Thanks Murray for laying this out for us...
 
Phil,

The thanks belongs to you for keeping this forum intact.

Without this forum, none of us would have made the electronic relationships we have established so far.... or the ones yet to be discover.

Murray
 
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