SPX Credit Spread Trader

Hi guys, i have been following this thread for a few months now but i thought i'd finally contribute to the discussion. I wanted to wait until i had 12 months of real data to report and share since i've learned a few things from all of you.

I employ a similar strategy to the one you are using with the difference that i go for 5 point spreads and i don't go that far out of the money. I usually go for 20-30 points above market.

What i do is sell call and put spreads ONLY at major support/resistance levels within the last 3 month trading range always considering the bigger trend apparently.

For a spread to become a loser, current (3 month) price channel needs to be broken in a serious way(10+ points closing price). At this point, instead of hedge(since my risk is limited to roughly twice my expected profit), i sell another call/put spread but double the position, then close the loser on the first pullback(ideally as close to breakeven as possible). Then if thats violated i do it ONE LAST time but only with call spreads and never with put spreads(where i just take the loss and wait for a new channel to form) and ONLY if the previous losing spread has been closed.

So here is the hard data after 12 months:

Total Trades: 25
Winning Trades: 17
Losing Trades: 3
Breakeven Trades: 5 (Within +/-.10 of entry)

Winning Trade Gain: $1.5-$2 credit
Losing Trade Loss: $3.0-$3.5 debit

Maximum Trade Risk: 1% of portfolio
Maximum Risk at Any Given Point: 6% of portfolio (given i've increased the positions in call spread upon 2 upward violations, hasnt happened yet)

Portfolio Growth After 12 Months: 29.7% (after commissions but including interest on cash balances)

I started the first 6 months taking half the risk but doubled it to the current level. I am contemplating doubling the risk again but have been very hesitant to due to the current economic, geopolitical picture we are facing. The success is clearly due to the trending market but i have a feeling we may be due for some wild swings in 2006. I am still trying to perfect my exits when trades go against me as i expect this to happen more often in 2006 than it did in 2005, so any suggestions are welcome.

Anyway, great thread and alot of information.

Current positions:
Apr 1330/1335 spread at $1.6 credit opened with SPX at 1309
Apr 1245/1250 spread at $1.5 credit opened with SPX at 1272
 
Cache,

You're right... the Diagonal trade is susceptible to volatiity and a decrease in volatiity does warrant recognition. From Oct to Nov last year the volatility did drop tremendously, but we're currently at those low levels. A repeat of a volatiilty drop of this magnitude would put us at levels not seen for.... ????

This is not to say it couldn't happen....

If this were to happen though... you have plenty of adjustment opportunities along way as with any strategy.... not necessarily profitable, but certainly manageable.

We all understand there is no holygrail option strategy, but with volatility levels this low... the odds may slightly favor the diagonal calendar strategy at this point.

Murray




Quote from Cache Landing:

Something didn't seem quite right to me and as I was going through this again I realized that I had made a BIG mistake when analyzing this trade. A run like the one in OCT-NOV would have resulted in a LARGE loss if held to expiry. My dates were off on the IV. The run resulted in a drop of 3-4% not an increase. An IV drop that large would result in a significant loss (to the tune of up to 50%). Your 5 shorts would have lost $7500 or so, while the 10 longs would only be worth $3,500-$4,500. IMO, it's pretty risky to assume that there will be an IV increase, when historically the opposite is true. (IV increases when underlying drops, IV drops when underlying increases)
More...
 
Put Diagonal Calendar,

The Put side of the diagonal is difficult to put on because the tremendous put-side-screw. That's not to say you can't place the trade and make money.... but it apprears as though your downside risk is greater.

Here too... volability comes into play.. but as a 'helper'. But even with an incrrease in volatility... and no protection from the 'black swan' event... we're still trading the downside cautiously and with smaller account positions.

A thought came up at our last class discussion about trading the call diagonal with the put credit spread. It is a compromise we have not yet examined carefully...

Murray
 
If the headline reads:

"FED stops raising INTEREST RATES"


I am curious to hear what others feel the market reaction will be... and to what degree?

Projections?

Murray
 
Quote from Sailing:

A thought came up at our last class discussion about trading the call diagonal with the put credit spread. It is a compromise we have not yet examined carefully...

Murray
More...


Murray,

What about a call side credit spread and a put calendar? In a ratio of 5(or >) to 1.

This way the credit spread pays for the calendar +some.
The calendar increases in value with increased volatility.

No fear of a "black swan" event because the credit spread will bring in more than the cost of the calendar.

You may have to adjust to the upside, but the market never "crashes to the upside", so you could adjust.........

example trade:

6 april XEO 600/605 call credit spread : credit 1.70 * 6 = 1020
1 april/may XEO 580 put calendar : debit = 215

So, at expiration, anywhere below around 601.5 you have a gain. With the highest gain at the 580 calendar (More with vol increase) The least amount = 805 (anywhere below 601.5)


What am I missing......? Could this be a "safer" strategy...?
 
I like the way you're thinking.... and brain-storming this time of night on a weekend is commendable to say the least.

As long as the volatility increases to the downside, this would offset any loss.... which I feel it would... your idea would be profitable throughout the range.

Now... if the market shoots up becasue the FED stops raising rates... that may be a different story. Here is where the credit spread hurts you. Those shorts will artificially inflate, and fast.
Although with that type of news I think you would see an increase in volatility also because of OTM calls being purchased in short order all at once.

I'll analyze it further.... thanks for the thought!

Murray



Quote from chrdso:

Murray,

What about a call side credit spread and a put calendar? In a ratio of 5(or >) to 1.

This way the credit spread pays for the calendar +some.
The calendar increases in value with increased volatility.

No fear of a "black swan" event because the credit spread will bring in more than the cost of the calendar.

You may have to adjust to the upside, but the market never "crashes to the upside", so you could adjust.........

example trade:

6 april XEO 600/605 call credit spread : credit 1.70 * 6 = 1020
1 april/may XEO 580 put calendar : debit = 215

So, at expiration, anywhere below around 601.5 you have a gain. With the highest gain at the 580 calendar (More with vol increase) The least amount = 805 (anywhere below 601.5)


What am I missing......? Could this be a "safer" strategy...?
More...
 
Quote from chrdso:

Murray,

What about a call side credit spread and a put calendar? In a ratio of 5(or >) to 1.

This way the credit spread pays for the calendar +some.
The calendar increases in value with increased volatility.

No fear of a "black swan" event because the credit spread will bring in more than the cost of the calendar.

You may have to adjust to the upside, but the market never "crashes to the upside", so you could adjust.........

example trade:

6 april XEO 600/605 call credit spread : credit 1.70 * 6 = 1020
1 april/may XEO 580 put calendar : debit = 215

So, at expiration, anywhere below around 601.5 you have a gain. With the highest gain at the 580 calendar (More with vol increase) The least amount = 805 (anywhere below 601.5)


What am I missing......? Could this be a "safer" strategy...?
More...

I had been thinking much along these same lines, but it gets you into a situation where you lose much of the advantage that the call side ratioed diagonal offered. As I ran through all the different scenarios, that put skew was always the killer. Every one of the combinations that I tried would work better on the put side using some type of call spread to hedge. But the put skew killed the entry and I was always forced to lean heavily on the assumption that there would be a big IV increase.

You are right sailing, even if there was a big run higher, I too would be really surprised if there was a significant drop from where IV is at now. My problem with the call side ratioed diagonal was that IV staying the same was also unacceptable on a big move up. I wasn't trying to say that entering that position is a bad idea. I was just wondering if anyone wanted to comment on what the preferred adjustment would be if we found ourselves above 610 with 4 days left to APR expiry and IV hadn't changed.:)
 
Murray:

Look back at my APR positions and you will see I have a bull put spread and call diagonal. As you said the skew does not allow for as good a diagonal with puts as I found with calls. So For the put side I still like the spreads but the diagonals look interesting for the call side.

Search for the word Banana in my posts or look back a page or two for my current positions.

Quote from Sailing:

Put Diagonal Calendar,

The Put side of the diagonal is difficult to put on because the tremendous put-side-screw. That's not to say you can't place the trade and make money.... but it apprears as though your downside risk is greater.

Here too... volability comes into play.. but as a 'helper'. But even with an incrrease in volatility... and no protection from the 'black swan' event... we're still trading the downside cautiously and with smaller account positions.

A thought came up at our last class discussion about trading the call diagonal with the put credit spread. It is a compromise we have not yet examined carefully...

Murray
More...
 
Welcome to the thread, Rally.

Your strategy is an interesting one and one that I would be interested in following. For me personally, your short strikes are too close to the actual price to place such trades. Further, it seems like your method will result in a higher incidence of adjustment than the further out OTM strikes. Therefore, this technique will probably require more monitoring.

However, these points that I raise are only relevant to me at this stage in my life where I still have to work for "the man". When I retire, I'll probably be trading at least half time and I'll be more experienced at trading options, so your strategy might be very interesting to try.

I hope you will continue to post your trading experience and results. Although Coach advocates further OTM spreads, there are others here who are less risk adverse and might want to try out your strategy. Further, as you gain experience, it will be interesting to see if you adjust your strategy to go further OTM or less OTM.

Good Luck!

[Edit]: Also, I wonder if at some time in the future, the party will be over and there won't be any credit left in the FOTM spreads that we trade. At that point, we may all be forced to go closer to the current index price to trade credit spreads or to look for new strategies.

Quote from rallymode:

Hi guys, i have been following this thread for a few months now but i thought i'd finally contribute to the discussion. I wanted to wait until i had 12 months of real data to report and share since i've learned a few things from all of you.

]
More...
 
Quote from rdemyan:

Welcome to the thread, Rally.

Your strategy is an interesting one and one that I would be interested in following. For me personally, your short strikes are too close to the actual price to place such trades. Further, it seems like your method will result in a higher incidence of adjustment than the further out OTM strikes. Therefore, this technique will probably require more monitoring.


]
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I agree that they are close but that's the price i pay for getting a $1.5 credit on a $5 spread. This is how i manage my risk compared to the $.7-$.1 credit on a 10/15 point spread.

What i didnt mention before is that 70% of my trades are with call spreads as i've noticed that breakouts to the upside are easier to manage and sometimes i use ES options for my positions instead of the SPX when the spread prices justify it.

Also, by studying the charts i have noticed that it doesnt happen often that the SPX rallies 30 points from a major resistance point(which is usually after a 30-40 point rally already) with no pullback or before some serious time decay has been eaten away allowing me to close the spread nearly breakeven and simply reopen a higher strike one.

On a final note, i have notice that during the past 12 months when the SPX hasnt made any major moves it has tested its 3 month range resistance and support prices about 4-6 times before violating them that translates to to having 4-5 open spreads during that time. And since my risk/reward is 2/1 i can afford to have that 1 loser even without the adjustment that i make.

The OP's strategy is great but like has said many times you need a very tight grip on money management as that position can hit you hard if you dont properly hedge at the right time.
 
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