SPX Credit Spread Trader

I have found that the optimal spread varies by when the calculation is made in time. I use a simple spreadsheet and use the rate of return per risked dollar the best measure of which spread to use. They are rarely $5, usually $10 or $15 based upon my criteria. The negative to $5 spreads is that to get the same dollars at risk, commissions are almost twice what a $10 spread would need. But the positive is the option prices tend to move a little closer in sync with only a $5 spread. With larger spreads, time decay occurs faster on the further out of the money options than the short positions. Last point, with smaller spreads, your risk is more concentrated to a small range.:confused:
 
Quote from DonnaV:

I put the link to it into the calendar thread. I think for those of us that are fairly new was quite helpful. I don't subscribe to chartbenders and I'm sure it may be more useful to you if you do. What I'm learning about calendar's is each one presents different opportunity and challenges. There is no shortcut for experience:(
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I have traded calendars for 5 years now.
There are really two good ways to make money with them.

1) By buying a far out long side and selling the short side month after month. (You pay big debit but if the underlying doesnt make a sharp move, you can consistently make money. NYSE stocks are better for this because of their lower volatility) Usually half way through the long side you will have already paid it off and then everything else is pure profit. I dont like this strategy because of the huge debit and when trading this over the long term, your wins won't cover those few times when news drives the stock out of your range and wipes out your big debit you paid which has been my experience.

2) My favorite, when the long and short sides are only a month apart. ( You pay a smaller debit, but your risk due to an adverse move is lower)


The best profit that i have realized during my years of trading calendars is during earnings season. Yes, i know what you are thinking, the volatility is very high but i pick stocks with high IV skews which hugely reduces my risk. I try to pick stocks which i dont expect the earnings to have a huge impact on stock price(5% or better would be huge). An example of such trade would be this:

JNPR may/apr 19 put calendar for $.20 debit.
JNRP may/apr 20 put calendar for $.20 debit.

I currently have both of those as i am anticipating that at APR expiry JNPR will ideally be between $19 and $20 where I anticipate a profit of 100-400% per spread. Because of the low debit of these calendars, even if JNPR tanks/surges, i would still be able to close them at/around breakeven.

Just thought i'd share this for those of you interested in calendars.
 
what do you mean calculation "in time"?

I have generally found two 5 point spreads is worth more than one 10 point spread. as you pointed out the steepness of delta is something to contend with.

Quote from gypsies:

I have found that the optimal spread varies by when the calculation is made in time. I use a simple spreadsheet and use the rate of return per risked dollar the best measure of which spread to use. They are rarely $5, usually $10 or $15 based upon my criteria. The negative to $5 spreads is that to get the same dollars at risk, commissions are almost twice what a $10 spread would need. But the positive is the option prices tend to move a little closer in sync with only a $5 spread. With larger spreads, time decay occurs faster on the further out of the money options than the short positions. Last point, with smaller spreads, your risk is more concentrated to a small range.:confused:
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Quote from Prevail:

what do you mean calculation "in time"?

I have generally found two 5 point spreads is worth more than one 10 point spread. as you pointed out the steepness of delta is something to contend with.
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I agree.
Ten 1 point SPY spreads generates more credit after commish than one 10 point SPY spread.
 
"In time" means it varies by time of day, strike price, and day of the week, Monday's are lower due to time decay than the previous Friday for instance. If you make an assumption that you can get about 30% of the spread, as of last Friday night on the Apr SPX options, I calculate you can get 4.7% on a 1220/1230 and 1345/1355 Condor, whereas on a 1225/1230 and 1345/1350 condor you would only get 4.2%. This does not include commissions, which would be twice as much on the $5 spread than on the $10 spread. However, a more aggressive Condor like the 1240/1245 and 1335/1340 would pay 13.6%, whereas the 1235/1245 and 1335/1345 Condor only pays 13.0%.

So here are two examples of condors that provide different results. My experience shows $10 and $15 more lucrative USUALLY, but not always. I have only done this analysis on the SPX, so other indexes like the SPY can be different.

I sort of prefer the wider spreads, in an extreme case comparing a $100 spread to a $10 spread, the index would have to really move far ($100 encroachment) to have maximum loss, compared to a $10 encroachment with the lower spread to achieve maximum loss. :)
 
Regarding the discussion of 5 point spreads versus 10 or 15 on the SPX, what has the experience been on actually getting filled. My experience is that I've had a lot harder time trying to fill a 5 point spread than a 10 or 15 spread (at linearly increasing credits; i.e. $0.25 for 5 pt spread, $0.50 for 10 point and $0.75 for a 15 pt spread). This seems particularly true as the time to expiration shortens.

Is this the experience of others.

Quote from gypsies:

"In time" means it varies by time of day, strike price, and day of the week, Monday's are lower due to time decay than the previous Friday for instance. If you make an assumption that you can get about 30% of the spread, as of last Friday night on the Apr SPX options, I calculate you can get 4.7% on a 1220/1230 and 1345/1355 Condor, whereas on a 1225/1230 and 1345/1350 condor you would only get 4.2%. This does not include commissions, which would be twice as much on the $5 spread than on the $10 spread. However, a more aggressive Condor like the 1240/1245 and 1335/1340 would pay 13.6%, whereas the 1235/1245 and 1335/1345 Condor only pays 13.0%.

So here are two examples of condors that provide different results. My experience shows $10 and $15 more lucrative USUALLY, but not always. I have only done this analysis on the SPX, so other indexes like the SPY can be different.

I sort of prefer the wider spreads, in an extreme case comparing a $100 spread to a $10 spread, the index would have to really move far ($100 encroachment) to have maximum loss, compared to a $10 encroachment with the lower spread to achieve maximum loss. :)
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Quote from rdemyan:

Regarding the discussion of 5 point spreads versus 10 or 15 on the SPX, what has the experience been on actually getting filled. My experience is that I've had a lot harder time trying to fill a 5 point spread than a 10 or 15 spread (at linearly increasing credits; i.e. $0.25 for 5 pt spread, $0.50 for 10 point and $0.75 for a 15 pt spread). This seems particularly true as the time to expiration shortens.

Is this the experience of others.
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My experience has been that it is easier to get filled on a 10-point spread, but not at lineraly increasing credits. It only makes sense that the credits would not be linearly increasing. If I were a market maker I would be much more likely to give someone a 0.25 credit on a 5-point spread, than a 0.50 credit on a 10-point spread (given that they had the same short strike). To get a 0.50 credit on the 10-point spread (when the corresponding 5-point spread was selling for 0.25) would mean that one of the the internal 5-point spreads was filled above the mid.

In theory the 10-point (or greater) spread is more risk averse because the long strike is less likely to be ITM at expiry than a 5-point spread with the same short strike. So IOW, the 5-point spread is more risky and should by default offer a slightly higher return. If you are able to get filled @ 0.50 on the 10-point spread, count your blessings because someone is giving you a gift. Technically speaking, the price of the 10-point spread should be the same as the sum of the two internal 5-point spreads, which will be lower than 2X the 5-point spread.
 
Quote from skdoyle1:

I'd like to find a analytical way to analyze whether I should open a 5pt spread or a 10pt spread. Right now I find a short strike that I would feel comfortable with using prob analysis, and then compare the ROI on margin of both a 5pt and 10pt spread. What I don't compare though now is what would happen if the index came rushing onto my short strike, how much would I lose on the 5pt spread vs. 10pt spread. Intuition tells me that the delta of the 10pt long would be lower than the 5pt long, so I would lose LESS selling a 5pt spread. I guess my question is how do I analyze not only the ROI between a 5pt and 10pt spread when selling them, but how do I analyze which would do more damage to my account when I would need to close or roll them. Then combining both the open and close ROI determine the best spread to trade?

Thanks
sd
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Skdoyle,

you are talking about dilemma I had some time ago. As using regular software was not much helpful, I wrote own spreadsheets in Excel calculating possible scenarios.
It was kind of balance sheet - just budgeting my whole position, piece be piece.
Regardless I am using other software now, I still find these sheets very useful - simple and budgeting whole strategy, same way as you budget the business, adding debts and liabilities. This is still my favorite analytical software :)
 
Rallymode...I took the liberty of posting your ideas on Calendar's in the calendar spread thread and had a question. Do you use Chartbender's or Ivolatility or any other service to find candidates or do you have a stable of stocks you follow. Thanks for sharing your thoughts.
 
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