SPX Credit Spread Trader

[El OchoCinco]

Sounds like a diagonal Iron Butterfly.

I assume the goal is to have the index hover for the first 30 days and eat at the short straddle premium and then have a long strangle in the back month at a much lower cost and then hope for a move outside the range.

Is this the approach you have been taking? I assume if the index makes a huge move in the front month the longer-term strangle helps offset the short-term straddle and the potential losses are quite limited with plenty of adjustment opportunities.

When you say the results look very goos, what way are you trading them?

It might work well like in a summer month that is expected to be quiet like August but followed by Sept where the market usually swings wide.

Quote from IV_Trader:

OC , did you ever looked at this strategy on SPX :
1. Short 30d ATM straddle
2. Long 60d wings (2% away from ATM)
The results looks very good.
I do it with stocks ( under certain conditions) and I wonder if you ever tryed the same with Index.

 

[IV_Trader]

Quote from optioncoach:

Sounds like a diagonal Iron Butterfly.

I assume the goal is to have the index hover for the first 30 days and eat at the short straddle premium and then have a long strangle in the back month at a much lower cost and then hope for a move outside the range.

Is this the approach you have been taking? I assume if the index makes a huge move in the front month the longer-term strangle helps offset the short-term straddle and the potential losses are quite limited with plenty of adjustment opportunities.

When you say the results look very goos, what way are you trading them?

It might work well like in a summer month that is expected to be quiet like August but followed by Sept where the market usually swings wide.

agree on all. Well , I trade stocks only when I expect additional "edge" (which not exists on Index) : spike in vols for 60d position. The results on SPX are just paper , but still looks good. I am not sure if one can make adjustments here ; the only one I see its to buy back one of the short legs for nothing and hope for a swing back ( which happens a lot lately). This strategy will also guarantee not to have a huge loss in case that VIX explode because 60d long Vega will have bigger gain that short 30d. Cannot see VIX going much lower from this level.

 

[El OchoCinco]

Well even though the SPX will not have the right skew to do the Diagonal Iron Butterfly, I think the "edge" so to speak will come from a difference in expectations in moves in the front and back months.

For example, a month that looks rangebound but might be followed by a more active move can use the DIB (nice name huh..) to sell the premium in the front month to finance the strangle in the back month and take advantage of front month decay to help offset back month decay and costs.

I think the right approach for SPX is to look at selling an ATM straddle and select long strangle strikes in the back month which are at the end of the range of the short straddle.

So if a current 1290 Straddle can be sold for $40, you can go long the next month strangle at 1330/1260, perhaps for a net credit (lazy to check the chains right now lol).

That might produce some steady returns as the market churns and eats into the premium and you would buy back the straddle at anytime the cost to do so would be less than the original debit to purchase the strangle in the first place. This wouldbe a way of legging into a long strangle using the short straddle to finance it.

If the index explodes out of the range I assume it would be wash? Have to look at premiums first before I start making up assumptions

Quote from IV_Trader:

agree on all. Well , I trade stocks only when I expect additional "edge" (which not exists on Index) : spike in vols for 60d position. The results on SPX are just paper , but still looks good. I am not sure if one can make adjustments here ; the only one I see its to buy back one of the short legs for nothing and hope for a swing back ( which happens a lot lately). This strategy will also guarantee not to have a huge loss in case that VIX explode because 60d long Vega will have bigger gain that short 30d. Cannot see VIX going much lower from this level.

 

[IV_Trader]

Quote from optioncoach:

Well even though the SPX will not have the right skew to do the Diagonal Iron Butterfly, I think the "edge" so to speak will come from a difference in expectations in moves in the front and back months.

For example, a month that looks rangebound but might be followed by a more active move can use the DIB (nice name huh..) to sell the premium in the front month to finance the strangle in the back month and take advantage of front month decay to help offset back month decay and costs.

I think the right approach for SPX is to look at selling an ATM straddle and select long strangle strikes in the back month which are at the end of the range of the short straddle.

So if a current 1290 Straddle can be sold for $40, you can go long the next month strangle at 1330/1260, perhaps for a net credit (lazy to check the chains right now lol).

That might produce some steady returns as the market churns and eats into the premium and you would buy back the straddle at anytime the cost to do so would be less than the original debit to purchase the strangle in the first place. This wouldbe a way of legging into a long strangle using the short straddle to finance it.

If the index explodes out of the range I assume it would be wash? Have to look at premiums first before I start making up assumptions

end of the range will make wings 3-3.5% away from the ATM strike. Good point , I will recalculate and compare with old results.
Thanks for replying

 

[CALCULON]

Quote from optioncoach:

Sounds like a diagonal Iron Butterfly.

Right, or a time fly. Can be tricky into earnings; works very well in stable vol-markets; short gamma and can be made neutral to possibly long vega depending on wing strike selection.

Looks like GOOG would be an excellent choice into eom earnings. Only wrinkle is YHOO's release next week and the GOOG sympathy move:

Short the GOOG APR 400 combo
Long the GOOG MAY 380/420 combo

Hold straddle through APR expiration and hold or offset wings depending on straddle PnL and the vol-line on the May wings. I'd likely hold the May wings into earnings if the APR straddle produced a >8 point gain.

 

[El OchoCinco]

Curious to see how to play it on the SPX...

Quote from CALCULON:

Right, or a time fly. Can be tricky into earnings; works very well in stable vol-markets; short gamma and can be made neutral to possibly long vega depending on wing strike selection.

Looks like GOOG would be an excellent choice into eom earnings. Only wrinkle is YHOO's release next week and the GOOG sympathy move:

Short the GOOG APR 400 combo
Long the GOOG MAY 380/420 combo

Hold straddle through APR expiration and hold or offset wings depending on straddle PnL and the vol-line on the May wings. I'd likely hold the May wings into earnings if the APR straddle produced a >8 point gain.

 

[wonton]

Hello Piccon:

Can you please clarify how you got your fibonacci numbers?

How did you decide to use 1246 and 1295? Why not 1253 or 1267?

Is your downside target 1228?

For what timeframes do these numbers hold?

If your targets are 1228 and 1313, what short strikes would you use for May, i.e. how much slippage?

Thanks.....


Does anybody trade on Fibonacci? I use it and it works well.

I believe SPX and OEX trade in accord with its Fibonacci numbers.

Did you look at SPX(1246,1295) Fibonacci 1.382=1313.718
OEX(569,589) Fibonacci 1.382=596.64.

Guess what were the last swing highs on SPX and OEX: 1314.07, 596.28 respectively. How much precise do you want it to be.

If you place your Short strike according to Fibonacci numbers, you don't have to worry about hedging most of the time.

It works for me all the time anyway. That's why most of my money is made on OEX Spreads.

I know it works on OEX and SPX . I trade RUT also ;not on Fibonacci but on other statistical data.

 

[CALCULON]

Quote from optioncoach:

Curious to see how to play it on the SPX...

It's certainly easier to model on an index. With a "tight" time fly you're likely long vega/short gamma depending on strikes and expirations. It's not like trading 5d-strikes in verticals, but can be traded w/o blowout protection.

It works very well with weekend straddle sales.

 

[B5476]

Quote from piccon:

Does anybody trade on Fibonacci? I use it and it works well.

I believe SPX and OEX trade in accord with its Fibonacci numbers.

Did you look at SPX(1246,1295) Fibonacci 1.382=1313.718
OEX(569,589) Fibonacci 1.382=596.64.

Guess what were the last swing highs on SPX and OEX: 1314.07, 596.28 respectively. How much precise do you want it to be.

If you place your Short strike according to Fibonacci numbers, you don't have to worry about hedging most of the time.

It works for me all the time anyway. That's why most of my money is made on OEX Spreads.

I know it works on OEX and SPX . I trade RUT also ;not on Fibonacci but on other statistical data.

I too use Fib levels and some Fib based patterns (butterfly (not to be confused with the option strategy of the same name) and Gartley patterns). I find it to be very helpful in indexes and liquid equities, although it certainly does not reliably exclude the possibility of news/event driven risk specific to the single equity.

 

[piccon]

Coach,

I don't use it after the fact. I calculated the last SPX(1246,1295) since last January 13th. and since I use the 1.382 as my down or up target for Strike.

It was based on this value I selected March 1340/1350. I already mentioned weeks ago that if the market close above 1315, I would have to hedge or close. It was based on Fibonacci too.

I use other indicators but I use it as a confirmation for my Strike selection.

Quote from optioncoach:

My only problem with Fibonacci is that it works quite well after the fact. Since where you decide is the low or highs to work off of is quite subjective between 2 different people, I always a getting Support and Resistance levels that already were touched looking back but can never project them accurately going forward. Many times a top I use for a retracement is just a pause and the market keeps going higher and thus you have to readjust the lines.