SPX Credit Spread Trader
- Thread starter El OchoCinco
- Start date
Quote from BoSox1962:
When did you enter the 1320/1330 to get the $2.70 credit - great trade
First week in April when we topped around 1310 again. My analysis said we were in for a pretty good drop so I didn't go too far OTM. But I didn't expect a 25point rally yesterday or I'd have bought them back for 0.10
Did you expect to hold them to expiration or were you more prepared to bail if it moved against you as it did yesterday. I continueally look for opportunites like that once we get inside 30 days, but I'm a bit skiddish of moving closer than 30 pts to the SPX - but I agree with your assessmet at that time - I was looking for calls at that time as well, but didn't pull the trigger.
MAV:
Your points are well taken and I really cannot refute as I see now flaws in your statements. My decision to do the credit spreads over the debits is more of a preference in the ways I can manage the portfolio of trades and select strike prices. Let me respond to your different points in the hope I can illustrate my points as well, but not in an effort to say I am right or you or wrong but merely to illustrate my side of the story, so to speak.
1. The 1370/1380 call spread was added merely to finance the cost of my put hedges and return some premium back to me. I chose the 1370 strikes because I honestly feel those strikes are well OTM to be any threat given current market conditions. I was simply adding credit to the IRON CONDOR position and would not open such a spread really on its own. Thus, I would not choose to go long the 1370/1380 spread even if I were predisposed to debit spreads since I see no threat of the market hitting that point unless conditions change. Therefore, I see the $450,000 profit or so on a debit spread is so unlikely as to make it a losing trade. I could go to lower strkes to raise the possibility but the debit cost would be so high and a few months of those would eat severly into my account.
2. The sales price of $0.20 was off the mid-point. If I were to buy this spread I most likely would have had to pay about $0.50 if I got a great fill, $0.60 more probable. So the cost would have been a lot more.
3. The reason I favor credit spreads is to bring in regular income. I the past year or so of this journal I only adjusted positions twice and the market never moved past my original short strikes to begin with. My adjustments were cautionary and the price to buy back the spreads was not extremely high and was offset by selling further OTM spreads based on my analysis at the time. If those had been debit spreads and sold for a profit I do not think I would still have been positive for the year given the other months of non-movement. Therefore, if I simply held debit spreads to expiration, I would not have had any winners in my positions. I would have had to spend debits month to month and reduce my portfolio balance waiting for the fat tail which never came. Also the price of the debits would be much higher than the credits due to the SPX bid/ask spread. So instead of making the profits I made last year, I would have lost closse to double that money in debit spreads. Instead of having regular cash outflows waiting for the big move, I would rather take in regular credits and grow the portfolio while hedging and limiting my risk as best as possible. It is a portoflio management preference really.
4. I agree on the theta issue. The nature of the spread substantially offsets the effects of time decay and volatility changes. The true threats to the position are delta/gamma and the positions profit from my choice of where I expect the index NOT to be by expiration. Therefore I am not playing theta although it does help in the last week or so if the spread is well OTM.
5. I have not seen my spreads move against me intraday enough on sharp moves to determine that I would be more net positive than playing the credit spreads. Although credit and debit spreads are synthetically equivalent at the same strikes, the way they are managed are different and their prices are far from even given the SPX b/a spreads. Therefore I would only make the big money if the market really moved closed to my short strikes with expiration close and that has happened only 2 times and the potential profit to take during those times would not have been greater than my current profit especially when the losing debits in the other months are taken into consideration.
6. The nature of the IV skew in SPX puts allows me to go relatively deep OTM and make 2-3% a month regularly whereas the debit spreads would require spending more money and waiting for the big move to cover my debit losses and make a profit. I know the reward portion of the debit spread looks large, but over the past year, the reward portions never materialized.
7. I am not saying I am totally against doing deep OTM debit spreads, but in SPX, credit spreads are preferred by me in how I can manage the position. Debits on SPY may be more worthwhile as mini-lottery tickets given the costs (or XSP).
8. Even if I were to take a loss on a position, I do not have 100% of my capital invested in these strategies and would never blow up my account. Moreover, with ES futures and hopefully VIX options, I can reduce the damage caused by a sudden drop or rise and therefore limited my loss in those rare fat tail events. There is no perfect hedge since there is no risk-free trading, but I can survive even a 20% drawdown on my risk margin and continue trading in size and earn back a portion of that loss. I would be down for the year most likely, but I would not be blown out or out of game at all. If this happens it is a down year in the course of trading but it would be a very rare event that I would have to deal with like any other trader. Since I am very conservative with my strike selections, I do not think I can make the same money with debits since after 6 or 7 months of losses I would have to keep scaling dowm my positions and a profit could perhaps not even get me back to even.
So my personal risk management, trade management and portoflio management styles favor the credit spreads on the SPX over the debit spreads. I think looking into debits on SPY or XSP may be worthwhile when my analysis sees large potential price swings and I am willing to take a directional bet.
Your points are well taken and I really cannot refute as I see now flaws in your statements. My decision to do the credit spreads over the debits is more of a preference in the ways I can manage the portfolio of trades and select strike prices. Let me respond to your different points in the hope I can illustrate my points as well, but not in an effort to say I am right or you or wrong but merely to illustrate my side of the story, so to speak.
1. The 1370/1380 call spread was added merely to finance the cost of my put hedges and return some premium back to me. I chose the 1370 strikes because I honestly feel those strikes are well OTM to be any threat given current market conditions. I was simply adding credit to the IRON CONDOR position and would not open such a spread really on its own. Thus, I would not choose to go long the 1370/1380 spread even if I were predisposed to debit spreads since I see no threat of the market hitting that point unless conditions change. Therefore, I see the $450,000 profit or so on a debit spread is so unlikely as to make it a losing trade. I could go to lower strkes to raise the possibility but the debit cost would be so high and a few months of those would eat severly into my account.
2. The sales price of $0.20 was off the mid-point. If I were to buy this spread I most likely would have had to pay about $0.50 if I got a great fill, $0.60 more probable. So the cost would have been a lot more.
3. The reason I favor credit spreads is to bring in regular income. I the past year or so of this journal I only adjusted positions twice and the market never moved past my original short strikes to begin with. My adjustments were cautionary and the price to buy back the spreads was not extremely high and was offset by selling further OTM spreads based on my analysis at the time. If those had been debit spreads and sold for a profit I do not think I would still have been positive for the year given the other months of non-movement. Therefore, if I simply held debit spreads to expiration, I would not have had any winners in my positions. I would have had to spend debits month to month and reduce my portfolio balance waiting for the fat tail which never came. Also the price of the debits would be much higher than the credits due to the SPX bid/ask spread. So instead of making the profits I made last year, I would have lost closse to double that money in debit spreads. Instead of having regular cash outflows waiting for the big move, I would rather take in regular credits and grow the portfolio while hedging and limiting my risk as best as possible. It is a portoflio management preference really.
4. I agree on the theta issue. The nature of the spread substantially offsets the effects of time decay and volatility changes. The true threats to the position are delta/gamma and the positions profit from my choice of where I expect the index NOT to be by expiration. Therefore I am not playing theta although it does help in the last week or so if the spread is well OTM.
5. I have not seen my spreads move against me intraday enough on sharp moves to determine that I would be more net positive than playing the credit spreads. Although credit and debit spreads are synthetically equivalent at the same strikes, the way they are managed are different and their prices are far from even given the SPX b/a spreads. Therefore I would only make the big money if the market really moved closed to my short strikes with expiration close and that has happened only 2 times and the potential profit to take during those times would not have been greater than my current profit especially when the losing debits in the other months are taken into consideration.
6. The nature of the IV skew in SPX puts allows me to go relatively deep OTM and make 2-3% a month regularly whereas the debit spreads would require spending more money and waiting for the big move to cover my debit losses and make a profit. I know the reward portion of the debit spread looks large, but over the past year, the reward portions never materialized.
7. I am not saying I am totally against doing deep OTM debit spreads, but in SPX, credit spreads are preferred by me in how I can manage the position. Debits on SPY may be more worthwhile as mini-lottery tickets given the costs (or XSP).
8. Even if I were to take a loss on a position, I do not have 100% of my capital invested in these strategies and would never blow up my account. Moreover, with ES futures and hopefully VIX options, I can reduce the damage caused by a sudden drop or rise and therefore limited my loss in those rare fat tail events. There is no perfect hedge since there is no risk-free trading, but I can survive even a 20% drawdown on my risk margin and continue trading in size and earn back a portion of that loss. I would be down for the year most likely, but I would not be blown out or out of game at all. If this happens it is a down year in the course of trading but it would be a very rare event that I would have to deal with like any other trader. Since I am very conservative with my strike selections, I do not think I can make the same money with debits since after 6 or 7 months of losses I would have to keep scaling dowm my positions and a profit could perhaps not even get me back to even.
So my personal risk management, trade management and portoflio management styles favor the credit spreads on the SPX over the debit spreads. I think looking into debits on SPY or XSP may be worthwhile when my analysis sees large potential price swings and I am willing to take a directional bet.
I didn't expect to hold them till expiration when I first opened the position, butthe drop was so dramatic that I got my hopes up when we were 30+points OTM with a few days left. Those hopes were quickly shattered yesterday. In retrospect I should've closed it for 0.05-0.10 when I had the chance.
RUT is a wild cat.
I am out of my position
I had 15 780/790/720/710 condor for 1.65. I willl let the Bull PUT expire worthless. I get out of 780/790 for 1.45
So I will make 0.20*15=$300 on the condor
Hedges: Bought 1 RUT 770@4.50. Sold back at 6.40 Gain $190
I also had 8 IWM77 @0.60; sold back @0.50 lossof 8*10=$80
Total: +300+190-80= Gain of $410.
Hedging can be very good sometimes. That's my lesson
I will ythink twice before trading this thing again. But I am Happy I am out safe. I won't regret if RUT goes back to 760 this afternoon but I know I will live another day in peace without cold sweat.
For those interested in my RUT trading you can go to picconrut to search this info later
I am still working with OEX 595/605 , OEX 600/605, OEX 605/610. 595/605 is the one I need to watch closely. Otherwise I am ok for this month. I am still in target to have a pretty good month. 4 to 5% is ok for me but I am looking for more.
I am out of my position
I had 15 780/790/720/710 condor for 1.65. I willl let the Bull PUT expire worthless. I get out of 780/790 for 1.45
So I will make 0.20*15=$300 on the condor
Hedges: Bought 1 RUT 770@4.50. Sold back at 6.40 Gain $190
I also had 8 IWM77 @0.60; sold back @0.50 lossof 8*10=$80
Total: +300+190-80= Gain of $410.
Hedging can be very good sometimes. That's my lesson
I will ythink twice before trading this thing again. But I am Happy I am out safe. I won't regret if RUT goes back to 760 this afternoon but I know I will live another day in peace without cold sweat.
For those interested in my RUT trading you can go to picconrut to search this info later
I am still working with OEX 595/605 , OEX 600/605, OEX 605/610. 595/605 is the one I need to watch closely. Otherwise I am ok for this month. I am still in target to have a pretty good month. 4 to 5% is ok for me but I am looking for more.
RUT is a funny animal..every single "big" MM says sm caps aren't going anywhere that the money should be in lg cap...in the meantime RUT goes up..up..up..
Piccon, Coach, and anyone else that can give me an answer,
I have the April 800/810 calls and 650/640 puts iron condor for
RUT and was wondering at what price do you look to close out the call side of the trade. I'm thinking of getting out if the RUT goes to 790 or above. Does this sound about right?
Also, I have the same question for you on the OEX. When do you look to close out of the trade when it approaches your short price? How close must it get?
DAVE