SPX Credit Spread Trader

[rdemyan]

Coach:

One thing I like about your trading style is that when you put on a position you live with it and don't seem to voice (at least in this forum) regrets over having missed a short-term high or low where you would have gotten more premium. For me it's a good example of not dwelling on what could have been but dealing with what is. Thanks for the calm, even approach which is certainly a good example for me to follow.

Quote from optioncoach:

Why press my luck? lol.... I already have my IC position for MAY, no need to let greed get in the way . Also... I could be wrong naturally and no need to load up on the one side.

If I want to play my analysis, then I would be better off doing a diagonal calendar perhaps which I am looking into right now .

 

[El OchoCinco]

I leave my missing high and low whining for my daytrading where I constantly bitch to myself about getting in and out too soon or too late lol.

As for credit spreads, I will never time it right and it did not take long to convince myself of that fact. If the credit was enough to convince me to get in, then I get in according to my plan and let the position do what I expect and even if I could have gotten better the next day, I also could have gotten worse so they even out.

You have to trade with confidence that THIS trade will be profitable, not that THIS trade is at the BEST price possible since that is truly difficult to know in advance. (gleamed from Market Wizards in a sense).

Quote from rdemyan:

Coach:

One thing I like about your trading style is that when you put on a position you live with it and don't seem to voice (at least in this forum) regrets over having missed a short-term high or low where you would have gotten more premium. For me it's a good example of not dwelling on what could have been but dealing with what is. Thanks for the calm, even approach which is certainly a good example for me to follow.

 

[Maverick74]

Quote from optioncoach:

Just a few general comments on the discussion:

1. "Telling it like it is" really only means being honest. Being nasty about it is a personal choice . Like if I ask Jessica Alba about what I am planning to wear and she says "Those colors do not match and look bad together, you should choose another shirt", that is telling it like it is.

Saying "You look like an idiot in those colors, change before you embarass yourself, me, my family and every other male on the face of the planet, even blind people!" is doing it in an unneccesarily rude way and obscures the message that is trying to be conveyed. let's not use "telling it like it is" as a license to say it rudely.

2. I find the discussions where we tell others what would make them sleep better at night amusing. If you are in any position which keeps you up at night or has you sick to your stomach while holding it, then get out immediately as you should not be in that position to begin with. I sleep fine at night with my credit spreads because I have confidence in my strike selection and loss limitation measures (futures, partial hedges, etc...). I cannot perfectly hedge the position because it is not a risk-free trade but by not putting all my eggs in one basket, I know I will never blow up entirely. So I sleep fine . I get a little stressed at times on certain positions but so does every trader on their portfolio and that is normal. I would actually be more stressed watching my portfolio shrink month after month on losing debits waiting for the move. Just a personal preference. Trade the strategy or approach that best fits your trading approach. No law says you have to lose everything on an adverse move or even sit by and let it take you out.

3. For the strikes that I personally choose and they way I manage the trades, the credits are better for me than the debits. Based on last year, I would have made no money or lost money if I did debits at the same strikes instead of credits. Intraday, they never really got juiced at all and who is to say I would have gotten out at the higg point of their premium. Every spread I sold last year never was ITM at any time and even the 2 adjustments I made, did not cost a lot of money to buy back. In fact it would have brought in less to sell if it were a debit given the SPX b/a spreads and with the debit bleed I would have had all summer I would have been close to flat I think. Not making a generalized statement on credits v. debits, but in my strike selection and the way I manage the trades, the credits work best for me. Credit and debit spreads are the same in theory but in SPX practice they have been quite different in my experience. So for me I got to stick with what works.

As I said, with SPX it does not make sense given the costs and skews on the put side but anyone interested in the debit positions should look to SPY or XSP.

4. Finally, assuming the belief and the generalization that the positions are the same leads to me ask then why one has a preference to argue for debits over credits as opposed to saying you could do either and it would not matter? One has to assume that debits would be held until they reached their maximum value to get that nice windfall to me is as erroneous as assuming i would hold my credit spreads until they hit the maximum loss.

Moreover, assuming one would get out early and take the profits on a debit spreads also has to assume that one would get out with a limited loss on a credit spread and make an adjustment to bring in credit to cover the cost. In my two adjustments I either took a much smaller loss or still made money. If the market was really moving against me I would get out of the way and make money the other side or take a futueres position to hedge. I must simply take measures to limit my losses and get out. I am not afraid of losses, just big ones so I want to limit those as best as I can. I cannot do anything about a 9/11 event so I do not lose sleep over it.

As I always said, the strategy you choose is not as meaningful as the way you manage your risk and portfolio. I manage my risk and portfolio much better with credits than I could with debits on the SPX. I am not 100% right or have 40 months of consecutive profits, but I a make money consistently and that is my goal. I got to use the strategies that fit me as best as I can and I would never tell anyone to blindly go against their own trading style.

So what is the bottom line? Trade the strategy or approach that best fits your personal trade and risk management style and thoroughly research the risk and reward profiles of that strategy and of the underlying you are trading it on. Risk money that you can and not 100% of it. Losses are inevitable so the goal is not to ever have one, but to make them as small as possible under the conditions and keep your capital. Trade with a long-term perspective no matter how short the time frame of your trades. Although I day and month trade, I focus on annual results.

And most importantly, never let more than 5 pages go by without a JA pic...

Phil,

I had typed a long response here to this post but accidently deleted it. I really don't feel like re-writing it. So I'll try to sum it up very quickly.

I gave Donna a proportional response to the absurdity of her comment. I understand now she did not make herself very clear at all. She never said anything about her history only relating to that strategy. Anyway, I am very blunt with people. Most people hate that, some people like it. Good thing I have nothing to sell or I would be in trouble.

Real quickly now on your credit spreads, I am not arguing whether the strategy is good or bad. Simply that people don't understand it. Credit and debit spreads are EXACTLY the same thing. I went into a long diatribe on this before I deleted it and don't feel like writing it again. LOL.

This is why I prefer to have these conversations in person vs the net. It's much easier to communicate. LOL.

I went on a long spiel about how I think it's in our genes to be self destructive. I used an example of gay men having unsafe sex. They are going after the whole instant gratification thing knowing that somewhere down the road they will meet their grim reaper. This is mery much akin to the option credit trader who needs the assurance of small profits month after month knowing that they too could meet their demise down the road. Of course as a society we see this everywhere. We see it in our addiction to popping pills, over eating, smoking, unsafe sex, gambling, we have a pre-disposition to destroy ourselves and that carries over to our trading.

I also asked you some questions as far as why we should assume a debit trader has to hold his positions to expiration. I then went on a long spiel about how option trading really comes down to making probability bets. The only thing that changes is how the p&l is being distributed. But the odds never change. Every adjustment you make is simply re-distributing the p&l. That's all. Sure we call them hedges, blah, blah, blah. But those are things we tell ourselves to make us feel better. Kind of like a guy justifying his cheating on his wife by saying she is cheating too. It's all so we can feel good.

Once you start thinking about options as simply being a probability bet, you will get away from this whole credit vs debit thing. Remember the dice game. You are paying 3.40 for the right to play and selling that right for 3.60. Very simple.

 

[riskarb]

Mr Subliminal speaks:

Quote from Maverick74:

Phil,

I went on a long spiel about how I think it's in our (my) genes to be self destructive. I used an (personal) example of (wonderful!) gay men having unsafe (w/o chaps) sex. They (me) are going after the whole instant gratification thing knowing that somewhere down the road they will meet their grim reaper (dreamboat).

 

[Maverick74]

Quote from Sailing:

Mav,

As a current under-paid and under-appreciated statistics/Calc teacher, I'm always exploring the theoretical side of options positions.... let me share some thoughts.

Each strategy has it's time and place in the market. Some more so than others depending on the structure of the trade with respect to your outlook (target price and time frame).

But as Nassim Taleb once said,

"We tend to think that traders make money because they are good. Perhaps we have turned the causality on it's head; we consider them good just because they make money. One can make money in the financial markets totally out of randomness."

My analysis of the 'ZERO SUM' game we call trading options, from a theoretical point of view... is just that ZERO. What I mean to say is that.... given enough time... over time... the expected return at best is ZERO. (less commission, b/a, etc)

Now... my recent analysis of trading from a 'greek perspective', rather than an options position perspective.... is unclear. Would you elaborate on the following analysis:

I have found trading volatility (long vol using diagonals), then selling volatility (selling calendars against the diagonal), and converting to THETA decay over an alternating two month cycle with various strike prices and positions is as close to ZERO sum as I can find. It tends to remove the Delta/Gamma game which most traders play.

Could you elaborate on this perspective and suggest any variations you may have experienced.

Thanks,

Murray

Hi Murray,

As I stated in my previous post, I believe we tend to over complicate things too much. The whole idea of theta and gamma and vega is really pointless in the understanding of options. The reason those greeks exist is to manage very large complicated positions that can't be broken down easily by dissecting out synthetics.

When you make a simple option trade, you are making a probability bet. No strategy is any better or worse then the other. I was trying to argue a case for the role luck plays over the long run in this profession. If you have a strategy with large amounts of risk, sooner or later, bad luck will get you. There is nothing we can do about this. And the inverse of that is true. No matter how bad of a trader you are, and you could be the worst trader on earth, if you have a position with huge upside potential, sooner or later, you will trip over some good luck and make a fortune. There are many stories like this in the floor where guys made millions on out trades there were merely mistakes on their part and they left the floor to retire. LOL.

I agree with what Taleb says for the most part regarding luck. Making money does not in and of itself justify the strategy. No more then someone who cheats on their wife and never gets caught. Taleb made some great arguments concerning how we tend to focus our trading over short term results. Look, I could sell naked puts in the NDX every month 200 pts OTM for .05 and .10. This strategy would produce a terrific track record over lets say 5 to 10 years. Hell i might be able to go 300 pts out. People who do not know what I am doing will call me a god. A natural, the next Soros, how does he do it. The guy never loses!

But the day will come when I not only blow out my account but probably my broker and perhaps my clearing firm as well. Now the trick is, how long can I push my luck. what if I just did this for 5 years. What are the chances, what are the odds? Will I get away with it? This is not trading. But to an outsider, this guy looks like the greatest trader ever.

 

[El OchoCinco]

What I do not understand is why if your argument is that they are the same, you argue for doing the debit over the credit?

Also, in the past year, my results show FOR ME only, not in general, that the debits would have been a loser just going on intraday swings of the spread, not holding to expiration. (I cannot assume I would have gotten out at the top of the spread value). I think the strikes I select are not conducive for debit spreads. If you took the other side of all my trades you would be flat more or less. I do not think we can discuss this in a vaccuum without looking at the SPX and IV skews and distance of strikes OTM.

This is not self-destructive as you say. If the debits are not self-destructive, then how could the credits, which you say are equivalent, then be self-destructive. If you can sell a debit spread before expiration, why cannot one get out of a credit spread before expiration if it is moving against you. You cannot assume a credit spread always goes to maximum risk when against you. It can be partially hedged quite easily and no one would sit in a spread as the market approached your short strike and watch it pass you by.

You present clear aguments why credits and debits are equivalent in theory but in practice they operate differently in a portoflio depending on how the positions are managed.

I already guaranteed that I will never blow up, never wipe out my capital account, never tkae my broker down with me and never be forced out of the trading game no matter what happens like a naked put seller would be (Niederhoffer). I also know my threshold for losses and what I can absrob and when to get out. Even a 9/11 event would not wipe me out, even less so if the futures market stays open.

The strategy is not the key, but how it is managed. Someone who feels more comfortable doing debit spreads and just waiting for the big bang (Taleb) can certainly do so if they have deep pockets but does it make his approach the right way? I can take a piece of my portfolio and generate monthly income year in and year out and manage my losses where appropriate.

Am I a good trader or just lucky? It would be wrong to assume it is pure luck since the risk is managed. Moreover, luck or skill are words people use to define others. The market has plenty of opportunities to make money and I am just taking mine .

 

[rdemyan]

Mav:

A while back I posted a graph showing how program trading has increased to account for 60% of the volume traded. I'd be curious to hear your opinion on program trading and how it affects the probabilities you've been discussing. Since program trading seems to be controlled by a relative few, aren't they in effect "stacking the deck". Edit: Well, maybe I should say that they have the ability to "stack the deck" which they may or may not choose to do.

Quote from Maverick74:

Hi Murray,

As I stated in my previous post, I believe we tend to over complicate things too much. The whole idea of theta and gamma and vega is really pointless in the understanding of options. The reason those greeks exist is to manage very large complicated positions that can't be broken down easily by dissecting out synthetics.

 

[IV_Trader]

Mav , what about diff vols on diff strikes ? Both cannot be "placed" fairly , something has to give. If one can gamma scalping it , isn't an small edge ? And any large move in any detection is very welcome here.

 

[momoneythansens]

Quote from Maverick74:

Simply that people don't understand it.

Just curious on why you seem convinced of people's lack of understanding and more interestingly why it irks you so LOL.

I went into a long diatribe on this before I deleted it and don't feel like writing it again. LOL.

Never fear, your long diatribe on this topic is well replicated on many other threads for those that are interested! (including this thread some 7 months ago). For those that aren't - they wouldn't have read it anyway.

I went on a long spiel...

I then went on a long spiel...

That poor spiel. Hope you don't weigh too much.

 

[momoneythansens]

LMAO...I'm nearly crying.

Quote from riskarb:

Mr Subliminal speaks:

Quote from Maverick74:

Phil,

I went on a long spiel about how I think it's in our (my) genes to be self destructive. I used an (personal) example of (wonderful!) gay men having unsafe (w/o chaps) sex. They (me) are going after the whole instant gratification thing knowing that somewhere down the road they will meet their grim reaper (dreamboat).