SPX Credit Spread Trader

[qamhwr]

I have a problem in that they do not address the options that have been bought and sold or sold and bought but not allowed to go the expiration. Also they do not address the fact that there are traders that do advanced strategies such as butterflies where you want two out of the three to expire out of the money. My feeling is that this data has a questionable value.

George

Quote from momoneythansens:

More background info for those that are interested:

ProfitTaker has an interesting take on the article in question.

Maverick comments a few posts later in his usual inimitable style.

All courtesy of the now infamous and mammouth Writing options for a living thread from last year.

[EDIT: I've made 300 posts now so no need to keep spamming this thread today]

 

[ryank]

Quote from rallymode:

great fill, i opened at SPX 1316 5 days ago and only got $1.6. On a second thought, if it was a paper trade then probably thats why, had it been real i doubt you would've gotten anything better than $1.2

This is my first time using TOS's papertrading platform. The mid was at $1.45 when I entered the trade and it filled me at that number. Realistically I would be around $1.25-$1.30 if it was even filled. I can't find a way to adjust my fill so I will just go with it as is with the understanding that in the real world the fill would have been much less.

There has been much discussion lately about hedges (the infamous VIX options and others). Rallymode and Cache got me thinking about the closer to the money spreads and using reserve cash as a hedge by rolling up/down and increasing contracts (I know, I know, Martingale and all that ). I'm working out the risks, adjustments etc. in my head and on paper right now as this technique seems like a more "sure" way to hedge rather than the "hope" that the VIX options price out the way people think they will during a Black Swan or that a prego butterfly will work out the way you hope, or others.

Now let me qualify some things before the flaming begins, I know there is no sure thing with any of the hedges. Reasonable position size (relative to your portfolio size) is a key part of risk managment, disclaimer, disclaimer, disclaimer...

Rallymode and Cache are trading this way and it is a strategy that is clicking for me right now and I am investigating it, nothing more nothing less. I think it is another interesting SPX credit spread strategy to investigate just like the diagonals that Sailing has exposed us to (my first papertrade worked out well Murray!).

 

[wonton]

Quote from ryank:

This is my first time using TOS's papertrading platform. The mid was at $1.45 when I entered the trade and it filled me at that number. Realistically I would be around $1.25-$1.30 if it was even filled. I can't find a way to adjust my fill so I will just go with it as is with the understanding that in the real world the fill would have been much less.

I noticed the same thing on the paper trade TOS platform. I think if you change your limit order to 1.30 it will fill at that price, but I am not 100% sure....why not try it.

Wonton

 

[Cache Landing]

Quote from ryank:

This is my first time using TOS's papertrading platform. The mid was at $1.45 when I entered the trade and it filled me at that number. Realistically I would be around $1.25-$1.30 if it was even filled. I can't find a way to adjust my fill so I will just go with it as is with the understanding that in the real world the fill would have been much less.

There has been much discussion lately about hedges (the infamous VIX options and others). Rallymode and Cache got me thinking about the closer to the money spreads and using reserve cash as a hedge by rolling up/down and increasing contracts (I know, I know, Martingale and all that ). I'm working out the risks, adjustments etc. in my head and on paper right now as this technique seems like a more "sure" way to hedge rather than the "hope" that the VIX options price out the way people think they will during a Black Swan or that a prego butterfly will work out the way you hope, or others.

Now let me qualify some things before the flaming begins, I know there is no sure thing with any of the hedges. Reasonable position size (relative to your portfolio size) is a key part of risk managment, disclaimer, disclaimer, disclaimer...

Rallymode and Cache are trading this way and it is a strategy that is clicking for me right now and I am investigating it, nothing more nothing less. I think it is another interesting SPX credit spread strategy to investigate just like the diagonals that Sailing has exposed us to (my first papertrade worked out well Murray!).

I have to admit that I do my fair share of FOTM credit spreads, but being closer to the underlying has some big advantages also.

In regards to the supposed Martingale adjustments.... This is my take on it.

Right now it is very difficult to add to a bear call spread when you roll up. This is because there aren't multiple levels of resistance. The previous market highs from 00' were much higher than we are right now. The only natural resistance that I can forecast is at 1400. So if we really start heating up, I think we will make it to 1400 pretty quick. Under these circumstances I would not be adding to a bear call spread.

On the other hand, there are multiple levels of support for a bull put spread. I would find the strongest support and make sure that if I was going to add to the position, that I would roll down far enough that my short strike was below that support. Under these circumstances I don't know that I would consider this "Martingale", because if I re-evaluated the situation I would likely think that it was a good time to open a new position. Thus adding to an existing position is not really a problem.

As mentioned previously, I think that is a great way to decide when to add to a losing position. "Would I open this position now if I didn't already have an open position?"

Anyway, beyond all that, I do think that the odds are better the closer you get to ATM anyway. I might even venture a little closer if it weren't for that crazy SET issue.

 

[El OchoCinco]

My thoughts are the same when it comes to these "expire worthless studies". The options bought and sold for profits are never counted. Also, the options that are still open and which were not sold usually are the ones that were worthless and the long holder just let them go as opposed to the long holder profitable ones which were closed to capture the time value premium. There are many potential statistical flaws in such studies and I generally ignore them for the most part.

The "edge" is not in either buying or selling premium but in matching the best strategy with your own risk and trade management style as well as experience, skill, emotional capabilities, capital and tiem commitments. I consider myself an above average investor with skills in reading charts and making decisions off of it, but being long prmeium is just not in fitting with my trading style any longer, although I occasionally go long premium. So I do not sell premium because it is better per se, just better for me. Anyone who professes to tell you the best way to trade for you, as long as you are not making a blatant risk and trade management oversights and are making money consistently, is not acting in your best interests. Nor should they have any desire to so take it al with a grain of salt.

Also, most of the times those studies are mentioned are part of marketing materials where something is trying to be sold to you...

Quote from qamhwr:

I have a problem in that they do not address the options that have been bought and sold or sold and bought but not allowed to go the expiration. Also they do not address the fact that there are traders that do advanced strategies such as butterflies where you want two out of the three to expire out of the money. My feeling is that this data has a questionable value.

George

 

[rallymode]

Quote from Cache Landing:

I might even venture a little closer if it weren't for that crazy SET issue.

Cache,

i guess you and i dont think alike about everything afterall.

With all due respect, i think that your fear of the SET is misguided. It is my impression that many here view the SET as the little brother of the black swan. Some even avoid using the SPX all together or prefer paying more in commissions or accept lesser credits on other instruments just so that they dont have to deal with the dreaded SET. While i agree that it is uncomfortable to see a winning position turn into a loser when you have no control over it since options expire thu night, i think the SET is just that - emotional discomfort. Its nature isnt much more than psychological and doesnt have much bearing on your long term results.

One of the benefits of being closer to the market is your increased r/r. With this relatively high r/r you can afford to see the position through as you are in no rush to close. And since probability bets is pretty much all we are doing here, letting things expire is probably a good way to go about things.

Statistically, with few exceptions, the SET is just as likely to help you as it is to hurt you. While sometimes it may turn your profitable OTM spreads into losers overnight, it will also save you and turn those losing ITM spreads into profitables OTM spreads just as many times.

I am not advocating that people completely dismiss the existence of the SET. People should clearly understand the risks it introduces on the short term, but over the long term, i think the SET is a non-event as the effects balance themselves out.

Just my views, you are welcome to disagree

 

[graemem]

Quote from wonton:

I noticed the same thing on the paper trade TOS platform. I think if you change your limit order to 1.30 it will fill at that price, but I am not 100% sure....why not try it.

Wonton

Been using the paper trade platform to trial butterflies - yesterday placed a butterfly with puts on the SOX with a .15 debit limit when the mid was flipping between .15 - .20 cents. After sending the order the mid sat at .20 as the SOX headed down on the charts. 30 minutes or so later SOX started moving up and the paper trade was filled. Not sure what it means in terms of real life fills though. I presume the paper trading platform is simply filling if it sees the limit order reach the mid on the live platform. So long as you take this into accountshoud be a good practise platform....

 

[tivthetrader]

i think that guy TIV doesn't have a clue about what he is doing; luckiest sob on the face of the trading planet- i heard that he thinks G-D tells him what to do. What a nut, huh.

 

[Cache Landing]

Quote from rallymode:

Cache,

i guess you and i dont think alike about everything afterall.

With all due respect, i think that your fear of the SET is misguided. It is my impression that many here view the SET as the little brother of the black swan. Some even avoid using the SPX all together or prefer paying more in commissions or accept lesser credits on other instruments just so that they dont have to deal with the dreaded SET. While i agree that it is uncomfortable to see a winning position turn into a loser when you have no control over it since options expire thu night, i think the SET is just that - emotional discomfort. Its nature isn't much more than psychological and doesn't have much bearing on your long term results.

One of the benefits of being closer to the market is your increased r/r. With this relatively high r/r you can afford to see the position through as you are in no rush to close. And since probability bets is pretty much all we are doing here, letting things expire is probably a good way to go about things.

Statistically, with few exceptions, the SET is just as likely to help you as it is to hurt you. While sometimes it may turn your profitable OTM spreads into losers overnight, it will also save you and turn those losing ITM spreads into profitables OTM spreads just as many times.

I am not advocating that people completely dismiss the existence of the SET. People should clearly understand the risks it introduces on the short term, but over the long term, i think the SET is a non-event as the effects balance themselves out.

Just my views, you are welcome to disagree

I'm not really inclined to disagree with you. In fact, I agree with everything that you said. In the long run, it is a non-issue, IF your strategy includes holding all positions through expiration.

My comment should be taken in light of a position exit preference. Thursday afternoon before expiry and I am 5-points OTM.... am I likely to close the position or ride it out for a worthless expiration? Under these circumstances I will close the position rather than letting a +10 point SET ruin my day.

Given that I will probably be in a 5-10 point spread, a bad SET could take me from a situation where I would capture 90% of the potential profit from the trade, to a 100% margin loss without the ability to adjust. On the other hand, a favorable SET will only benefit me as much as the additional potential profit. So the r/r of holding through the SET is horrible.

If my short strike is ITM a couple days before expiry I will roll the position. Once I've rolled, a favorable SET doesn't help me. When viewed in this light, SET is only a bad thing with the potential to hurt and completely lacking the ability to help.

So let's say that I think we will find strong resistance at 1320-ish. What I am saying is that we won't break-out past 1320, but I'm not saying that we won't close near 1320 thurs afternoon. If I've ventured too close with my short strike (say 1330), a close at 1320-ish won't allow me to sit through expiration. As stated above, the r/r of sitting it out is horrible.

So I like to give myself a good enough cushion past certain support/resistance. Under these guidelines, I would never find myself opening a position closer than 20 points above/below the underlying if I intended to hold it through expiry.

 

[rdemyan]

If my short bear call is withing 15 points of the SPX on opex Thursday, I will usually close it out. Bull puts I've been pretty much closing out prior to expiration.

I've found that if you wait until the last two hours or so of trading, it's relatively easy to get out. Of course, this assumes that the SPX is having a somewhat neutral day and of course that your not ITM.

However, to get out I typically have to leg out. I've generally been able to buy back the short for $0.05 or $0.10 max, and then I have an order on the long to sell it. If it sells, it's gravy. Buying the credit spread back (as opposed to just the short strike) has been, in my experience, considerably more difficult.

Quote from Cache Landing:

I'm not really inclined to disagree with you. In fact, I agree with everything that you said. In the long run, it is a non-issue, IF your strategy includes holding all positions through expiration.

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