SPX Credit Spread Trader
- Thread starter El OchoCinco
- Start date
No. All else being equal with the same short strike, a 5-point spread generates the greatest return and it just goes down from there.
Two main reasons are:
1) IV increases as you get further OTM so the long leg is getting more expensive.
2) Technically speaking a 30-point spread is less risky than a 5-point spread with the same short strike, because the underlying is less likely to breach the long strike, which is what determines you max loss. IOW, in a 5-point spread you are more likely to reach max loss if held to expiry.
Think of it this way. Ignoring slippage, selling a 10-point spread (1 SPX 1350/1360 bear call) is essentially the same as selling two 5-point spreads at different strikes (1 SPX 1350/1355 and 1 SPX 1355/1360).
As I've been lurking for awhile now I have decided to (with coach's permission of course) to participate. In the spirit of openess and sharing I'm including a picture of myself as well as a bit about myself.
http://www.nature-reserve.co.za/images/ecca-aardvark.jpeg
I think I'm looking pretty buff actually and knowing no other way to say it I'll just blurt it out...Coach I'm really sorry but I have it on very good authority the JA prefers guys with really big... long....noses
and I have the biggest, longest and swingingest nose around...you Cache and the other dudes in the SPX thread haven"t a chance
You all may call me A, Mr A or Mr Big
I do however have excellent animal instincts which may help and am willing to share via AA (Aardvark alerts) my trades...that is if anyone is interested
Anyway to the business. I'm short fairly large size (as Riskarb might say) the 1340's and lesser amt 1345's so very interested in mkts reaction to Mr. B. I actually haven't a clue what will happen. I've been suprised at the continued strength in the market while it does seem to have a soft underbelly. The oscillators...charts and divining rods all seem to say we are overbought yet we manage to climb month after month. I really bet on May's set being lower than April and felt when I put on my bear calls very safe and secure with those positions..while the put side I put on with great fear...go figure I'm now looking at all the options...even the box spread! most likely will wait until Thurs or Friday to make a move if I'm going to move at all (we Aardvarks are rather slow after all). If I survive until next week will look to close early pt of week.
http://www.nature-reserve.co.za/images/ecca-aardvark.jpeg
I think I'm looking pretty buff actually and knowing no other way to say it I'll just blurt it out...Coach I'm really sorry but I have it on very good authority the JA prefers guys with really big... long....noses
and I have the biggest, longest and swingingest nose around...you Cache and the other dudes in the SPX thread haven"t a chance You all may call me A, Mr A or Mr BigI do however have excellent animal instincts which may help and am willing to share via AA (Aardvark alerts) my trades...that is if anyone is interested
Anyway to the business. I'm short fairly large size (as Riskarb might say) the 1340's and lesser amt 1345's so very interested in mkts reaction to Mr. B. I actually haven't a clue what will happen. I've been suprised at the continued strength in the market while it does seem to have a soft underbelly. The oscillators...charts and divining rods all seem to say we are overbought yet we manage to climb month after month. I really bet on May's set being lower than April and felt when I put on my bear calls very safe and secure with those positions..while the put side I put on with great fear...go figure
I'm now looking at all the options...even the box spread! most likely will wait until Thurs or Friday to make a move if I'm going to move at all (we Aardvarks are rather slow after all). If I survive until next week will look to close early pt of week.I do a big portion of my SPX trades using es options. Without going into details, sometimes ES options can be very advantageous over SPX options if you play close to the market. The only downside that i have seen is the fact that while you may be able to get filled mid point between the bid and ask on the SPX options, midpoint fills on the ES options dont exist and you simply have to hit the bid/ask where the spread is somewhat narrower. This fact will probably render them useless for FOTM spread strategies.
ES aren't bad for fotm strategies provided you're willing to hedge your deltas with futs until you're filled. IB has a spread/combo function through globex with allows you to quote a single line for spreads/combos on E-mini options. Nice feature... oops, sorry, you guys are all with TOS. =)
What a great journal. As a relatively new spread trader, the insights I've obtained from this thread have been extremely informative.
I have a question re: cache's repsonse bleow re: 30 v. 5 point spreads, specifically reason #2...unless I am missing something, which given my relatively new status as a credit spread trader is entirely possible, it would seem that:
1) a 5 pt spread is less risky than a 30 pt b/c of a better ROI
2) even though the uderlying is less likely to breach the long strike on a 30 than a 5, your max loss would either be the same or greater with a 30 pt than with a 5, given the same short...even if the 30 long is not breached. For every 1 point move of the underlying adverse to you short, you are losing 100 of your margin, regardless of whether your initial margin is 500 or 3000.
Let me illustrate:
hypothet. let's say you buy a 1350/55 for .5 and a 1350/1380 for
2.0. Your risk (margin) 450 on the first and 2,800 on the second. Let's say at expir. the underlying settles at 1360.
Your max loss on the first is 450. Wouldn't your max loss on the 2nd be 800? At expir. the 1350 would be worth 1000 minus your credit of 200.
So with the 5 your risking 450 for a return of 11.1% and with the 30 you've lost 800 for a return of 7%.
Am I missing something?
I have a question re: cache's repsonse bleow re: 30 v. 5 point spreads, specifically reason #2...unless I am missing something, which given my relatively new status as a credit spread trader is entirely possible, it would seem that:
1) a 5 pt spread is less risky than a 30 pt b/c of a better ROI
2) even though the uderlying is less likely to breach the long strike on a 30 than a 5, your max loss would either be the same or greater with a 30 pt than with a 5, given the same short...even if the 30 long is not breached. For every 1 point move of the underlying adverse to you short, you are losing 100 of your margin, regardless of whether your initial margin is 500 or 3000.
Let me illustrate:
hypothet. let's say you buy a 1350/55 for .5 and a 1350/1380 for
2.0. Your risk (margin) 450 on the first and 2,800 on the second. Let's say at expir. the underlying settles at 1360.
Your max loss on the first is 450. Wouldn't your max loss on the 2nd be 800? At expir. the 1350 would be worth 1000 minus your credit of 200.
So with the 5 your risking 450 for a return of 11.1% and with the 30 you've lost 800 for a return of 7%.
Am I missing something?