SPX Credit Spread Trader

[rallymode]

Quote from riskarb:

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. =)

im not with TOS im a big IB fan, and I know what you mean by the single line quote for spreads/combos. However, you can only quote, cannot place orders on futures options as spreads using TWS, you have to leg in. Globex doesnt recognize combo orders with options. Unless you have a secret version of TWS that isnt available to the public

 

[riskarb]

Quote from rallymode:

im not with TOS im a big IB fan, and I know what you mean by the single line quote for spreads/combos. However, you can only quote, cannot place orders on futures options as spreads using TWS, you have to leg in. Globex doesnt recognize combo orders with options. Unless you have a secret version of TWS that isnt available to the public

Ooops, maybe I let the cat out of the proverbial bag.

 

[rallymode]

Quote from riskarb:

Ooops, maybe I let the cat out of the proverbial bag.

if you share your TWS build, i will let you take JA out in town

 

[rsflint]

Quote from Cache Landing:

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).

Cache, thanks for your response. I understand what you mean regarding once the P&L line starts going down how with a 30 point spread it would take a bigger move ITM to get to max loss as compared to a 5 or 10 pointer. However, I'm just not comfortable doing 30 point spreads because the margin requirement is so large ($3,000 minus credit received) plus it looks like the % return for the $ invested isn't necessarily better.

Once I figure out where I'd like to open my short options, I typically do a 5 and 10 point analysis using the OX credit/margin calculator to figure out which credit received is the biggest % return for the $ invested. Sometimes the 10 point ($1,000 less credit) has a larger % gain but sometimes it a 5 point ($500 less credit).

Rookie Rich

 

[domestic]

Quote from Aardvark:

Hi domestic...what is your position for May? Are you planning any rolls? tia Aardvark

funny you ask.......yes. i currently have a 1310/1315 call credit spread that i received 2.6 (may).......

without getting off topic, any idea's?(beyond my own of course)

 

[cdowis]

>futures

I do my spreads on the futures -- SP.

 

[cdowis]

>Do 30 point spreads generate a greater % return than a 5 or 10 point spread?

I don't think in terms of return, but risk management.

A 30 pt spread allows me to place my shorts further away with a decent premium, and, in this case, it was just the right amount to balance the call side of my position. Just a matter of style.

>Also I think you mean a credit of $1.10.

I am in the futures, so I use ticks. 110 ticks = $275.

 

[Aardvark]

Quote from domestic:

funny you ask.......yes. i currently have a 1310/1315 call credit spread that i received 2.6 (may).......

without getting off topic, any idea's?(beyond my own of course)

wow I certainly don't have any good ideas...Rallymode might? The reason I ran into your posts is back in Oct/Nov/Dec we had some very challenging spreads to deal with...so I was reading to try and remember what I was thinking when I rolled my Dec short call (1285 to 1295). I rolled that on Nov 25 and I think because the market was moving up strongly still and I had a ways to go before Dec exp.

With just 9 days of trading and a 25% chance of landing in the money with my 1340 call I'm leaning toward holding out for more theta. I will close my put spread (try to today) and be ready to open another p/s on Friday to help pay the costs of rolling the call if necessary. I'd love to be able to game B's speech today ( buying a higher call spread before the speech and selling the 1340/1350 after the speech assuming the mkt goes down). Not wild about that idea even though Coach SAID we'd go down...he can't be right TWICE in a week can he? (nice call on the up move when we were churning in no-man's land last week)

 

[rdemyan]

Unless I'm missing something, I'm sure Cache is assuming that the same amount of margin is invested in each scenario. So you'll have 6 times as many positions with the 5 point spread as with the 30 point spread. To compare 10 - 5 point spreads with 10 - 30 point spreads would not be fair. To me it makes sense to keep the margin the same for the comparison: so 60 - 5 point spreads versus 10 - 30 point spreads.

So in your hypothetical, the loss would be $2700 for the 5 point spread where the SPX finishes at 1360 (I think I calculated that right).

Edit: For the purposes of setting up a hypothetical comparison, my definition of margin here does not include any credits received. However, the 'loss' for your hypothetical does.

Quote from scienter:

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?

 

[rallymode]

Quote from domestic:

funny you ask.......yes. i currently have a 1310/1315 call credit spread that i received 2.6 (may).......

without getting off topic, any idea's?(beyond my own of course)

what do you plan on doing with that 1310/1315 spread?