SPX Credit Spread Trader
- Thread starter El OchoCinco
- Start date
Not coach either!
You are right to consider it illogical to be nervous about adjusting a 1375/1405 spread vs. having two seperate spreads: 1375/1390 and 1390/1405.
They are both the same.
As for point 2) Adjusting just the short leg is the same as buying back a vertical e.g. on your 1375/1405 spread, if you were to adjust the short leg up to 1390, this is identical to just buying back your original 1375/1390 spread. You will be left with your second 1390/1405.
By rolling up the short leg (in a Bear Call spread) you are buying a vertical. If the amount you pay for that vertical is more than what you got when you originally sold the vertical, then you are locking in a loss.
When you buy back a vertical in this manner, you are obviously taking risk off the table - this will be reflected in lower margin requirement when you do so.
IMO, it's better to think of any spread wider than 5-points to simply be a collection of 5-point verticals e.g. a 10-point vertical is just two 5-point verticals next to each other. You can buy back either one or both to lock in a profit or loss depending on the situation. If the underlying moves away from you then you can buy back the higher vertical to lock in a profit and reduce risk on the table. You might think of this as rolling down the long leg closer to the short leg.
When you refer to the probabilities of max loss being lower on a wider vertical being lower, you are really referring to the probabilities of the embedded verticals at the higher end being lower - but this is obvious when you think about it in terms of embedded verticals.
Anyway, hope I haven't confused the situation and provided a different way to look at these wider verticals.
MoMoney.
You are right to consider it illogical to be nervous about adjusting a 1375/1405 spread vs. having two seperate spreads: 1375/1390 and 1390/1405.
They are both the same.
As for point 2) Adjusting just the short leg is the same as buying back a vertical e.g. on your 1375/1405 spread, if you were to adjust the short leg up to 1390, this is identical to just buying back your original 1375/1390 spread. You will be left with your second 1390/1405.
By rolling up the short leg (in a Bear Call spread) you are buying a vertical. If the amount you pay for that vertical is more than what you got when you originally sold the vertical, then you are locking in a loss.
When you buy back a vertical in this manner, you are obviously taking risk off the table - this will be reflected in lower margin requirement when you do so.
IMO, it's better to think of any spread wider than 5-points to simply be a collection of 5-point verticals e.g. a 10-point vertical is just two 5-point verticals next to each other. You can buy back either one or both to lock in a profit or loss depending on the situation. If the underlying moves away from you then you can buy back the higher vertical to lock in a profit and reduce risk on the table. You might think of this as rolling down the long leg closer to the short leg.
When you refer to the probabilities of max loss being lower on a wider vertical being lower, you are really referring to the probabilities of the embedded verticals at the higher end being lower - but this is obvious when you think about it in terms of embedded verticals.
Anyway, hope I haven't confused the situation and provided a different way to look at these wider verticals.
MoMoney.
Mo:
I agree with you in theory. But as a practical matter given the b/a spreads on the SPX, it might be easier to just adjust a single option (the short stike), and I might be able to get the fill executed closer to the midpoint. Also, a small advantage is that the commissions on such an adjustment would be lower (trading a single option twice (getting out and then back in) as opposed to two options twice).
I agree with you in theory. But as a practical matter given the b/a spreads on the SPX, it might be easier to just adjust a single option (the short stike), and I might be able to get the fill executed closer to the midpoint. Also, a small advantage is that the commissions on such an adjustment would be lower (trading a single option twice (getting out and then back in) as opposed to two options twice).
Before i open my 5-point spreads i always make an attempt at grabbing the 10 pointer if i can get it for twice the credit. Sometimes, options get slightly out of balance and you can manage to get such a fill but most of the times MM's won't give up the wider spread for virtually the same max risk. This is easier done on the ES in my experience but is very difficult with anything over 20 contracts
LOL I probably didn't construct my description very clearly.
Adjusting the short strike is entails buying a vertical - whether that is done in two separate trades or in one. My point was it might help to visualize the position as "taking off a vertical from the table" rather than "adjusting the short strike" - they are in fact the same but perspective might influence decision making.
Adjusting the short strike is entails buying a vertical - whether that is done in two separate trades or in one. My point was it might help to visualize the position as "taking off a vertical from the table" rather than "adjusting the short strike" - they are in fact the same but perspective might influence decision making.
Thanks rdemayan,
I realized after I posted that the margin requirments were not the same...(late night posting phenomenon). So given your counter hypo, let's see if I can summarize the advantages of a 30 pt spread v. a 5 point, with regards to movement against your short:
1) You can let it run pretty far past your short before you equal the max loss of the 5 pt spread (agian in my corrected hypo, if your short is 1350 and the spx settled at 1360, with the same margin at risk, the 5 point would suffer a max loss of 2700 while your looking at 800 loss on the 30 point). So, bottomline you could let the underlying run a good 20-30 points before you approach the max loss of your 5 point spread. Obviously, this gives you more flexibility in minimizing your losses...placing hedges, closing out, etc..
2) If I understood Cache correctly, if your short is breached and you need to close out, with a 5 point spread you have less flexibility to shop your exit prices...MM's are more stingy....obviously this is compunded by a potentially short time to mange your risk before your long is reached and max loss acheived
3) However you are "paying" for this increased flexibility with a lower ROI on the 30 than the 5.
I realized after I posted that the margin requirments were not the same...(late night posting phenomenon). So given your counter hypo, let's see if I can summarize the advantages of a 30 pt spread v. a 5 point, with regards to movement against your short:
1) You can let it run pretty far past your short before you equal the max loss of the 5 pt spread (agian in my corrected hypo, if your short is 1350 and the spx settled at 1360, with the same margin at risk, the 5 point would suffer a max loss of 2700 while your looking at 800 loss on the 30 point). So, bottomline you could let the underlying run a good 20-30 points before you approach the max loss of your 5 point spread. Obviously, this gives you more flexibility in minimizing your losses...placing hedges, closing out, etc..
2) If I understood Cache correctly, if your short is breached and you need to close out, with a 5 point spread you have less flexibility to shop your exit prices...MM's are more stingy....obviously this is compunded by a potentially short time to mange your risk before your long is reached and max loss acheived
3) However you are "paying" for this increased flexibility with a lower ROI on the 30 than the 5.
Ha! I don't have a public journal but if I do, the working title is still "Disaster Trading Inc."
I don't want to pollute others' journals with my trades so unless I start my own that is the way I'd like to keep it. This doesn't preclude me polluting others' journals with my ramblings though LMAO.
The reason I think this journal works is because it is oriented around a single strategy with a low barrier to entry in terms of knowledge/understanding. It is also low frequency in terms of trades and thus easy to follow.
What I do isn't that interesting but probably wouldn't be as conducive to public journalizing.
Thanks for asking though!
I don't want to pollute others' journals with my trades so unless I start my own that is the way I'd like to keep it. This doesn't preclude me polluting others' journals with my ramblings though LMAO.
The reason I think this journal works is because it is oriented around a single strategy with a low barrier to entry in terms of knowledge/understanding. It is also low frequency in terms of trades and thus easy to follow.
What I do isn't that interesting but probably wouldn't be as conducive to public journalizing.
Thanks for asking though!
Well, most of us who are regular posters (except Rally and maybe Cache) follow Coach's strategy which is to adjust or get out before your short strike is breached. Also, while the probability is lower that the long on a 30 point is breached when compared to a 5 point, do you really want to take the chance. What's your experience with living with positions where your credit spread is ITM. I know my stomach churns if that happens. When it gets bad enough you'll do just about anything to get out and that usually means compounded losses because you no longer think rationally(decisions are driven by emotions). Unless your quite experienced and have a very calm personality, I wouldn't underestimate the influence of emotions on trading when you start facing huge losses relative to the credit you received.
In theory, the ROI is lower, but in practice I don't know. I've virtually never been able to get a FOTM 5 point vertical spread filled without giving up (percentage wise) a lot. If I look at 10 and 15 pt spreads to enter, I've usually found that the mid on the 15 pt is 50% higher than the mid on the 10 pt. If I have to give up a nickel or dime on each, then the ROI on the 15 pt spread is higher than the 10 pt spread.
However, my current trading strategy is to not put on all my positions at once. So if I start to place a 10 lot 30 pt wide spread, then that eliminates three 10 lot 10-pt wide spreads that I would normally place at different times of the month. Instead, I'll probably just consider the really wide verticals when I want to add to my positions and the long from a current position is cancelled by the short of a new position (yes, I know Mo, there is really no difference, but give me some time to get comfortable with it).
In theory, the ROI is lower, but in practice I don't know. I've virtually never been able to get a FOTM 5 point vertical spread filled without giving up (percentage wise) a lot. If I look at 10 and 15 pt spreads to enter, I've usually found that the mid on the 15 pt is 50% higher than the mid on the 10 pt. If I have to give up a nickel or dime on each, then the ROI on the 15 pt spread is higher than the 10 pt spread.
However, my current trading strategy is to not put on all my positions at once. So if I start to place a 10 lot 30 pt wide spread, then that eliminates three 10 lot 10-pt wide spreads that I would normally place at different times of the month. Instead, I'll probably just consider the really wide verticals when I want to add to my positions and the long from a current position is cancelled by the short of a new position (yes, I know Mo, there is really no difference, but give me some time to get comfortable with it).