Sorry Rdeyman. I meant to say that the 5-point spreads are technically MORE risky than the 30-point spreads.
SPX Credit Spread Trader
- Thread starter El OchoCinco
- Start date
Sorry Rdeyman. I meant to say that the 5-point spreads are technically MORE risky than the 30-point spreads.
Rallymode,
You posted the following:
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
My reply is this:
The difference between two adjacent put verticals is the value of a butterfly spread.
If you are willing to sell a MM a 5 point vertical spread for .50 but instead offer the 10 point vertical for 1.00 you are handing the MM the butterfly spread for free. If I were a MM I would take the 10 point spread for 1.00 because I end up synthetically long the butterfly spread for free.
I assume the price levels you are trading at when initiating your credit spreads support butterfly spread prices of at least .05
Knowing that the butterfly is worth .05 you should be offering the 10 point butterfly at 1.05 NOT 1.00
If this is confusing to you let me know and I will help with my logic.
Knucklehead
You posted the following:
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
My reply is this:
The difference between two adjacent put verticals is the value of a butterfly spread.
If you are willing to sell a MM a 5 point vertical spread for .50 but instead offer the 10 point vertical for 1.00 you are handing the MM the butterfly spread for free. If I were a MM I would take the 10 point spread for 1.00 because I end up synthetically long the butterfly spread for free.
I assume the price levels you are trading at when initiating your credit spreads support butterfly spread prices of at least .05
Knowing that the butterfly is worth .05 you should be offering the 10 point butterfly at 1.05 NOT 1.00
If this is confusing to you let me know and I will help with my logic.
Knucklehead
I will just throw in my $0.0175 here with respect to 5-point spreads v. 30-point spreads.
I do not think you will get much comparing these two since they are quite different. There are pros and cons to doing each and it is really a matter of personal preference and how each would maesh with your own trading style and capital.
5-point spreads allow you to do big volume for small credits and take in nice premium. The short is really close to the long so if the market starts moving towards you, the long will help offset more initially than if the spread was much wider. Most cases it is hard to get a good credit since the spread is onyl 5 points apart due to the wide b/a spread. in most cases you have a negative bid for the spread or the wide b/a spread puts the midpoint close to $0. However with some time and good entries on swings you can grab one for decent credit and do nice volume. On a large market swing, the spread will reach a greater loss sooner than a much wider spread but depending on how and when you adjust it might not matter as much.
A wider spread means the long option will cost much less than the short one allowing for a greater premium. The margin is of course higher unless you are doing a fixed capital amount no matter the size of the spread. Wider spreads may allow you to go furtgher OTM since you can take in more premium and therefore use further out strikes. On the downside the long strke will be too far away in most cases to offset moves in the index against you. So if the market moves towards you, the short strike has a much greater delta in general and the position will suffer a larger loss in general on PAPER. Again, whether this paper effect matters depends on how you trade them.
But since you could choose different strikes with the narrow and wider spreads and they will react differently to market moves it is hard to compare them and really say which is better. One is better in certain situations than the other but it is really personal preference. One trader who does these in larger scale than me like the really wide spreads to be able to go as far OTM as possible and get a decent credit. I do not have the cheddar to make that profitable for me so I do not mind moving a little higher than him and use 5, 10 and 15 point spreads.
Personal preference really controls here as opposed to an objective easy answer.
I do not think you will get much comparing these two since they are quite different. There are pros and cons to doing each and it is really a matter of personal preference and how each would maesh with your own trading style and capital.
5-point spreads allow you to do big volume for small credits and take in nice premium. The short is really close to the long so if the market starts moving towards you, the long will help offset more initially than if the spread was much wider. Most cases it is hard to get a good credit since the spread is onyl 5 points apart due to the wide b/a spread. in most cases you have a negative bid for the spread or the wide b/a spread puts the midpoint close to $0. However with some time and good entries on swings you can grab one for decent credit and do nice volume. On a large market swing, the spread will reach a greater loss sooner than a much wider spread but depending on how and when you adjust it might not matter as much.
A wider spread means the long option will cost much less than the short one allowing for a greater premium. The margin is of course higher unless you are doing a fixed capital amount no matter the size of the spread. Wider spreads may allow you to go furtgher OTM since you can take in more premium and therefore use further out strikes. On the downside the long strke will be too far away in most cases to offset moves in the index against you. So if the market moves towards you, the short strike has a much greater delta in general and the position will suffer a larger loss in general on PAPER. Again, whether this paper effect matters depends on how you trade them.
But since you could choose different strikes with the narrow and wider spreads and they will react differently to market moves it is hard to compare them and really say which is better. One is better in certain situations than the other but it is really personal preference. One trader who does these in larger scale than me like the really wide spreads to be able to go as far OTM as possible and get a decent credit. I do not have the cheddar to make that profitable for me so I do not mind moving a little higher than him and use 5, 10 and 15 point spreads.
Personal preference really controls here as opposed to an objective easy answer.
This is essentially exactly what I was referring to, but didn't want to take the time to explain it. Also, Mo is better at explaining things than I am.
Anyway, I haven't ever compared them close enough to make a strong statement, but I would imagine that slippage makes the wider spreads more attractive. But, the only time I have ever opened a wider spread is when the strategy entailed just rolling the short strike up when the underlying got too close. In my experience, it didn't work out very well and I am reluctant to suggest it as a bread and butter strategy to anyone here.
I would generally suggest selling the 10-15 point spreads instead of the 5-point IF;
--volatility skew is minimal
--slippage is too high on the 5-point spread.
I have my order screen set with a large order of ES contracts at market order and when the market moves I am just going to hit BUY or SELL and enter real fast and ride it in the appropriate direction.... 
Quick point or 2 on the ES and then I am out.
Quick point or 2 on the ES and then I am out.Well put.
A 10 point spread that is worth twice as much as a 5 point spread implies the other embedded 5-point spread is exactly the same price as the first one and therefore the butterfly is free.
That further implies the original 5-point spread is either worth more than quoted or the other 5-point spread is worth less than quoted.
Either way, you have to ask yourself why sell the original 5-point spread (individually or embedded in the 10-pointer)?
A 10 point spread that is worth twice as much as a 5 point spread implies the other embedded 5-point spread is exactly the same price as the first one and therefore the butterfly is free.
That further implies the original 5-point spread is either worth more than quoted or the other 5-point spread is worth less than quoted.
Either way, you have to ask yourself why sell the original 5-point spread (individually or embedded in the 10-pointer)?
This is true. If you can sell the further OTM spread for the same price that you sell the closer spread for, why not just sell 2X the further OTM spread rather than 1/2 the 10-point spreads?
In the real world though, you would really never get filled on the further OTM spread at the same price as the closer spread unless some dynamic changed.
I see what you are saying but to me it doesnt matter whether you view the vertical as a part of FLY's or any other combo. I am talking from a r/r perspective on that SPECIFIC spread. What i am saying is that you are less likely to get a fill on the 10 pointer vs the 5-pointer unless you give up some credit i.e. reduce your r/r. If you can manage to get a fill on a wider spread for the same r/r, you are in a better trade.
Example:
1340/1345 BCS for $1 credit r/r 1:4
1340/1350 BCS for $2 credit r/r 1:4
Now whether the first spread is really worth the quoted $1 when the 10 pointer is $2, i doubt it. But since things are only worth what you can buy/sell them for, the instant you place your trade if you can manage to get the 10 pointer for $2 when you can only get the 5-pointer for $1, you are in a better position. That's all i was saying.
I completely agree. You shouldn't get filled on the further OTM spread at the same price as the closer spread - but if you are being filled on a 10-pointer for twice that which you are being filled on 5-pointer as per Rally - that is precisely what is happening.
The logical explanation as alluded to by Knucklehead is that you didn't get "paid" enough for the closer spread and when the fit hits the shan and you need to buy back the closer spread (adjusting the short leg of the 10-pointer) then it might make a material difference.
I think the pertinent point is just to be aware of these mispricings.
Btw, how goes the journal?
The logical explanation as alluded to by Knucklehead is that you didn't get "paid" enough for the closer spread and when the fit hits the shan and you need to buy back the closer spread (adjusting the short leg of the 10-pointer) then it might make a material difference.
I think the pertinent point is just to be aware of these mispricings.
Btw, how goes the journal?