SPX Credit Spread Trader

[LeonPhelps]

Quote from IV_Trader:

why would option's pros short vols at the lower deciles in the first place? I really don't get it.

There is a flip side to that logic. VIX was in the upper range, at least upper quartile, on May 23 at 18.26. SPX promptly went up nearly 3% and has dropped 5% from that high, all within 3 weeks!

Sometimes high VIX is predictive of more volatility.

Of course now VIX is in upper decile, do we short premium now?

One method that could be employed is to sell premie at the VIX spike. If the market then rallies and VIX cools then buy premie back and go long vega.

Would have worked the last three weeks, but who knows what works next three weeks?

 

[El OchoCinco]

Any premium seller who gets taken out in a market like this does not know what they are doing and should not be trading credit spreads IMHO. Stress exists in any market and for any strategy. And given the number of posts today I donot think we are too quiet. I have been busy making adjustments myself .

You seem to take a personal joy on large market moves at the potential losses of credit spread traders here on the thread which makes no sense to me at all. As though a large price swing is needed to vindicate your criticisms of the strategy. I think that is detrimental to the purpose of the thread since we are not here to debate ATM or FOTM spreads but to trade credit spreads in any form on the indexes.

I have demonstrated using Greeks how changes in vols have a minor impact on the pricing of these spreads and that the significant risk is delta/gamma. Depending on how wide your spread is, vega of the spread is reduced substantially and it is more the actual volatility and price swings of the index which are the biggest concern. A move in the VIX from 15 to 20 actually helps me to go even further OTM in a better comfort zone. Whether the VIX is at 15 or 30, I still emply the same risk management approach in reducing my losses where possible and I will never blow up my account.

It was a long time ago but I demonstrated how a huge drop in the price of the index combined with a spike in IV resulted in about 85% or some nuber close to it of the change in the price of the spread coming from delta/gamma. SO I disagree that changes in IV are painfuil for credit spreaders. THey are painful for naked option writers.

Quote from rallymode:

Its tough not to stress when the SPX pinches through support like knife through butter and cant even get a dead cat bounce going. Market like this is what takes alot of premium sellers out for good. This thread sure is quiet lately.

 

[rallymode]

Quote from optioncoach:

Any premium seller who gets taken out in a market like this does not know what they are doing and should not be trading credit spreads IMHO.

Coach, lets be real here. That might apply to half the people on this thread. I havent seen a 100+ points selloff within 30 days in a few years. Many posters here who are relatively new to options are probably in a lot of pain right about now swearing off FOTM credit spreads.

 

[IV_Trader]

Quote from LeonPhelps:

There is a flip side to that logic. VIX was in the upper range, at least upper quartile, on May 23 at 18.26. SPX promptly went up nearly 3% and has dropped 5% from that high, all within 3 weeks!

Sometimes high VIX is predictive of more volatility.

Of course now VIX is in upper decile, do we short premium now?

One method that could be employed is to sell premie at the VIX spike. If the market then rallies and VIX cools then buy premie back and go long vega.

Would have worked the last three weeks, but who knows what works next three weeks?

yes , for the first time in an year I am thinking to put short trade...Looking to short DITM calls + DOTM puts on index ( probably DOW)...50% skew is very tempting...

 

[rallymode]

Quote from optioncoach:



You seem to take a personal joy on large market moves at the potential losses of credit spread traders here on the thread which makes no sense to me at all. As though a large price swing is needed to vindicate your criticisms of the strategy. I think that is detrimental to the purpose of the thread since we are not here to debate ATM or FOTM spreads but to trade credit spreads in any form on the indexes.

coach,

not here to argue with you. This is your thread. Not trying to validate anything either, just pointing out facts which just so happen to be painful for many. Furthermore, i am not debating CTM vs FOTM either. My spreads would've been hurting too had i not closed them. I won't say much more on this.

 

[El OchoCinco]

You are speaking for a lot of people and making assumptions. I do not know who is new or not or who is swearing off this strategy. But I will let them speak for themselves then plant a victory flag on a 100-point decline lol...

Quote from rallymode:

Coach, lets be real here. That might apply to half the people on this thread. I havent seen a 100+ points selloff within 30 days in a few years. Many posters here who are relatively new to options are probably in a lot of pain right about now swearing off FOTM credit spreads.

 

[dagnyt]

Quote from IV_Trader:

why would option's pros short vols at the lower deciles in the first place? I really don't get it.

One good reason is that Newton's first law applies here: "A body in motion tends to stay in motion, unless acted upon by an outside force."

That means: Periods of low volatility tend to be followed by more periods of low volatility (same hold true for high volatility). thus, it is usually profitable to sell premium when IV is low because - in the vast majority of cases - market volatility will continue to stay low.

Mark

 

[smilingsynic]

Quote from dagnyt:

One good reason is that Newton's first law applies here: "A body in motion tends to stay in motion, unless acted upon by an outside force."

That means: Periods of low volatility tend to be followed by more periods of low volatility (same hold true for high volatility). thus, it is usually profitable to sell premium when IV is low because - in the vast majority of cases - market volatility will continue to stay low.

Mark

It depends on what you mean by "period".

I just completed a study of the VIX (from the early 1990s to the present). New 50 day highs and lows in the VIX tend to come in bunches (several new highs and lows in the ten and twenty day period), but after a ten-day period of no new highs (esp highs) or lows, the extreme high (or low) tends to hold for a while.

In this period of rising volatility, those who want to sell vol should keep track of new highs (like today), and wait to sell until ten days pass without a new high. If ten days have gone by, a long period of steady to decreasing volatility tends to follow. Then it would be safe to sell.

In general, a reversion to the mean is more the pattern than I used to think.

The future does not always imitate the past (or the present), so take this with a grain of salt.

Good luck to all.

 

[LeonPhelps]

An experiment.

Hypothesis: Selling premium when VIX spikes is profitable.

Tools: SPX options.

Method: Sell ATM straddle.

Procedure: SPX at 1224, VIX at 23.2. Sell Jul06 1225 straddle 60.9b/63.0a. Assumed btw bid and mid at 61.4.

Follow-up/exit strategy: TBA. Choices incl. hold for duration, closing at profit%, protecting with other options, SPY, or ES.

Conclusion: Jury is out.


(BTW OC not sure rally is so much taking joy as issuing a warning ,as you do, to be careful out there. ATM, OTM, FOTM, or WTFFOTM, if your have been selling options you are smarting either a little or a whole lot right now.)

 

[El OchoCinco]

ADJUSTMENTS!

I may be away from the screen tomorrow or Thursday so I wanted to adjust down and give me another 5 points of room with 2 days left until SET. I will allow at least one more potentially before closing out but we will see what happens tomorrow. Rather take a small loss now and buy some space then worry in the hospital lol.


JUNE POSITIONS

Sold 225 SPX JUN 1140/1160 Put Spreads @ $0.75
CLOSED for $0.15 or net profit of $0.60 or $12,375 after commissions.

OPEN: Sold 225 SPX JUN 1330/1350 Call Spreads @ $0.15
Credit = $3,375
CLOSED for $0.05 or net profit of $0.10 or $1,125 after commissions.

OPEN: Sold 225 SPX JUN 1195/1175 Put Spreads @ 0.20
Credit = $4,500.

Rolled 1195 strike down to 1190 for net debit of $0.75 or $16,875
INTERIM RESULT: 225 1175/1190 Put Spreads

OPEN: Sold 75 1175/1190 Put Spreads @ $0.50 for a net credit of $3,750.

FINAL RESULT 300 1175/1190 Put Spreads


Hedges

+ 200 SPY JUN $133 Calls @ $0.05 for $1,000

+ 50 SPY JUN $121 Puts @ $0.35 for $1,750


NET RESULTS

Basically I rolled from 225 1175/1195 Put Spreads to 300 1175/1190 Put Spreads. I still have my 50 SPY $121 Puts which are worth about $1,750 in profit and I am gonna hold them through tomorrow. I will most likely sell 50 $120 Puts to take my cost off the table and have a $121/$120 bear put spread for a net credit and buy some $119 Puts with the same original $1,750.

I would rather take the small hit and gain some space to absorb another down day and make a SET decision.

If above is hard to follow, just know that if all expires worthless I will have a net loss close to $5,000 which is fine with me given the risk (minus any profits from the SPY Put hedges and adjustments made to it tomorrow).