SPX Credit Spread Trader

I did not say it was a non-event, I said the move in the VIX from 16 to 23 is not the main factor affecting the pricing of the spreads we are discussing now, it is the delta/gamma move that occured on the large drop. In fact the IV change is a smaller factor since the spreads have low net VEGAs.

The current increase in IV is not making it harder to do these credit spreads as was implied by yours and other's posts. Everyone jumps to the conclusion that a move in 16 to 23 has a huge negative affect on the ability to trade these spreads.

The bid/ask spreads I faced making my adjustments were no wider than the spreads I see when I first opened the positions- about $1.00 or $1.20 or so. You are assuming that the move in IV is causing us to get raped by the MMs and I am telling you from someone who has adjusted during these moves such as now and post-Katrina that it is not a given.

Spikes in IV from 16 to 23 have a much greater affect on the naked premium seller than the spread seller. I do not know why you think what I said is so silly. There are many authors who discuss how spreads help reduce negative affects of changes in volatility.

Your comments are welcome and I do not see why you feel this is an emotional phase. I do not get emotional over positions. They are what they are and if I take a loss, I take a loss and move on. I have not jumped to hypoerbole, just having an honest discussion. That is what this thread is for. :D

If I never raised my tone or reacted emotionally to Riskarbs or Maverick's rants, then your conversation certainly will not LOL. But my comments come from experience in trading these spreads in the current environment we are talking about. I am not talking hypothetically about spikes to 40%.

Quote from rallymode:

coach,

excuse my lack of diplomacy skills but i am surprised someone who's been around for as long as you have would say something so ludicrous. Of course a -delta/gamma position will suffer during an adverse market move, that's a given by definition. But to say that the spike in IV isnt causing major pain to the spread seller here is just ridiculous especially given the SPX options monopoly as well as convexity not being on your side. (when forced to get out/adjust/hedge your approaching -strike) I dont feel like going into option modeling to prove a point here or continue this silly banter. Anyone, trying to hedge/close/roll/adjust here is feeling exactly what i am talking about and is getting raped by the MM's on these adjustments. I am sure you doo too, perhaps you misspoke about the vix hitting 23+ being a non event. That's the last thing i will say on this topic for now as it seems my comments arent welcome during this emotional phase.

Happy trading.
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I am doing analysis on this SPX trade.


Sell ATM straddle - July 1225 call and July 1225 put
buy OTM strangle July 1310 call and july 1120 put.

The total credit = 49.00 and Margin is 5K.
Max loss for this position is about 5K if SPX trades outside range. If it trades between the range, there will be some profit.

IV of 1225 call/put is about 20%
IV of 1310 call = 14%
IV of 1120 put = 28%


It seems interesting R/R. I will put this trade as one Iron condor to reduce the bid/ask issues on SPX. I want to know your comments on this trade.
 
What you have there is an unbalanced IRON FLY with a credit of $49 and a maximum loss of $36 on the upside and $56 on the downside. Since it is unbalanced, most brokers will treat it as 2 credit spreads with a margin charged on each side, unless you call the broker and get some consideration.

Quote from mantenar:

I am doing analysis on this SPX trade.


Sell ATM straddle - July 1225 call and July 1225 put
buy OTM strangle July 1310 call and july 1120 put.

The total credit = 49.00 and Margin is 5K.
Max loss for this position is about 5K if SPX trades outside range. If it trades between the range, there will be some profit.

IV of 1225 call/put is about 20%
IV of 1310 call = 14%
IV of 1120 put = 28%


It seems interesting R/R. I will put this trade as one Iron condor to reduce the bid/ask issues on SPX. I want to know your comments on this trade.
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Oc is correct somewhat in saying that iv plays a smaller part in the pricing of spreads although I hope he knows that OTM verticals expand when vols expand. A lot? maybe not but when u are talking about teeny spreads which are done in size, these extra teenies add up. What is not discussed here which I think is critical in these Far OTM spreads where one risks $10 to make .50 cents is the concept of liquidity holes. When there is a preponderance of big positons held by better capitalized players (Bear, Goldmans-the spread buyers)vs. the lesser ones any move toward those strikes triggers liquidity holes which is a fancy name for the raping the weaker hands will get at the expense of the ones who hold the key to the "exit door"
 
Yeah I am not trying to make generalizations here, just about what is happening right now with the 16 to 23% VIX move. If VIX went from 16 to 40% and the SPX did not move at all, the spreads would have a huge increase naturally. This has been a pretty smooth move to 23 over the past few days in my OPINION. There was no black swan gap or dive. In fact, the drop followed a perfect bear flag formation when it bumped from 1245 to 1290 or so before continuing the down move and at 1225 or so is the end of the measured move out of the flag and thus will find a short-term bottom as long as no huge shock comes from CPI.
 
Quote from rallymode:

coach,

excuse my lack of diplomacy skills but i am surprised someone who's been around for as long as you have would say something so ludicrous. Of course a -delta/gamma position will suffer during an adverse market move, that's a given by definition. But to say that the spike in IV isnt causing major pain to the spread seller here is just ridiculous especially given the SPX options monopoly as well as convexity not being on your side. (when forced to get out/adjust/hedge your approaching -strike) I dont feel like going into option modeling to prove a point here or continue this silly banter. Anyone, trying to hedge/close/roll/adjust here is feeling exactly what i am talking about and is getting raped by the MM's on these adjustments. I am sure you doo too, perhaps you misspoke about the vix hitting 23+ being a non event. That's the last thing i will say on this topic for now as it seems my comments arent welcome during this emotional phase.

Happy trading.
More...

If anyone, you are the one with the condecending tone on coach's thread. It does seem to me(as it does others on this thread) that you are hoping for an extra whippy market to shake out the newbie's on here trying to learn a proven successful strategy. Then, when the market sells off 80+ points, you come on here with your holier than thou 'told ya so' platitudes.

Give us a freikin' break already.

Coach is right. change in vega is muted on a covered selling strategy, unlike nekkid selling. to portend that fact as a falsehood is 'ridiculous' in and of itself.

Second, what does SPX traded at one exchange have anything to do with the price of beans in Boston?

Third, what does convexity have anything to do with selling otm credit spreads? Unless your talking about pricing variance swaps or gamma curvature, this has no relevance.

Fourth, getting 'raped by the MM's' and all your other hedge/adjust/roll slippage is just flat out wrong as well. As options move otm to atm, they in fact become MORE liquid as at the money options are the most readily traded(remedial options 101). I don't buy into the liquidity holes as other mention about larger orders can get out before smaller hands. An order is an order is an order is liquidity is liquidity. Size matters not when mm's are trying to book their inventory for the day, IMO.

In sum, try to use the gray matter that God/Allah/Mohammed/Budda gave you before you start attacking Coach's ideas as ridiculous and ludicrous.
 
Back to the markets and trading......

Attached is a table showing the extent of the recent drop in the markets and select commodities.

BTW: Is there a way that I can display images contained on my hard drive (not the internet) directly in these posts as opposed to attaching them.
 

Attachments

Quote from optioncoach:

I did not say it was a non-event, I said the move in the VIX from 16 to 23 is not the main factor affecting the pricing of the spreads we are discussing now, it is the delta/gamma move that occured on the large drop. In fact the IV change is a smaller factor since the spreads have low net VEGAs.

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coach,

i will just touch on this one point since i dont want to keep dwelling on this issue. In my opinion, the vix increase plays a major role/causes major pain in the current situation and will continue to as long as your opening your spreads at lower vols relative to when you close/adjust/roll them.(e.g. environment of increasing IV) Let's use the put side as it paints a more dramatic picture.

Here is the definition of a credit put spread position in my opinion, more risk averse perspective. It is a naked put position. It's just that the trader has chosen to limit the unbounded risk of the -strike with going long an OTM strike and given up credit in the process. The wider you position the strikes of your spread, the closer the resemblance to a naked put position from a risk perspective. Having said that, statements like "increasing IV environment hurts the naked put seller but not the credit spread trader" are simply erroneous given the fact how wide you guys tend to spread yourselves on the put side. I dont see the need for an arguement there, its just options theory.

To take this a lil deeper. The increasing IV has the same effect as adding time to your short spread which by the way is now also closer to the money. So 30 days have passed, your FOTM spread is expiring, yet its still worth =>more than before. How is that not painfull? I wont touch on the convexity issue as it has been discussed many times before but you are being forced to close/roll/adjust your strike close to the gamma peak much before any meaningful gains kick in from the long strike. Dont get me wrong, this is painful for CTM spreads too not just FOTM. Not debating one vs the other here.

I guess we will have to agree to disagree on this one too. :)
 
I've been tied up organizing a business venture for the past few days (and likely will be for another month or so) so I've just been skimming through posts occassionally. I'm sure nobody cares, but anyway, I'm intrigued by many of the recent posts.

I'm not trying to start a debate so let's all behave.:D

There seems to be a fair amount of concern over the increase in vols, accompanied by skepticism toward credit spreads. This intrigues me because I have actually been cautious selling credits spreads for the past year and a half or so because the vols appeared to have bottomed out. It scares me to sell OTM verticals when vols are at 10+ year lows. The low vol environment isn't conducive to selling premium. I've been waiting for vols to pick up a bit.

Funny thing is, everyone here loved the FOTM credit spreads during extremely low vols (IMO a less desirable time to sell FOTM), and now that vols/credits are higher (IMO a much better environment for selling FOTM) people are getting worried. Based on my experience, everyone should be getting excited that vols are increasing. It makes OC's strategy all the more appealing.

Anyway, just thought it was interesting. Good luck in your trading OC and all who follow here. I'm anticipating consistent returns you.:D
 
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