SPX Credit Spread Trader

[El OchoCinco]

Excellent question. Of course it assumes that I sit and watch the market move 110 points before taking any action. Even after 9/11 the market did not gap down 100 points or so.

When I traded put ratio spreads on stocks I used the short strike as the signal to make an adjustment. So if the market was screaming lower I would make a move at 1175 or so. Short futures, buyback half the short strikes, convert to a 1200/1175/1150 Butterfly or simply take a loss at 1175 which would be much less than the six figure loss you are looking at.

The key with credit spreads and put ratio spreads as always is that you cannot just sit back and watch it and hope for the best. Either make the pre-planned adjustment and take a profit or limited loss, or watch your account blow away...

Quote from 1robert11:

Coach

Would you please post what your next trade or hedge would be if the index took an event drop below your break even point of 1147 within a short time after placing the trade.

My analysis shows that if the index droped to 1130 by the end of June, the position with an 8% IV increase would show a paper loss of $375K and a paper loss of $275K if it dropped to your break even point of 1147 in the same time frame.

While I realize there are long deltas infront of the shorts, it still appears that having douple the shorts presents a substantial down side risk in an event or quick down move situation. In this down move...the IV will substantially increase, thereby also increasing the paper loss with double the shorts.

 

[El OchoCinco]

ALp168:

You only have about 5 posts, how have we disagreed in the past lol

 

[momoneythansens]

He/she was quoting one of Rally's posts (in bold).

Quote from optioncoach:

ALp168:

You only have about 5 posts, how have we disagreed in the past lol

 

[rdemyan]

Thanks for posting your method for entering positions. On the STO curves, do you wait for a confirmation of the top/bottom before placing the trade. IOW, do you wait for the curve to actually turn up (if at the bottom) or down (if at the top) so that you have some confirmation that a short-term top or bottom is in place. Or are you just using the 80/20 levels as your guide.

Quote from rallymode:

Alot of discussion lately on use of TA to call direction on the SPX. For those interested, I thought i'd post exactly what i am usually looking at when i place my SPX trades. Is it perfect? Certainly not, but is very manageable. I have personally placed a trade at each and every point i have outlined on that chart except maybe once in april or may. I even drew my next trade LOL

Looking at the chart one can argue why i didnt go long/short the futures instead and make a killing. Well, it just isnt my style. We are all good at our own things.

I consider other things when i open a trade not just TA but it certainly is an important part of my trading. Here it is:

Excuse my messy picture, apparently those drawing lessons i took in 3rd grade were a waste of my time, should have been studying stocks instead LOL

 

[rallymode]

Quote from alp168:


Rally,

How do you hedge credit spread or put ratio spread? Could you elaborate it.

Alpha

I dont think you can hedge them without introducing more risk so i simply dont, purely probability bets. In the case of a ratio vertical, i'd probably go flat half way to my short strike due to the unbounded risk.

 

[rallymode]

Quote from rdemyan:

Thanks for posting your method for entering positions. On the STO curves, do you wait for a confirmation of the top/bottom before placing the trade. IOW, do you wait for the curve to actually turn up (if at the bottom) or down (if at the top) so that you have some confirmation that a short-term top or bottom is in place. Or are you just using the 80/20 levels as your guide.

It depends. More often then not, i dont wait for a confirmation or a turn, i simply enter against the trend. (indicator crossovers and turns are a grey area in my opinion, not sure i buy into all that LOL) If you wait for a confirmation you will likely be 5-10 points late and thats like 25-50% of your cushion with a 20-25 points OTM credit spreads. I really dont even use the stochs all that much except to confirm the overbought/oversold level. I can probably call its value without charting it and just looking at the price action but its simpler when its drawn right in front of you.

 

[El OchoCinco]

I forgot to mention in the discussions I am also testing out using VIX Calls as a partial hedge on big drops and spike in IV to match with my put ratio spreads on ES. Will let you know if I add a VIX hedge today on the uptick and drop in IV.

Quote from optioncoach:


JULY 100*200 Put Ratio Spread:

BTO 100 JULY ES 1200 Puts @ 8.50 ($42,500)

STO 200 JULY ES 1175 Puts @ 5.50 ($55,00)

Net credit = 2.50 ($12,500)

Breakeven at expiration = 1147.50 on the ES for July.

 

[1robert11]

Does the Prop Firm you trade with offer good analysis tools to determine your overall risk when all your trades are looked at in an overall portfolio basis?

Do you plan on trading a Delta neutral position in your overall portfolio to take in Theta?

Quote from optioncoach:

I forgot to mention in the discussions I am also testing out using VIX Calls as a partial hedge on big drops and spike in IV to match with my put ratio spreads on ES. Will let you know if I add a VIX hedge today on the uptick and drop in IV.

 

[rallymode]

phil,

i know you have said before that you dont attempt to catch the exact bottoms or tops with your entries but here is a chart of your ratio vertical. Look at the price with spx at 1220 and vix at 20+. No criticism, just for reference.

 

[volatilitypimp]

rally, can you chart equity spreads(like the above ES) with IB? If so, I may have to revisit them as a broker.

I remember riskarb charting some reversals in his journal, it escapes me what the underlying was tho..