The options I am refering to are E-mini S & P 500 futures options.
augiedixit
augiedixit
SPX Credit Spread Trader
- Thread starter El OchoCinco
- Start date
InteractiveBrokers and Tradestation are two good ones...
Day 1..... I'm @#$%ing exhausted....
Need another good down day tomorrow on FED news to grab some ES put ratio spreads and possible SPX put spreads for July
Need another good down day tomorrow on FED news to grab some ES put ratio spreads and possible SPX put spreads for July
FROM COTTLE'S BOOK:
Insight: Wings. By owning, that is being long cheap wing
premium (either 1 for 1 or ratioed long), one is given permission to shortcloser to the money, beefier premium. The proof is in the implied volatility (IV) skewâ¦you knowâ¦the smile. To John Q. Public and speculators high implied volatility represents an over-priced opportunity motivating them to sell OTM options. The smile is caused by options inventory guys, that is, market makers, hoarding the wings. Did you ever notice the price, in terms of dollars and cents, of those high implied volatility options? They are the cheapest options available in those underlying instruments and this is the reason that market makers can sell
premium across all sectors, and the reason that the banks can back them and remain comfortable with the firmâs exposure. They may lose money here and there, but when the nightmare hits, these institutions with extra long wings score big. They avoid getting destroyed like victims of derivatives debacles. Why? Their wings kick in and it rains money.
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Can you please explain this with an example?. Is this something retail investors can do?.
Insight: Wings. By owning, that is being long cheap wing
premium (either 1 for 1 or ratioed long), one is given permission to shortcloser to the money, beefier premium. The proof is in the implied volatility (IV) skewâ¦you knowâ¦the smile. To John Q. Public and speculators high implied volatility represents an over-priced opportunity motivating them to sell OTM options. The smile is caused by options inventory guys, that is, market makers, hoarding the wings. Did you ever notice the price, in terms of dollars and cents, of those high implied volatility options? They are the cheapest options available in those underlying instruments and this is the reason that market makers can sell
premium across all sectors, and the reason that the banks can back them and remain comfortable with the firmâs exposure. They may lose money here and there, but when the nightmare hits, these institutions with extra long wings score big. They avoid getting destroyed like victims of derivatives debacles. Why? Their wings kick in and it rains money.
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Can you please explain this with an example?. Is this something retail investors can do?.
Not sure which bit you are unclear on...
Example:
Iron condor = short strangle (closer to the money/beefier premium) + long outer strangle (further out of the money/long cheap wings)
Yes, retail investors can do this as this thread is evidence of (although technically not an IC thread)
Ratioing the wings, especially on the PUT side is what allows the position to "rain money" "when the nightmare hits"
As discussed before, ratioing the wings is only really practical if the short option is NOT FOTM otherwise you risk decimating the "credit". Market makers have different margin requirements which also helps.
One can build up long wings at various intervals and also at various strikes or even maturities (diagonalize) as circumstances permit.
The 10,000 mile (portfolio) view of the position will look like a long butterfly/condor (long wings, short body)
The 1 mile view of the position will reveal short and long positions across multiple strikes and multiple maturities with predominantly short positions close to the money and predominantly long positions (wings) further out. It depends how the inventory is built up over time.
So in summary: to get the "raining money" effect in unexpected scenarios e.g. black swan, as well as "earning theta" under under more normal scenarios, the goal is to be short gamma (long theta) by shorting near the money options but also to be net long contracts by ratioing the wings.
Cottle's explanation for the skew is one of many contributing factors and not the definitive reason IMO.
HTH.
MoMoney.
Example:
Iron condor = short strangle (closer to the money/beefier premium) + long outer strangle (further out of the money/long cheap wings)
Yes, retail investors can do this as this thread is evidence of (although technically not an IC thread)
Ratioing the wings, especially on the PUT side is what allows the position to "rain money" "when the nightmare hits"
As discussed before, ratioing the wings is only really practical if the short option is NOT FOTM otherwise you risk decimating the "credit". Market makers have different margin requirements which also helps.
One can build up long wings at various intervals and also at various strikes or even maturities (diagonalize) as circumstances permit.
The 10,000 mile (portfolio) view of the position will look like a long butterfly/condor (long wings, short body)
The 1 mile view of the position will reveal short and long positions across multiple strikes and multiple maturities with predominantly short positions close to the money and predominantly long positions (wings) further out. It depends how the inventory is built up over time.
So in summary: to get the "raining money" effect in unexpected scenarios e.g. black swan, as well as "earning theta" under under more normal scenarios, the goal is to be short gamma (long theta) by shorting near the money options but also to be net long contracts by ratioing the wings.
Cottle's explanation for the skew is one of many contributing factors and not the definitive reason IMO.
HTH.
MoMoney.
Yes. Just buy extras. Example. Buy 50 butterflys or condors. Then buy 10 (or more) of the cheaper call and the cheaper put. You would now own 60 calls and puts and you would be short only 50 of each. You would lose that extra money most of the time, but a black swan would be most welcome.
Mark
Piccon;
I'm a Russell 2K condor guy. You are not alone. I used OXs virtual trader for about six months and then jumped in for real last Feb. So far I've made about 4% per month. I bailed out at break even on my June position. In retrospect I should have stayed in because my June 640/630 Put spread was quite safe.
But I lived to fight another day and would definitely like to learn more about the RUT from others.
Thanks,
Bob
I'm a Russell 2K condor guy. You are not alone. I used OXs virtual trader for about six months and then jumped in for real last Feb. So far I've made about 4% per month. I bailed out at break even on my June position. In retrospect I should have stayed in because my June 640/630 Put spread was quite safe.
But I lived to fight another day and would definitely like to learn more about the RUT from others.
Thanks,
Bob