SPX Credit Spread Trader
- Thread starter El OchoCinco
- Start date
Hi all,
i am puzzled a bit by the mentions of the skew helping the selling of put spreads...
put credit spread is when you sell a put at some strike and then buy a put at a lower strike, right?
this, or the ratio variation on this is what most people here are doing right? You collect a small (or not so small) credit and hope that you dont get hit for the full difference of the strikes if s**t hit the fan.
so how does the skew help you? you are buying the put with the higher iv, no?
K
i am puzzled a bit by the mentions of the skew helping the selling of put spreads...
put credit spread is when you sell a put at some strike and then buy a put at a lower strike, right?
this, or the ratio variation on this is what most people here are doing right? You collect a small (or not so small) credit and hope that you dont get hit for the full difference of the strikes if s**t hit the fan.
so how does the skew help you? you are buying the put with the higher iv, no?
K
SPX puts have higher IV the mroe OTM they go. Therefore, the deep OTM puts have higher IVs than the ATM puts. This lets you go pretty far OTM and still get decent premium since the IV is higher. Calls on SPX workthe opposite. IV drops as you go OTM so premiums start to dry up quicker.
Therefore, the SPX skew in puts lets you choose further OTM strikes than you would be able to if vols were constant across all strikes. We are not talking about the skew between the long and short strike, but the skew between the ATM and OTM puts
Therefore, the SPX skew in puts lets you choose further OTM strikes than you would be able to if vols were constant across all strikes. We are not talking about the skew between the long and short strike, but the skew between the ATM and OTM puts
Quote from optioncoach:
SPX puts have higher IV the mroe OTM they go. Therefore, the deep OTM puts have higher IVs than the ATM puts. This lets you go pretty far OTM and still get decent premium since the IV is higher. Calls on SPX workthe opposite. IV drops as you go OTM so premiums start to dry up quicker.
Therefore, the SPX skew in puts lets you choose further OTM strikes than you would be able to if vols were constant across all strikes. We are not talking about the skew between the long and short strike, but the skew between the ATM and OTM puts
It should be mentioned that you only get a better credit right now for the put spreads if you are more than about 1.7sigmas OTM. At about 1.7sigmas OTM the credits are about even. As you get nearer ATM there is a huge advantage in selling call spreads. As you get further OTM there is a huge advantage in selling put spreads. That is why the skew topic is referred to frequently on this thread. OC manages his strategy very well without getting greedy or vengeful, thus he can stay >2sigmas OTM and take advantage of the vol skew on the put side.
Just thought that was worth mentioning as it seems that many people think the skew ALWAYS makes the put credits better than the call credits.
Yes good point. The put skew just lets me go further OTM than I could without it but the puts are not better simply because of it. It all depends on the strike selection of hte individual.
Quote from snoobler:
IMHO, for SPX spreads, that thing is junk. It works purely off assumptions of where fills might occur mid vs. nat. It's nothing like the TPC. I would love to see the TPC functionality solved for price rather than value.
I second that. I was very excited when they announced it but practically it hasn't made much difference. Except that I probably have "lowered" my expectations more than I actually needed too
Asking for some ideas.
My diag spreads have shown a profit, around $400 to date.
S Jul 1310/ L Aug 1330 call
S Jul 1240/ L Aug 1220 put
SP (futures) at 1280.
If I liquidate or let expire my Jul shorts, what about the remaining Aug longs?
Liquidate and lock in the profit, or sell a 1320 and 1230 Aug strangle to roll into an IC?
This is my first experience with a diagonal spread rather than a iron condor, so have no firm idea on what to do with the remaining longs.
My first impression is to liquidate and start all over again.
Thanks
My diag spreads have shown a profit, around $400 to date.
S Jul 1310/ L Aug 1330 call
S Jul 1240/ L Aug 1220 put
SP (futures) at 1280.
If I liquidate or let expire my Jul shorts, what about the remaining Aug longs?
Liquidate and lock in the profit, or sell a 1320 and 1230 Aug strangle to roll into an IC?
This is my first experience with a diagonal spread rather than a iron condor, so have no firm idea on what to do with the remaining longs.
My first impression is to liquidate and start all over again.
Thanks
Well, any idea that you get will largely depend on your own directional and vega forecast for aug but i will throw this out anyway.
If you intend to do another diagonal then obviously you will have no choice but to liquidate and start over but if going the diagonal route isnt a must and you are considering plain credit spreads(that's what i'd probably do given that i already have the longs open) then you might as well keep the longs and only open the short sides on the swings. No need to give up the edge on your longs, the MM's will be alright without it LOL
Also, you can keep the longs as proactive hedges for Aug and simply open credit spreads higher, or simply no aug credit spreads and you can just leg out of the strangle on the swings or keep the strangle and gamma scalp with the ES (LOL).
Again, it depends on how you feel about the direction and/or vega next month.
Quote from optioncoach:
SPX puts have higher IV the mroe OTM they go. Therefore, the deep OTM puts have higher IVs than the ATM puts. This lets you go pretty far OTM and still get decent premium since the IV is higher. Calls on SPX workthe opposite. IV drops as you go OTM so premiums start to dry up quicker.
Therefore, the SPX skew in puts lets you choose further OTM strikes than you would be able to if vols were constant across all strikes. We are not talking about the skew between the long and short strike, but the skew between the ATM and OTM puts
But the put skew will only help in naked selling of puts and not when doing bull put spreads because you are long the lower ( further OTM ) put with higher IV and hence the put skew is working against you...no?