SPX Credit Spread Trader

[rallymode]

Quote from tyrant:

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?

In an instrument like the SPX where the volatility curve is skewed on the put side rather than forming a smile, you will always get higher IV on the OTM puts vs same distance calls. When the IV is higher, the spread is priced higher. Doesnt matter that you have a long side, the price of the spread is still expanded due to the IV. The IV of the long strike isnt all that much higher than the IV of the short, atleast not enough to overwhelm the difference in deltas and equate the spread price to a comparable call spread.

Simply price a bull put spread 100 points OTM and a bear call spread 100 points OTM and you will see it clearer.

 

[El OchoCinco]

AS rally said, the IV difference between a deep OTM put spread and a deep OTM Call spread could be as much as 100% (i.e 11% v. 22%).

The put skew lets you go further OTM then you could with calls but there is theoretically more risk to the downside given the speed of market crashes so it is a trade off. The skew itself does not make puts more favorable, it just lets you pick further OTM strikes if you are already pre-disposed to opening a put spread. Call spreads have a slight negative skew but there are still premiums at OTM strikes. As I said it is a trade-off of risk/reward considerations.

But in general the put skew is what allows me to be extra conservative with respect to strike selection since if I am looking for my 2 - 3% return on margin, I can go much further OTM than trying to get the same ROM with calls. However, individual analysis is the key factor as to what strikes to choose and market direction so the the skew alone is not enough to use to decide between calls and puts. The skew is what you take into consideration AFTER deciding on whether you will do calls or puts.

Quote from tyrant:

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?

 

[rdemyan]

Coach:

I've noticed that you seem to be putting on fewer and fewer bear call spreads. Is this solely due to your analysis of the market or are you now predisposed to bull puts preads based on your comments in the post below.

Quote from optioncoach:

AS rally said, the IV difference between a deep OTM put spread and a deep OTM Call spread could be as much as 100% (i.e 11% v. 22%).

The put skew lets you go further OTM then you could with calls but there is theoretically more risk to the downside given the speed of market crashes so it is a trade off. The skew itself does not make puts more favorable, it just lets you pick further OTM strikes if you are already pre-disposed to opening a put spread. Call spreads have a slight negative skew but there are still premiums at OTM strikes. As I said it is a trade-off of risk/reward considerations.

But in general the put skew is what allows me to be extra conservative with respect to strike selection since if I am looking for my 2 - 3% return on margin, I can go much further OTM than trying to get the same ROM with calls. However, individual analysis is the key factor as to what strikes to choose and market direction so the the skew alone is not enough to use to decide between calls and puts. The skew is what you take into consideration AFTER deciding on whether you will do calls or puts.

 

[Heatheranderson]

Are you guys thinking of hedging with SPY for your positions or is it too soon?.

I am looking at Aug SPY 132/133 debit call spreads...


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ryank


Registered: Jul 2005
Posts: 399


07-06-06 11:55 AM

For better or worse I was filled on my 1345/1355 for $.60.


rdemyan


Registered: Aug 2005
Posts: 613


07-06-06 11:11 AM

Got filled on the following today:

August SPX 1345/1360 bear call at $0.75

 

[rdemyan]

No, it didn't even cross my mind especially since we are now 80 points OTM on my short strike (SPX is currently at about 1265).

EDIT: ToS is currently showing a mid of .15 and natural of 0.20 on the 132/133. For the 133/134 the numbers are 0.10/0.15.

Coach, riskarb what are your thoughts on this. If I bought the August SPY 133/134 for $0.10 to hedge my August SPX 1345/1360 bear calls, it would be some fairly cheap insurance.
I'm requesting a response from riskarb because awhile back he posted that we should consider putting these FOTM credit spreads on 6 weeks before expiration and getting out about 2 weeks before. Also, I believe you hedge your exotics frequently and I'm curious if you think hedging is a prudent strategy for FOTM spreads or more often than not just a waste of premium.

Seems worth considering.

Quote from Heatheranderson:

Are you guys thinking of hedging with SPY for your positions or is it too soon?.

I am looking at Aug SPY 132/133 debit call spreads...

 

[ryank]

Quote from Heatheranderson:

Are you guys thinking of hedging with SPY for your positions or is it too soon?.

I am looking at Aug SPY 132/133 debit call spreads...

Not yet, market is too far away and not seeing the upward momentum yet. Things can turn on a dime though. With the down draft today might be a good time for put spreads.

 

[El OchoCinco]

Not really. It is that for most of the year we have had a somewhat uptrend and drifting higher so I was taking the bull put side since with new highs it is hard to say where the resistance is really. Even the past dive we had was still stopped by support more or less and a strong rebound. I think the market is looking for any news to bounce with respect to the Fed so I have stayed out of the way with calls since the premiums were not worth it for the strikes I wanted to choose.

I do favor the skew to be able to go much further OTM than I can with the calls but in April or May I did add the calls for a Condor.

Right now I expect us to drift and stay sideways to higher so my preference for the puts right now. I see more levels of support on the downside to trade from than resistance to the upside so just staying clear of calls for now. However anything outside of the recent highs a month or two ago (1325?) seems good for JULY.

Quote from rdemyan:

Coach:

I've noticed that you seem to be putting on fewer and fewer bear call spreads. Is this solely due to your analysis of the market or are you now predisposed to bull puts preads based on your comments in the post below.

 

[El OchoCinco]

Decided to add a partial hedge to my position today just in case moving average supports do not hold today and we fall further. I still think if we drift lower we will not move below previous lows on ES at 1229 and therefore I might make some money on the partial hedge by expiration if we bleed slowly down to 1250 or so.


(7/5/06)

Sold 300 July ES 1220/1210 Put Spreads @ $0.55

Credit = $8,250

Risk at Expiration = $141,750

Return = 5.8%

(7/7/06)

Bought 5 ES JULY 1265 Puts @ 9.25 for $2,312.50

NEW NET CREDIT = $5,937.50

Return on Risk at Expiration = 4.18%


This is not a huge hedge but will provide some $$ if hte market starts moving to 1250 (ES) and below and I start thinking about where ES might be as expiration closes in.

 

[scoobie27]

Quote from optioncoach:



This is not a huge hedge but will provide some $$ if hte market starts moving to 1250 (ES) and below and I start thinking about where ES might be as expiration closes in.

Nice move Coach. With your partial hedge....I might be wrong but it does now seem to resemble a little like a Put ratio spread in a general sense.

Your credit spread could be the short side of the of the ratio spread and the ES Puts your just bought could be the long side Now if ES fall in between your new Long ES Puts and the Shorts of your Credit Spread at expiration, you have a little lottery scenario

scoobie

 

[rdemyan]

This is probably going to seem like a bizarre question [hey, it wouldn't be the first from me ]

I'm the only one in my family who trades options and also am the only one who can even access my accounts.

So, I'm wondering if others have plans in place should they become incapacitated and unable to trade in their accounts.

For example, let's say I'm in a car accident and am in a coma. No trading will occur in my account for who knows how long. The immediate threat is that I have short positions that become threatened and there is no one who can adjust or offset the positions. Therefore, there may be max losses in my account (based on the open credit spreads) because of this accident. Our risk management strategies require that some action be taken. Now the question is, what if you are not able to take any action because of incapacitation.

I'm not sure how to handle this, because even if you have power of attorney or whatever, the person who gets that power needs to understand the open option positions and how to adjust/offset.