SPX Credit Spread Trader

apex82 · Jul 8, 2006

good call rydeman... seems like there is endless worry to these FOTM spreads eh?

Coach, since volatility has been shrinking the past 3 years, it has been a nice environment for credit spread traders. If we do get a phase shift into a higher vol environment what are your thoughts on credit spreads? It seems if volatility is expanding your short strikes are more likely to get hit even though you are receving more premium. Would you make any changes to your strategy? I.E be more patient with your strikes and trying to time key reversals before putting on spreads etc? Only play one side of the market?

Thanks

iprph90 · Jul 8, 2006

Quote from 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.

instruct power of attorney to call broker to close all open positions!!

El OchoCinco · Jul 9, 2006

If vols increase, I will be able to go evenn further OTM because premiums will be higher. It is all relative really. Increased vols just means you have to adjust your approach and strike selection. If the market is making wild swings then more care is needed for strike selection and on which side of the market. Since credit spreads can be bullish bearish or neitral you can adapt to the changing market.

Quote from apex82:

good call rydeman... seems like there is endless worry to these FOTM spreads eh?

Coach, since volatility has been shrinking the past 3 years, it has been a nice environment for credit spread traders. If we do get a phase shift into a higher vol environment what are your thoughts on credit spreads? It seems if volatility is expanding your short strikes are more likely to get hit even though you are receving more premium. Would you make any changes to your strategy? I.E be more patient with your strikes and trying to time key reversals before putting on spreads etc? Only play one side of the market?

Thanks

rdemyan · Jul 9, 2006

Coach:

I knew this would be your answer. However, at this point in time, the only way I can see of implementing this is based on roughly constant premium.

So, in a low volatility environment that we've had, let's say that I've become satisified (learned to live with) with a $0.50 premium on a 10 point spread (4 to 6 weeks out). And this amount helps me establish which strikes I will select. Assuming that other criteria are met (staying comfortably outside major support and resistance), then I would use the same premium requirement in the high volatility environment. In the high vol environment, this would push me further OTM than in the low vol environment.

How else might one establish the strike selection for FOTM to account for different volatility environments?

Quote from optioncoach:

If vols increase, I will be able to go evenn further OTM because premiums will be higher. It is all relative really. Increased vols just means you have to adjust your approach and strike selection. If the market is making wild swings then more care is needed for strike selection and on which side of the market. Since credit spreads can be bullish bearish or neitral you can adapt to the changing market.

burrben · Jul 9, 2006

Why don't you just place your contingent order to close the position at the market when the index hits your short strike. I always have contingent orders in place, as well as alerts just in case something freaky happens and I can't get to a pc or phone. Yes, you will still lose a large amount of $$, but not all of it.

Quote from 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.

volatilitypimp · Jul 9, 2006

Quote from burrben:

Why don't you just place your contingent order to close the position at the market when the index hits your short strike. I always have contingent orders in place, as well as alerts just in case something freaky happens and I can't get to a pc or phone. Yes, you will still lose a large amount of $$, but not all of it.

out of curiosity, which broker do u use?

fwiw, TOS does not allow a GTC contingent market order. They told me I could use a limit order, but how do I know what the limit price will be when the poo hits the fan? I've actually tested this and the order just doesn't get filled because the limit order is too far away from the current trading price. So, I guess I'm forced to constantly monitor these things.

RichardRimes · Jul 9, 2006

Quote from 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.

Autually my spouse and I did discuss that possibility....I told him my dying words would be.... "close the iron condor"

. My guess is he is smart enough to call TOS and ask their advise on settling everything else.

edit: put your spouse/exececutor on the account (POA to trade)asap.

apex82 · Jul 9, 2006

Coach,
Thanks for the reply. I guess my question was not as clear. I was thinking if volatility was rising from month to month, year to year it seems like it wouldnt matter if you were receving more credit. The risk would be higher regardless if you were receiving more premium then before. Nobody can really predict a scenario like this, but if it were to begin to happen would you still continue to put on FOTM condors?
Thanks

rallymode · Jul 9, 2006

Quote from apex82:

Coach,
Thanks for the reply. I guess my question was not as clear. I was thinking if volatility was rising from month to month, year to year it seems like it wouldnt matter if you were receving more credit. The risk would be higher regardless if you were receiving more premium then before. Nobody can really predict a scenario like this, but if it were to begin to happen would you still continue to put on FOTM condors?
Thanks

When you sell premium, there's always the risk of vols expanding on you. Figuring out whether they will increase or decrease once in the position is the real question. With the FOTM credit spreads, you may not get too concerned unless the expansion comes with a move to your short but risk is still there nonetheless. Due to the fact that most traders adjust their FOTM credit spreads only after a predetermined delta expansion(market reaches a certain distance from your short strike) and not when vols expand to a certain point, there is a tendency to disregard the vega risk. Which really hasnt been a big deal given the vols have decreased for the past 3 or so years but that can change in a second.

El OchoCinco · Jul 9, 2006

The risk does not necessarily increase when the vols increase. If vols increase and premiums increase and I can go further OTM, I am still going to use support & resistance, previous highs and lows, market analysis and delta/probabilities to make my strike selections.

I do not do condors consistently, I do credit spreads. Occasionally I may roll into a condor when market conditions warrant. If the market is quite volatile I may see more price swings but the analysis I undergo to select strikes is still the same.

The risk for me is always predetermined and known ahead of time. The increased volatility may decrease the odds I had previously which is why I look to go further OTM to stay as conservative as possible.

I do not have a fixed premium or % return I need or want each month. I let the market tell me and the strikes tell me what is the best I can get and I determine if it is worth the risk. One month it might be a 4% return on risk, another it might be 2%. With a rolled into condor it could be 10%. I never force myself into fixed return or premium rules. I have to decide each month based on what I am seeing in the market.

Remember that after JUNE expiry I specifically stayed out of JULY SPX until after the FED. I did not like the strikes or premiums I was seeing in the SPX and therefore passed. I did like what I saw in the ES spreads so I grabbed some.

Quote from apex82:

Coach,
Thanks for the reply. I guess my question was not as clear. I was thinking if volatility was rising from month to month, year to year it seems like it wouldnt matter if you were receving more credit. The risk would be higher regardless if you were receiving more premium then before. Nobody can really predict a scenario like this, but if it were to begin to happen would you still continue to put on FOTM condors?
Thanks