SPX Credit Spread Trader

[Sailing]

Math Margin Quiz:

The only legitimate way to calculate your monthly return on margin is to weight it according to the total possible.

That question always reminds me of this high school ACT test question.

" If Mr. Ryans 1st hour class of 10 students had a class average of 60% and Mr. Ryans 3rd hour class of 50 students had a class average of 80%, then the overall average is:

a) 70%
b) 76 2/3%
c) 80%
d) no one could have passed that test
e) both a & b above
f) only b & c
g) a, b, & c above
h) all of the above
i) none of the above

And the answer is:

Quote from Sailing:

Rdemyan,

With a week to go until expiration.... let's say .15 plus commissions is what it will cost you to close the position... in my opinion is like giving away a 10% profit for one week. Would you be the buyer of this .15 debit spread hoping to make 10% in one week?

Here's how I like to rationalize it! If you think you can find a position which will make you more than 10% (almost guaranteed in your case) in the same time period.... then it's an easy question to answer..... sell or roll the position. (remember there is little risk in your current position)

But, in reality, a pretty sure fire 10% for one week would be hard to find. So, unless you really need the money, it seem prudent to wait it out.

There will be plenty of opportunities ahead... maybe even bigger and better ones....

M~

 

[rdemyan]

Always nice to hear from you Murray:

I think you missed that these were August not July options. However, I pretty much agree with you. Had these been July options still DOTM and with a week left I would only get out for $.05 or less (I already did that by legging out of my previous July spreads for a net $0.00 cost, excluding commissions).

Actually, this turned out to be an exceptional month for me given that I'm currently only trading bear calls. By opening and closing both July and August bear calls for substantial profit, my overall ROM was 7.6% for July. Clearly, this was a rare opportunity as normally it is less than 5% assuming expiration of any open positions and no adjustments.

So, Murray, how about starting a double diagonal thread. I and many others are interested in what you are doing. Can you at least suggest some reading as I would like to study the DDs more, particularly the greek effects.

EDIT: Also, I'm curious, the account you have set up with Mav is it a retail account or something else.

Quote from Sailing:

Rdemyan,

With a week to go until expiration.... let's say .15 plus commissions is what it will cost you to close the position... in my opinion is like giving away a 10% profit for one week. Would you be the buyer of this .15 debit spread hoping to make 10% in one week?

Here's how I like to rationalize it! If you think you can find a position which will make you more than 10% (almost guaranteed in your case) in the same time period.... then it's an easy question to answer..... sell or roll the position. (remember there is little risk in your current position)

But, in reality, a pretty sure fire 10% for one week would be hard to find. So, unless you really need the money, it seem prudent to wait it out.

There will be plenty of opportunities ahead... maybe even bigger and better ones....

M~

 

[Cache Landing]

Quote from Sailing:

Math Margin Quiz:

The only legitimate way to calculate your monthly return on margin is to weight it according to the total possible.

That question always reminds me of this high school ACT test question.

" If Mr. Ryans 1st hour class of 10 students had a class average of 60% and Mr. Ryans 3rd hour class of 50 students had a class average of 80%, then the overall average is:

a) 70%
b) 76 2/3%
c) 80%
d) no one could have passed that test
e) both a & b above
f) only b & c
g) a, b, & c above
h) all of the above
i) none of the above

And the answer is:

Answer = B

Sorry Rdemyan, if I understood your post that isn't the appropriate way to calculate RoM as Sailing's post should have pointed out.

Example:

JAN Margin = $10K Return = $1K (10% RoM)

FEB Mar = $20K Return = $5K (25% RoM)

MAR Mar = $15K Return = $1,500 (10%RoM)

Your way:

(10K + 20K + 15K)/3= 15,000

(1,000 + 5,000 + 1,500)/15,000 = 50%

Correct Way:

10K/45K= 0.2222 * 0.1 = .0222
20K/45K= 0.4444 * 0.25= .1111
15K/45K= 0.3333 * 0.1 = .0333

.0222 + .1111 + .0333 = 0.1666 = 16.6%

 

[Cache Landing]

OTOH Rdeyman, if I misunderstood your post and you were actually saying that you:

1) Summed the monthly margins and divided by the # months to get average margin.

2) Divided the monthly returns by the average margin one at a time to determine a monthly rate of return on average margin.

3) Summed the monthly rates and then divided again by the # months.

That will work too.

 

[rdemyan]

I see it takes a math problem to get you to post these days

Not sure I agree with you. In your example, there was never more than 20K at risk at any time. So why you would suddenly add all of the margins together, I'm not clear on.

Let's assume 20K in your example instead of variable margin. 20K is at risk for three months and it earns $7,500 during those three months. It still seems to me that the ROM is $7,500/$20,000 or 37.5%. Let's say I broke all of Coach's rules and risked an entire account of 20K. After three months, the account has $27,500 in it. That's 37.5% on the original 20 K.

To make it simpler, assume that the profit from each month is swept from the account after each expiration. $7,500 is removed after three expirations and it was generated from $20,000.

Quote from Cache Landing:

Answer = B

Sorry Rdemyan, if I understood your post that isn't the appropriate way to calculate RoM as Sailing's post should have pointed out.

Example:

JAN Margin = $10K Return = $1K (10% RoM)

FEB Mar = $20K Return = $5K (25% RoM)

MAR Mar = $15K Return = $1,500 (10%RoM)

Your way:

(10K + 20K + 15K)/3= 15,000

(1,000 + 5,000 + 1,500)/15,000 = 50%

Correct Way:

10K/45K= 0.2222 * 0.1 = .0222
20K/45K= 0.4444 * 0.25= .1111
15K/45K= 0.3333 * 0.1 = .0333

.0222 + .1111 + .0333 = 0.1666 = 16.6%

 

[Cache Landing]

Quote from rdemyan:

I see it takes a math problem to get you to post these days

Not sure I agree with you. In your example, there was never more than 20K at risk at any time. So why you would suddenly add all of the margins together, I'm not clear on.

Let's assume 20K in your example instead of variable margin. 20K is at risk for three months and it earns $7,500 during those three months. It still seems to me that the ROM is $7,500/$20,000 or 37.5%. Let's say I broke all of Coach's rules and risked an entire account of 20K. After three months, the account has $27,500 in it. That's 37.5% on the original 20 K.

You are talking about a longer period return on a single position max risk. I'm talking about your average return on risk for a single position.

Yes you can argue in the above example that the $7.5K was all earned on the same $20K and thus the total RoM was 37.5%

This sort of calculation doesn't hold up when there are losses and gains mixed together.

For example:
$20K account and margin is always $10K each month.

Jan + 1K
Feb - 8K
Mar + 5K
Apr + 3K

Your calculation would give:
$1,000/$10,000 = 10% RoM

But you'll notice that after february's loss you weren't using the same $10K. You essentially had to pull an additional $7K out of reserves. So your way, done more accurately, would give:
$1,000/$17,000 = 5.9% RoM

The more proper way (from my previous post) would give an accurate weighted monthly return on margin regardless of gains or losses. In the example above you should get:
RoM = 0.625%

 

[momoneythansens]

Quote from rdemyan:

Can you at least suggest some reading as I would like to study the DDs more, particularly the greek effects.

Old article from Tom Preston at ToS:
http://mediaserver.thinkorswim.com/articles/TPDubDiagArticle.pdf

ToS chat transcript on diagonals:
http://mediaserver.thinkorswim.com/transcripts/June012005_Diagonal_Basics.pdf

A diagonal is a vertical and calendar. If you are familiar with each of those then understanding the diagonal becomes intuitive IMO. Vega in the back month. Gamma in the front month. Stress test the position to see the greeks.

2 cents.

 

[blure2]

Hi, Group;

Currently my position is thus:

RUT Jul 140C 780/770 @$.4 credit
RUT Jul 140P 640/650 @$.4 credit

I would deeply appreciate some of the groups expertise on what to do heading into expiration Friday. RUT held fairly strong yesterday only giving up 4.76 pts.

Should I be concerned about the mideast developments? If I bailed out now I would breakeven for the month. Should I roll down to say the 620/630 position? Or perhaps roll my position to Aug.?

Thank you,

Bob

 

[rdemyan]

Hi Bob:

The RUT closed around 681 on Friday. You're still about 30 points away, which would probably suggest waiting to see what happens next week. However, the RUT is more volatile than the SPX.

Have you traded the RUT before? My limited experience with the RUT is that the MMs really punish you when they see that you're trying to get out of a position that is potentially headed for trouble. I also know of others who have experienced this (newsletter group). Maybe you've had better luck. But it's one of the reasons I no longer trade the RUT.

My 2 cents: I would have a plan in place for an adjustment that's ready to go on Monday. Sunday night I would check the futures (I usually tune into Bloomberg TV for that) to get a preliminary sense of where things might be headed.

One of the tricky things is to decide at what point to adjust. The RUT is different than the SPX and there's only a week left before expiration. I would look at support levels (I don't know what they are for the RUT) and probably use those to decide as well as a differential (my first inclination is about 10 points because the RUT is more volatile than the SPX).

IMHO the current geopolitical situation makes this more complicated.

I currently only trade bear calls because of geopolitical situations and possible black swans. So take this with a grain of salt and hopefully others will chime in with their thoughts and suggestions.

Good Luck!

Quote from blure2:

Hi, Group;

Currently my position is thus:

RUT Jul 140C 780/770 @$.4 credit
RUT Jul 140P 640/650 @$.4 credit

I would deeply appreciate some of the groups expertise on what to do heading into expiration Friday. RUT held fairly strong yesterday only giving up 4.76 pts.

Should I be concerned about the mideast developments? If I bailed out now I would breakeven for the month. Should I roll down to say the 620/630 position? Or perhaps roll my position to Aug.?

Thank you,

Bob

 

[RichardRimes]

Quote from blure2:

Hi, Group;

Currently my position is thus:
Should I roll down to say the 620/630 position? Or perhaps roll my position to Aug.?

Thank you,

Bob

Bob...IF you chose to roll out to August one word of advise I would have is to wait until exp. day...not roll sooner. If I had waited (I rolled out one day prior to exp) I would have had many more options. Rolling out is last resort, when its either close for a large loss or roll to give market time to go up (this of course is assuming you believe the market is at a bottom)...if coach is feeling for a bottom then I'm sure its around here somewhere!