SPX Credit Spread Trader

[yip1997]

Quote from optioncoach:

As volatility increases it will push the higher VEGA positions up more than the lower VEGA positions. There is also a delta difference. I do not have the ES greeks in front of me right now but for illustrative purposes lets look at SPX options of similar strikes and their greeks:

SEP SPX 1200 Put

Vega 1.39
Delta -.20
Gamma -.18

AUG SPX 1225 Put

Vega 1.10
Delta -.24
Theta -.27

As the market goes down and IV increases, the SEP puts have a bigger increase in price due to Vega. Moreover, if the drop in price happens closer to expiration, the theta differential also favors the long puts. Both of these hep against the delta differential between the two which can grow as the market moves lower since the AUG puts have higher gamma.

Murray can explain better from his actual trades

Just imagine the index went down 1 point after one day with a 1% rise in IV to see how the position would react

I used the diagonal and calendar spread in the past. One thing I didn't like was the initial debit. As the market continues to go down, even a rise in IV might not give u any profit. I will try to find a past trade to illustrate it in my next post.

 

[El OchoCinco]

I too am not a big fan of doing these for a debit since I have a credit mentality lol and since I can do it better with the calls for a nice credit (see my positions above) and prefer put credit and ratio spreads. However with the ES and EW options I have a lot of choices to roll and make adjustments to make a nice profit.

The profit is not from the IV expansion alone. For me that is not why I play it. It is just a greek in my favor. I also look for the potential of having the short strike expire worthless so I can take money in the later month or adjust to another position. That is why I chose 1225 and 1200 strikes. If the market moves down strongly, I can roll the AUG ES to AUG EW (end of month options) or to SEP itself or even to OCT for a reverse calendar which Murray and Mo have me looking at.

So the fact that there is a lot of potential has me dipping my toes with this 20 lot position.

Quote from yip1997:

I used the diagonal and calendar spread in the past. One thing I didn't like was the initial debit. As the market continues to go down, even a rise in IV might not give u any profit. I will try to find a past trade to illustrate it in my next post.

 

[rallymode]

Quote from Neoxx:

Thanks for the advice everyone. Will let you know if I get a decent fill.

A decent fill on that spread would be $2.8-3.00 in my opinion. Though i think you are early with your timing. With CTM spreads you want to make sure you get a nearly perfect entry or you will be breaking even over the long haul at best as you will be forced into way too many adjustments. It all depends on your directional forecast but i wouldnt be doing these with SPX below 1280-1290.

Just my experience, good luck.

 

[ryank]

Quote from optioncoach:

I too am not a big fan of doing these for a debit since I have a credit mentality lol and since I can do it better with the calls for a nice credit ...

It's a tough thing to deal with mentally after doing credit spreads for so long isn't it? I'm still trying to get myself used to it, dipping my toes in as well per my post Monday. I do like the credits you can get on the call diagonals, just need some more bleed in the vix before I go that route.

 

[yip1997]

Quote from chrdso:

So does this mean we should try and sell better that the Theo (when spread is expensive) and buy less than the Theo (when spread is cheap) - waiting for the point where IV makes the spread price cheaper(buy)/expensive(sell) as compared to Theo which is based on HV?

It is hard to get IV lower than HV. MMs want to make $ (IV higher than HV is one of their edges ). One way is compare the current HV (short-term) with historical HV (long-term). I am not the type of traders using volatility as my trading strategy. I think someone can provide a better trading idea than me if you want a volatility play.

BTW, I am still learning. It seems that I can't stop learning. Is option trading a NP problem?

 

[El OchoCinco]

The only time you stop learning is when you are no longer trading, otherwise it is a graduate school that never ends....

Quote from yip1997:

It is hard to get IV lower than HV. MMs want to make $ (IV higher than HV is one of their edges ). One way is compare the current HV (short-term) with historical HV (long-term). I am not the type of traders using volatility as my trading strategy. I think someone can provide a better trading idea than me if you want a volatility play.

BTW, I am still learning. It seems that I can't stop learning. Is option trading a NP problem?

 

[Neoxx]

Quote from rallymode:

A decent fill on that spread would be $2.8-3.00 in my opinion. Though i think you are early with your timing. With CTM spreads you want to make sure you get a nearly perfect entry or you will be breaking even over the long haul at best as you will be forced into way too many adjustments. It all depends on your directional forecast but i wouldnt be doing these with SPX below 1280-1290.

Just my experience, good luck.

Thanks for the response.

Relented. Credit was too paltry, upped my offer, so now I'm even less likely to get a fill

Appreciate that I might be jumping the gun but I'm just feeling overwhelmingly bearish...

 

[yip1997]

Quote from optioncoach:

I too am not a big fan of doing these for a debit since I have a credit mentality lol and since I can do it better with the calls for a nice credit (see my positions above) and prefer put credit and ratio spreads. However with the ES and EW options I have a lot of choices to roll and make adjustments to make a nice profit.

The profit is not from the IV expansion alone. For me that is not why I play it. It is just a greek in my favor. I also look for the potential of having the short strike expire worthless so I can take money in the later month or adjust to another position. That is why I chose 1225 and 1200 strikes. If the market moves down strongly, I can roll the AUG ES to AUG EW (end of month options) or to SEP itself or even to OCT for a reverse calendar which Murray and Mo have me looking at.

So the fact that there is a lot of potential has me dipping my toes with this 20 lot position.

I probably can't comment on SPX or ES. Yesterday it was my trade with SPX, thanks to the idea from this forum.

My past experience with stock options was that when the market dropped like in May, the front month leg expired worthless but the value of the long leg dropped to almost 0 as well. It dropped too fast. I had similar trades with PD and OIH options. I couldn't sell the long leg to cover the initial debt.

 

[ryank]

Quote from yip1997:

I probably can't comment on SPX or ES. Yesterday it was my trade with SPX, thanks to the idea from this forum.

My past experience with stock options was that when the market dropped like in May, the front month leg expired worthless but the value of the long leg dropped to almost 0 as well. It dropped too fast. I had similar trades with PD and OIH options. I couldn't sell the long leg to cover the initial debt.

How wide was your spread? Puts/calls?

 

[El OchoCinco]

I gave up on stock options a long time ago

Too many stock specific variables to deal with and abnormal skews due to eearnings or news announcements (which of course also present trading opportunities I guess).

Quote from yip1997:

I probably can't comment on SPX or ES. Yesterday it was my trade with SPX, thanks to the idea from this forum.

My past experience with stock options was that when the market dropped like in May, the front month leg expired worthless but the value of the long leg dropped to almost 0 as well. It dropped too fast. I had similar trades with PD and OIH options. I couldn't sell the long leg to cover the initial debt.