SPX Credit Spread Trader

[rdemyan]

Yes, of course, you are right.

As I think about it, I was probably thinking back to an earlier post on the topic and it probably was with regards to double diagonals. I believe the idea was that if you put on a call diagonal for a credit, then most likely the "equivalent" put diagonal would be for a debit. Equivalency here means the same months, the same number of contracts and the same spread between long and short strikes.

EDIT: Also, probably this assumed following the general guidelines about being OTM and risk management that are generally practiced here. I suppose you could always come up with some combination where both would give a credit.

Quote from dagnyt:

Any diagonal - put or call - can be put on for a credit. Obviously, the amount of credit (or debit) depends on the distance between the strikes.

Mark

 

[Prevail]

I took a different approach today. sold the aug 1190 put and bot the sep 1140 put for .3 credit. the trade cost no money on 4k of margin. I show a 10 percent chance the 1190s are hit. there are two exits, the 1190s expire or if sp hits 1190 the entire spread is reversed. currently, the latter exit is priced at 6 points. this will improve over time.

the goal here is not a large gain, although possible, but rather to own a sep put free and clear.

 

[rdemyan]

Not clear on what the instrument is: SPX, ES, SP?

Quote from Prevail:

I took a different approach today. sold the aug 1190 put and bot the sep 1140 put for .3 credit. the trade cost no money on 4k of margin. I show a 10 percent chance the 1190s are hit. there are two exits, the 1190s expire or if sp hits 1190 the entire spread is reversed. currently, the latter exit is priced at 6 points. this will improve over time.

the goal here is not a large gain, although possible, but rather to own a sep put free and clear.

 

[JimPos]

Prevail:
What do you mean when you say the spread is reversed?

Quote from Prevail:

I took a different approach today. sold the aug 1190 put and bot the sep 1140 put for .3 credit. the trade cost no money on 4k of margin. I show a 10 percent chance the 1190s are hit. there are two exits, the 1190s expire or if sp hits 1190 the entire spread is reversed. currently, the latter exit is priced at 6 points. this will improve over time.

the goal here is not a large gain, although possible, but rather to own a sep put free and clear.

 

[Sailing]

Beautiful day on the water... not so good for the market.

I'll do my best to answer the questions posted. If I miss one, please reinterate.

We placed three Diagonals... which placed a large profit range from 1310 to 1170... all depending on the VIX. As volatility increaased ... so also did the B.E. (bread even).

When the position 1250 short was ITM, ie, like it was on Monday and Tuesday... the other positions at 1225 and 1195 were more profitable than what was being lost at 1250. Strangely enough, when the vix spiked on Monday-Tuesday this past week... and the SPX was around 1230ish, the July 1250p short along with the Aug 1230p long... was only losing a very small amount. The Aug. 1230p was increasing in both delta and vega (premium), the July 1250p was losing premium but fighting delta.

It was truly amazing to watch how VEGA played a huge hedging role in the position. In fact, when the market surged up Wednesday around 1240ish... the position was losing more.. becasue VEGA fell right out of the bottom on the August puts.

Just another reason I like the put diagonals... VEGA is a self hedging instrument... gives you more time to be right in the trade.. or adjust.

~~ _/) ~ ~

M~

Quote from Prevail:

Murray, thank you for your detailed synopsis; I know that took some time.
I have a question if you are up for it. at some point this month the short 1250's were in the money and perhaps will be today at x. do you have an exit to limit losses if the short losses start mounting and overcoming the gains of the long?

if you don't have time to respond i'll just imagine you are winning the race with the wind in your hair.

 

[rallymode]

Alot of discussion and interest in diagonals the last few days so i thought i'd share my 2 cents on the strategy.

If i am doing diagonals, i much rather be net long delta/gamma especially on the put side. For those confused by this, i rather have my long strike in front of my short strike. It is a diagonal debit vertical of sorts. I know what you are thinking, thats a huge debit. Well that comes with being long delta/gamma. Those who love credit positions and are willing to take on the gamma risk can ratio the vertical by selling more contracts at the short strike or even go further up/down a strike. This would turn the position into a diagonalized frontspread or diagonalized christmas tree. It is in my opinion a better way to play the volty as described over the last few days. Increasing the size on your +strike or reducing the size on your -strike will get your deltas longer(bigger debit) and vice versa reducing the size on your +strike or increasing the size on your -strike will get your deltas shorter(smaller debit and maybe a credit).

Having said that, i rarely ever put these on, much less on any index or ETF(not enough juice, especially with reversed strikes where i sell closer to the market). I do these when i find a very sharp volty smile or skew on one side(debit is significantly reduced as you sell lotsa juice) that will make carrying all that delta worthwhile. This approach fits much better in my style to close/adjust positions when i want to and not when i have to.

Anyway, didnt mean to take this discussion even further offtopic but i thought you guys should look into these if the theme of buying longer dated options and selling shorter dated ones against them interests you. I dont think you will find much discussion on these on ET but perhaps mo can prove me wrong and dig up a link or two.

 

[Sailing]

Mark,

Interesting that you mentioned this....

we analyzed this extensively.... our final conclusion was... if you're playing Expected Return on trade position, then the Expected Value isn't attained until expiratoin. Moreover, the rate of change of profit to loss, occurs greatest (rises exponentially) up until expiration... not taking into consideration commissions.

Each person certainly has their own comfort level and trading style... but holding through expiration (under normal circumstances) most definitely increases your long term (monte carlo.... random phenonimum) expected return. The profit rate of return vs. loss increases as you approach expiration.

I believe an earlier post eluded to an example. We ran several.

Murray

Quote from dagnyt:

I disagree. It is ANYTHING but prudent to hold these positions through expiration. I tend to close all diagonals early. When I believe the profit is sufficient AND the risk of holding the position is high, I close and open a new position in a further month.

That may not work for everone, but it works for me. I see no need to go for huge profits when risk is ever present.

Mark

 

[Sailing]

Rally,

We looked at this type of diagonal also.

It certainly has it's place. It's more intune with how you like to trade... ie, closer deviations to the mean.

We are still backtesting and analyzing this type.

Any additional info would be appreciated...

M~

Quote from rallymode:

Alot of discussion and interest in diagonals the last few days so i thought i'd share my 2 cents on the strategy.

If i am doing diagonals, i much rather be net long delta/gamma especially on the put side. For those confused by this, i rather have my long strike in front of my short strike. It is a diagonal debit vertical of sorts. I know what you are thinking, thats a huge debit. Well that comes with being long delta/gamma. Those who love credit positions and are willing to take on the gamma risk can ratio the vertical by selling more contracts at the short strike or even go further up/down a strike. This would turn the position into a diagonalized frontspread or diagonalized christmas tree. It is in my opinion a better way to play the volty as described over the last few days. Increasing the size on your +strike or reducing the size on your -strike will get your deltas longer(bigger debit) and vice versa reducing the size on your +strike and increasing the size on your -strike will get your deltas shorter(smaller debit and maybe a credit).

Having said that, i rarely ever put these on, much less on any index or ETF(not enough juice, especially with reversed strikes where i sell closer to the market). I do these when i find a very sharp volty smile or skew on one side(debit is significantly reduced as you sell lotsa juice) that will make carrying all that delta worthwhile. Anyway, didnt mean to take this discussion even further offtopic but i thought you guys should look into these if the theme of buying longer dated options and selling shorter dated ones against them interests you. I dont think you will find much discussion on these on ET but perhaps mo can prove me wrong and dig up a link or two.

 

[Sailing]

Any diagonal can be placed as a put or a credit... but when you really look at logical strikes.... (support and resistance) you'll find that the skew in the Puts favors a debit trade, and the calls a credit trade. If you choose to ratio the call side for further upside B.E., then it can be placed for either a small credit or debit.

Check the chains yourself and get a feel for the numbers.

M~

Quote from rdemyan:

Yes, of course, you are right.

As I think about it, I was probably thinking back to an earlier post on the topic and it probably was with regards to double diagonals. I believe the idea was that if you put on a call diagonal for a credit, then most likely the "equivalent" put diagonal would be for a debit. Equivalency here means the same months, the same number of contracts and the same spread between long and short strikes.

EDIT: Also, probably this assumed following the general guidelines about being OTM and risk management that are generally practiced here. I suppose you could always come up with some combination where both would give a credit.

 

[Sailing]

Jeff,

Well said... just let me add... that the volatility increase really does make a huge impact... HUGE! Which in turn, make for even a nicer profit.

For reference, one of our traders closed his identical diagonals Thursday morning, by the close... it was a difference between 17K and 31K.

But he's still smiling..... we're just smiling a little more!

M~

Quote from jeffm:

Just a reminder of Murray's position:
Position #3
STO July 1250p - $20.00 STC July 1250p - expired, pending SET
BTO Aug 1230p - $20.90 BTC Aug 1230p - $13.20

Ignoring that SET was 1251, lets just play with the numbers...

Lets assume SPX drops to 1230 today. Where would this diagonal end up?
Short 1250P loses 20 pts.
Initial debit was 0.90 pts.
The question then becomes, "what is the value of the AUG 1230P?"
SPX is currently 1240, so I'll just use the AUG 1240P as a ballpark value for the ATM 1230P if SPX dropped to 1230.
SPX 1240P is 18x20, so lets just call it 19. If we did drop another 10 pts, the volty bump would help the long put, but we'll ignore that for simplicity.

So the final trade value is (20) + (0.9) + 19 = (1.9)

I'm gonna say that's not too bad for a suprise 1 day move where the market plunges 20 points below your short.

As rallymode alluded to, a drop to your short strike that happens with two weeks remaining is much more painful.

If the market closed right here at 1240, the AUG1230P is worth 15, so the trade still nets (10) + (0.9) + 15 = 4.1 pts. Still a nice result considering an unpleasant expiration day. Plus the other put diagonals that are expiring OTM will all benefit nicely from this move down.