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SPX Credit Spread Trader
- Thread starter El OchoCinco
- Start date
Quote from 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.
Murray
Murray,
Very interesting points. I carry many small positions each month (I sell spreads for cash credits only and I also sell more call spreads on every rally and sell more put spread on every dip - until I have invested all I care to invest for that time period). To date, I have been happy to take my profits early, by closing diagonal spreads (for another cash credit). That allowed me to open new positions in the further month without waiting for expiration.
Thus, it all boils down to this: Is it more profitable to open the next month early, when the credits are larger (I can go further OTM for additional safety when opening early), or to hold current positions in an attempt to collect even larger profits? Have your studies considered this alternative?
Thanks
Mark
Quote from Sailing:
July/August Diagonals at Expiration, July 20, 2006
Well, Friday is going to be a sailing day... so here are the numbers upon close today. I'll use 'mid' for remaining values for reference sake. Positions were placed approximately when market was at 1265ish. SET will have some effect on one position possibly... although looking like positive open for tomorrow on MSFTs earnings... etc.
Position #1
STO July 1195p - $7.50 STC July 1195p - expired
BTO Aug 1175p - $9.70 BTC Aug 1175p - $4.60
Profit = $2.40 on $20 margin or 12.0%
Position #2
STO July 1225p - $11.80 STC July 1225p - expired
BTO Aug 1200p - $13.20 BTC Aug 1200p - $7.30
Profit = $5.90 on $25 margin or 23.6%
Position #3
STO July 1250p - $20.00 STC July 1250p - expired, pending SET
BTO Aug 1230p - $20.90 BTC Aug 1230p - $13.20
Profit = $12.30 on $20 margin or 61.5%
Position #4
STO July 1305c - $6.20 STC July 1305c - expired
BTO Aug 1325c - $6.80 BTC Aug 1325c - $0.55
Loss = $-.05 on $20 margin or -0.2%
Overall: $20.55 on $85 margin or 24.1% return
Because position #2 was more heavily weighted in contracts, the real return was 24.8%
I'm just now getting this concept...I suffer from lack of oxygen...So I took a look at the RUT because that is what I have been trading ICs with.
On 7/14, mid-morning, RUT was at 683. I could have STO the JUL 640p for 1.45 bid, or maybe 1.55 mid-pt.; BTO the AUG 630p for 7.3 ask, or maybe 7.15 mid-pt. BTW the delta at that time on the JUL 630p was -.10.
The RUT Set wound up at 681.8; the AUG 630p b/a at close yesterday was 6.9/7.3. Even STC this position at market would have returned 1.05-1.15 credit or 10.5-11.5%...for only five days.
Unless I'm missing something, that's a good deal and a pretty short time period to have your money on the table.
Bob
Mark:
I tried the MID over a year ago and had to adjust out of a bull put so that I wound up at about breakeven for my IC. I was watching it yesterday and it seems pretty volatile relative to the SPX.
Played the RUT a few times, but getting out was a nightmare. THe RUT MMs are very tight fisted. Is this your experience as well.
Different question. I haven't been playing bull puts because of my concern over a black swan event. Do you put on any hedges or take any measures to provide "insurance" should a black swan hit.
Thanks.
I tried the MID over a year ago and had to adjust out of a bull put so that I wound up at about breakeven for my IC. I was watching it yesterday and it seems pretty volatile relative to the SPX.
Played the RUT a few times, but getting out was a nightmare. THe RUT MMs are very tight fisted. Is this your experience as well.
Different question. I haven't been playing bull puts because of my concern over a black swan event. Do you put on any hedges or take any measures to provide "insurance" should a black swan hit.
Thanks.
Quote from dagnyt:
I get an occasonal fill in SPX, but it's a very annoying process. Perhaps it's my diagonal spread orders that makes is so difficult. I received better fills when trading same month vertical spreads.
These days I trade RUT, RUI and MID. I've tried XEO and SMA, looking for alternate indexes, but have had little success. XEO did provide a couple of fills, but not until my order sat long enough to become fillable at the natural bid-ask. That is not the path to profitable trading.
Mark
Mark,
The answer lies in what the market offers you. I seem to trade opportunities when the market allows. So you answer your question... is tough.
Yes.. next month out is nice for additional premium and FOTM positions... but you also have more time to be wrong in the trade. So it comes down to return on time interval... and if you're selling premium... that occurs in the last few days to expiration.... but that also is where the risk is greatest also...
So... I think looking for small opportunities... whether it be in the current month... or next month is what I find best for my style. For example, we have diagonal positions on for the next two months... now.. placed them when the VIX dropped to 14.
Also applied some FOTM put credit spreads when VIX was high last Monday.... ie, sold the 1115/1125 for .55 This was definitely not the time for placing the Diagonal... but this was a great time to take advantage of the Put Skew.
It's all about consistency... risk management...
Hope this was helpful,
Murray
The answer lies in what the market offers you. I seem to trade opportunities when the market allows. So you answer your question... is tough.
Yes.. next month out is nice for additional premium and FOTM positions... but you also have more time to be wrong in the trade. So it comes down to return on time interval... and if you're selling premium... that occurs in the last few days to expiration.... but that also is where the risk is greatest also...
So... I think looking for small opportunities... whether it be in the current month... or next month is what I find best for my style. For example, we have diagonal positions on for the next two months... now.. placed them when the VIX dropped to 14.
Also applied some FOTM put credit spreads when VIX was high last Monday.... ie, sold the 1115/1125 for .55 This was definitely not the time for placing the Diagonal... but this was a great time to take advantage of the Put Skew.
It's all about consistency... risk management...
Hope this was helpful,
Murray
Quote from dagnyt:
Murray,
Very interesting points. I carry many small positions each month (I sell spreads for cash credits only and I also sell more call spreads on every rally and sell more put spread on every dip - until I have invested all I care to invest for that time period). To date, I have been happy to take my profits early, by closing diagonal spreads (for another cash credit). That allowed me to open new positions in the further month without waiting for expiration.
Thus, it all boils down to this: Is it more profitable to open the next month early, when the credits are larger (I can go further OTM for additional safety when opening early), or to hold current positions in an attempt to collect even larger profits? Have your studies considered this alternative?
Thanks
Mark
Quote from blure2:
I'm just now getting this concept...I suffer from lack of oxygen...So I took a look at the RUT because that is what I have been trading ICs with.
On 7/14, mid-morning, RUT was at 683. I could have STO the JUL 640p for 1.45 bid, or maybe 1.55 mid-pt.; BTO the AUG 630p for 7.3 ask, or maybe 7.15 mid-pt. BTW the delta at that time on the JUL 630p was -.10.
The RUT Set wound up at 681.8; the AUG 630p b/a at close yesterday was 6.9/7.3. Even STC this position at market would have returned 1.05-1.15 credit or 10.5-11.5%...for only five days.
Unless I'm missing something, that's a good deal and a pretty short time period to have your money on the table.
Bob
Bob,
This example showed that you took advantage of the fast decay of front month leg as compared to the back month. The time decay grows exponentially till expiration.
You have to consider the possibility that RUT went up before July expiration. You might suffer a loss say if RUT was 720 at July expiration day. (I didn't run any simulation and can't confirm this statement)
So if you want to take advantage of fast decay when close to expiration, I will consider a naked write ( or credit spread if you are not comfortable with risk profile of naked positions ).
Percy
Bob,
Vega plays a large part of this position... and yes it can be powerful as it moves your direction or increases in VEGA.
Try to figure what would have happened if the market moved and RUT closed at 690. According to my estimates.. you still would have made a small profit.
This is certainly not the 'holygrail' of strategies... but certainly one for the arsenal.
Enjoy,
M~
Vega plays a large part of this position... and yes it can be powerful as it moves your direction or increases in VEGA.
Try to figure what would have happened if the market moved and RUT closed at 690. According to my estimates.. you still would have made a small profit.
This is certainly not the 'holygrail' of strategies... but certainly one for the arsenal.
Enjoy,
M~
Quote from blure2:
I'm just now getting this concept...I suffer from lack of oxygen...So I took a look at the RUT because that is what I have been trading ICs with.
On 7/14, mid-morning, RUT was at 683. I could have STO the JUL 640p for 1.45 bid, or maybe 1.55 mid-pt.; BTO the AUG 630p for 7.3 ask, or maybe 7.15 mid-pt. BTW the delta at that time on the JUL 630p was -.10.
The RUT Set wound up at 681.8; the AUG 630p b/a at close yesterday was 6.9/7.3. Even STC this position at market would have returned 1.05-1.15 credit or 10.5-11.5%...for only five days.
Unless I'm missing something, that's a good deal and a pretty short time period to have your money on the table.
Bob
Quote from rdemyan:
Mark:
Played the RUT a few times, but getting out was a nightmare. THe RUT MMs are very tight fisted. Is this your experience as well.
Different question. Do you put on any hedges or take any measures to provide "insurance" should a black swan hit.
Thanks.
Hi,
I find RUT MMs reasonable. That means they (almost) always show a bid for my spreads that is 15 - 20 cents better than the natural b/a. About half the time, I get filled immediately if I offer 5 to 10 cents better than the mid-point.
But - I find it more difficult to close diagonals. Perhaps the MMs natural inclination is to own gamma and that means they awould be eager to allow me to open (but not close) those diagonals.
I have no black swan protection per se - unless you count being long vega (I do) as limited insurance.
Mark
good question. these trades are part of a larger piece. when/if the aug expires the long sep is free. then a new calendar is rolled into for a credit. the result is a form of a diagonal backspread which has no cost basis and, in my view, a better risk graph than a vertical backspread. most if my trading is short premim and vega. these trades simply balance some of that out.
if we rally to 1300 then everything else is doing well. but, on the rally if a calendar were set up for a debit it could very well lose money.
for my purposes the margin is inconsequential. however, if the aug expired with sp at 1200, the seps could be worth upwards of 25 points which is over 6k. 150 percent return on margin.
if we rally to 1300 then everything else is doing well. but, on the rally if a calendar were set up for a debit it could very well lose money.
for my purposes the margin is inconsequential. however, if the aug expired with sp at 1200, the seps could be worth upwards of 25 points which is over 6k. 150 percent return on margin.
Quote from Aardvark:
My only question here is if the goal is owning a put for free...is this not somewhat directional? You will own 1140 sept...what if we rally back to the 1300's in Sept? Are you in a small way betting on a continuation of this downtrend? Say you did a 10 lot of these your margin/maintainence is now $40,000. Thats been my whole issue with these diagonal's in a retail/IRA account.