SPX Credit Spread Trader

[Sailing]

Well... I still consider myself a novice in the diagonal arena. Certainly six months of trading them doesn't account for much credibility.

I like your positons though, I don't trade the OIH, really don't konw it's "personality", but your analysis is interesting.

As far as closing out, you can play DELTA or VEGA, with the diagonal. Your situation here appears to be both DELTA and VEGA driven. As I understand the OIH, as the movement moves up, so to does VEGA. It's similar to the Call Diagonal of the SPX, volatiity wise that is.

Personally, with this much trading time remaining in Aug, I would close and 'wait' for another opportunity. It's obviously a personal choice, but it's not a RISK choice. If it were closer to Aug expiration, I'd consider following your plan into SEPT. But your risk in Aug is only .05 + commission. That's about as good as it gets.

We've looked at similar positions going additional months out in time.... what we decided was... if we get a VEGA spike, the further out month, ie your OCT positions, doesn't allow us to sell back month options at a higher profit potential, say than the next month out.

Example: you own long the OCT... if we get a VEGA spike, and want to sell VEGA, then we would close our Aug positions and sell DEC, and ride the tide out.... by owning the OCT... you would be limited (but not impossible) to sell further months out with larger b/a spreads.

In summary... I like the way you have set up your analysis and trading plan. I would play the 'wait and see' game and take advantage of the next opportunity to sell again.

Murray

Quote from yip1997:

Murray,

Thanks for sharing a wonderful document with us. I have 2 questions regarding closing a position.

1. It is true that hedging reduces your expected return. My monte carlo simulation also showed that the expected return is reduced if you have a pre-set cutloss point ( such as stock at your strike, 2x premium, 3x premium), so I tried not to hedge in the past. However, in May I faced a significant loss with OIH put options because I postponed the hedging process. I am currently facing a dilemma unable to judge what to do when the market has moved against your position. Do you use TA (support & resistance) to define your cut loss point? How do you choose your cut loss point?

2. Regarding closing early.
What do you do with your diagonal spread when the front month short is close to worthless because the market moved further away from your strike?
I am facing a similar situation now. I opened a modified 3-leg position (as I have posted before) on 7/5

STO OIH Aug 175 call @1.0
BTO OIH Oct 170 call @ 5.2
STO OIH Oct 175 call @ 3.9

with a net debit of 0.3

The initial plan was that when front month short expires, I STO another Sep short and the position becomes a credit position. Now the market moved further away from the strike, and bid ask for OIH Aug 175 is 0 x 0.05. I can close the position now at 0.05, but it is very obvious that Aug 175 will expire worthless. What are my choices?
1. close Aug short, and STO Sep short ( same as my plan but earlier). BYW there is no market for Sep 175 call.
2. close Aug short and it releases my margin (wait for other opportunities). The margin is very small though because it is far away from the strike.
3. wait till expire.

What do you think? I want to learn from your experience of closing diagonal spreads.

 

[Sailing]

[In my above statement with Call Diagaon and VEGA.... it could be mis-interpreted.

The OIH as it moves up also creates increased volatility... as does the SPX when it moves down.

So, as his positions (Put Diagonal in the OIH) moves up... it is moving away from this position while at the same time VEGA is increasing. This is similar to what happens in the Call Diagonal, as the SPX moves away from the Call side, volatility increases.

I sure hope that clears up the VEGA issue

QUOTE]Quote from Sailing:



As far as closing out, you can play DELTA or VEGA, with the diagonal. Your situation here appears to be both DELTA and VEGA driven. As I understand the OIH, as the movement moves up, so to does VEGA. It's similar to the Call Diagonal of the SPX, volatiity wise that is.


Murray [/QUOTE]

 

[yip1997]

I don't have IB account. Can anyone tell me what the margin requirement for es aug 1130/1110 put credit spread? Like to get a feeling on span margin.

 

[El OchoCinco]

You guys should be careful trying to compare SPAN margin to reg T margin fro SPX v. ES.

The margin requirement is meaningless since the max loss is what really matters. If your account is $50,000 and the SPAN is $40,000 for a spread with a max loss of $100,000 then you might be trading way over your head unless you have a lot of experience with the positions.

SPAN just means the up front money is less, but the risk is not different and returns should take into account amount risked. I do not pay attention to the SPAN or risk haircut, I only look at my maximum risk and for the credit spreads I focus on keeping that within my risk management plan.

Quote from yip1997:

I don't have IB account. Can anyone tell me what the margin requirement for es aug 1130/1110 put credit spread? Like to get a feeling on span margin.

 

[yip1997]

Quote from Sailing:

Well... I still consider myself a novice in the diagonal arena. Certainly six months of trading them doesn't account for much credibility.

I like your positons though, I don't trade the OIH, really don't konw it's "personality", but your analysis is interesting.

As far as closing out, you can play DELTA or VEGA, with the diagonal. Your situation here appears to be both DELTA and VEGA driven. As I understand the OIH, as the movement moves up, so to does VEGA. It's similar to the Call Diagonal of the SPX, volatiity wise that is.

Personally, with this much trading time remaining in Aug, I would close and 'wait' for another opportunity. It's obviously a personal choice, but it's not a RISK choice. If it were closer to Aug expiration, I'd consider following your plan into SEPT. But your risk in Aug is only .05 + commission. That's about as good as it gets.

We've looked at similar positions going additional months out in time.... what we decided was... if we get a VEGA spike, the further out month, ie your OCT positions, doesn't allow us to sell back month options at a higher profit potential, say than the next month out.

Example: you own long the OCT... if we get a VEGA spike, and want to sell VEGA, then we would close our Aug positions and sell DEC, and ride the tide out.... by owning the OCT... you would be limited (but not impossible) to sell further months out with larger b/a spreads.

In summary... I like the way you have set up your analysis and trading plan. I would play the 'wait and see' game and take advantage of the next opportunity to sell again.

Murray

Murray,

Thank you for introducing me to vega play. I never look at vega when I open a combo. My analysis is always delta and theta driven.

You are right that my risk is small for closing the short now. It is just an opportunity cost. I have been trading this naked diagonal (my 3-leg strategy) for three months with very volatile stocks or index. I really didn't care about the underlying. It is very similar to your diagonal in that the max profit is gained when it moves close to your front month short. So the choice of strikes in diagonal and naked diagonal is very important.

One thing regarding SPX. I entered my first SPX trade this month. It surprised me when my simulation showed you can find SPX credit spread with postive expectancy. That means, in the long run, you always make $ with a good choice of strikes. I was never able to find similar trades with OIH nor IWM. It seems SPX has a personality very different from OIH. For those who trades RUT and SPX probably can tell me their difference in personalities.

I have learned a lot from you and Coach Phil this month and I will never be the same. Thank you everyone for making this forum so wonderful.

 

[yip1997]

Quote from optioncoach:

You guys should be careful trying to compare SPAN margin to reg T margin fro SPX v. ES.

The margin requirement is meaningless since the max loss is what really matters. If your account is $50,000 and the SPAN is $40,000 for a spread with a max loss of $100,000 then you might be trading way over your head unless you have a lot of experience with the positions.

SPAN just means the up front money is less, but the risk is not different and returns should take into account amount risked. I do not pay attention to the SPAN or risk haircut, I only look at my maximum risk and for the credit spreads I focus on keeping that within my risk management plan.

Coach,

If we don't look at the leverage, I don't see the benefit of moving to ES as commission cost for ES is higher than that of SPX. I understand the leverage can hurt me when I were wrong. The benefit of span margin is that the margin automatically releases when the probability of your short expires worthless increases, so my capital can work harder for me. I don't have to close my winning positions in order to release my margin.

Just like my OIH situation, I have to pay 0.05 + commission to close a position that very likely expires worthless ( > 99%) in order to release my margin. It seems that I work very hard to make money for my broker.

Percy

 

[Sailing]

FYI,

Maverick from V-Trader IM'd me this:

20x20 Haircut Margin on SPX 25pt 1200p/1225p diagonal spread = 44K
20x20 Reg-T Marginon SPX 25pt. 1200p/1225p diagonal spread = 50K

I would be interested to compare SPAN... to the above.

Quote from yip1997:

Coach,

If we don't look at the leverage, I don't see the benefit of moving to ES as commission cost for ES is higher than that of SPX. I understand the leverage can hurt me when I were wrong. The benefit of span margin is that the margin automatically releases when the probability of your short expires worthless increases, so my capital can work harder for me. I don't have to close my winning positions in order to release my margin.

Just like my OIH situation, I have to pay 0.05 + commission to close a position that very likely expires worthless ( > 99%) in order to release my margin. It seems that I work very hard to make money for my broker.

Percy

 

[Sailing]

[What's even better.. .... is the reverse VEGA play.

Consider this... we get a huge VEGA spike sometime in Aug.

The Put diagonal 1225/1200 is making money....
Short Aug 1225p = $6.00
Long Sept 1200p = $8.00

Buy back that expensive Aug 1225p for $6.... (this is when most people would say... WHAT?)

And sell the back month DEC 1175p for $28.00

Case I: (Market continue down)
The market moves further down.... ok.... ride it out and take Aug 1225p profit. Buy next month put to replace it and be covered on the DEC short.

Case 2: (Market trades sideways)
The market consolidates for two weeks.... VIX drops 10%, August 1225p is now $3, but the DEC 1175p is now $15. HUGE profit... on VEGA slide. DEC put can be bought back and front month again resold

Case 3: (Market trades up)
The market moves up... VIX really falls, Aug 1225p fall to $1.00, DEC 1175p falls to $5.00 Even a bigger $$$ VEGA play.


We've bact tested this for SIX months, because we're not in the appropraite 'margin' required account types... 'haircut' or 'span' at this time. But I really like the Risk/Reward on this... 'MAV' style X-mass tree strategy.... oops.. that's proprietary.

Mav, sure hope you're reading this!



QUOTE]Quote from yip1997:

Murray,

Thank you for introducing me to vega play. I never look at vega when I open a combo. My analysis is always delta and theta driven.

You are right that my risk is small for closing the short now. It is just an opportunity cost. I have been trading this naked diagonal (my 3-leg strategy) for three months with very volatile stocks or index. I really didn't care about the underlying. It is very similar to your diagonal in that the max profit is gained when it moves close to your front month short. So the choice of strikes in diagonal and naked diagonal is very important.

One thing regarding SPX. I entered my first SPX trade this month. It surprised me when my simulation showed you can find SPX credit spread with postive expectancy. That means, in the long run, you always make $ with a good choice of strikes. I was never able to find similar trades with OIH nor IWM. It seems SPX has a personality very different from OIH. For those who trades RUT and SPX probably can tell me their difference in personalities.

I have learned a lot from you and Coach Phil this month and I will never be the same. Thank you everyone for making this forum so wonderful. [/QUOTE]

 

[El OchoCinco]

Murray:

Now that I like! You roll into a long Sept 1200/Short Dec 1175 so your short is now ahead of the long although the time difference changes the spread value and the fact that it is a reverse calendar with some margin requirements (not a big deal since you can make any adjustments until Sept expiration).

I could even see buying back the AUG and selling a smaller amount of the DEC in a ratio to control the margin a bit if needed.

I did not have a chance to work out what you were saying rolling into a reverse calendar but the example shows it nicely.....

 

[Sailing]

Coach,

In order to pull of this great VEGA play to the downside, you'll need to sell BACK month options.

Since I'm still in Reg-T margin.... do you know if IB will allows this with options on futures using SPAN?