SPX Credit Spread Trader

[Sailing]

Quote from yip1997:

I like your reverse vega play.

Suppose I am going to do it now.

STO Aug 1225 Put @ 7.3
BTO Sep 1200 Put @ 9.3

net debit 2.0

Case 1: Market going down at Aug.
VIX increases, and BTC Aug 1225 Put for a loss, say at that time Aug 1225 Put @ 9.3 for a loss of $2.
STO Dec 1175 Put, say @ 25 ( currently it is at 16.5).

Then follow the adjustment in your post.

If the market continues down... your profit from the current September long will cover your DEC 1175p, until VEGA bleeds out of the DEC faster than the SEPT. If you historically look at the VIX... it doesn't stay high very long... usually days, not weeks.

Case 2: Market going sideway.
No need to adjust. Let the front leg expires, and you still have some values for Sep 1220 Put.

The front leg may or may not expire pending on the time frame. You can buy back the DEC put when the VIX drops... and it drops like a rock with any move up or time. You can roll into next month, say Sept to give yourself even more time... and say the market then moves back up. The Sept will have some value left, the DEC will deteriorate much much much faster. Even at Sept expiration you be: -$2 + -$Sept put, but you'll bring in most of $25 from DEC put.

Case 3: Market goes up a lot at Aug b/c Fed announced no more rate hike.
Aug 1225 Put expires worthless.
Sep 1220 Put loses a lot more b/c vega decreases as the stock is further away from the strke.

So in case 3, we are losing money, and how do we adjust our position?

Let's do the math... August 1125p buy it back lose $2 + original price of your Sept put say $9.3 = $11.30.... you only need the $25 Dec put to depreciate by half.... surely if the Sept put is almost zero... the DEC put will be about $4 You stand to make about $10. (25-11.30-4)

 

[Sailing]

Equity is the beautiful thing! VOLUME... LIQUIDITY... cross margin

Quote from yip1997:

Most of the prop firms there are equity only.

 

[yip1997]

Quote from Sailing:

If the market continues down... your profit from the current September long will cover your DEC 1175p, until VEGA bleeds out of the DEC faster than the SEPT. If you historically look at the VIX... it doesn't stay high very long... usually days, not weeks.


The front leg may or may not expire pending on the time frame. You can buy back the DEC put when the VIX drops... and it drops like a rock with any move up or time. You can roll into next month, say Sept to give yourself even more time... and say the market then moves back up. The Sept will have some value left, the DEC will deteriorate much much much faster. Even at Sept expiration you be: -$2 + -$Sept put, but you'll bring in most of $25 from DEC put.


Let's do the math... August 1125p buy it back lose $2 + original price of your Sept put say $9.3 = $11.30.... you only need the $25 Dec put to depreciate by half.... surely if the Sept put is almost zero... the DEC put will be about $4 You stand to make about $10. (25-11.30-4)

Sorry, Murray. I am confused now. I haven't short Dec put yet.

When should I short Dec put, if I just made the diagonal today for a debit of $2?

 

[ryank]

Quote from yip1997:

Sorry, Murray. I am confused now. I haven't short Dec put yet.

When should I short Dec put, if I just made the diagonal today for a debit of $2?

I'll let Murray speak for himself, but his post said if there is a VIX spike in August you could possibly buy back the August put (probably at a profit, lots of variables here though) and then sell the Dec put that has lots of volatility built into it. If/when volatility goes back down the Dec put gets crushed soon thereafter and you make a handsome profit.

 

[Sailing]

It's a VEGA play.... so when volatility spikes.... you want to suck it out... or place a 'reversion to mean' by selling the DEC puts.

So... wait for the 'panic selling', check the VIX regularly and take advantage of what most can not.

M~

Quote from yip1997:

Sorry, Murray. I am confused now. I haven't short Dec put yet.

When should I short Dec put, if I just made the diagonal today for a debit of $2?

 

[Maverick74]

Quote from yip1997:

If span margin is as good as hair cut, I like to stay retail by switching to future options.

Murray wanted me to jump in on this thread and say hi again. So I'll say span margin is no where hear as good as haircut. Not even remotely close. Are you happy now Murray?

 

[Beachie]

Quote from Sailing:

It's a VEGA play.... so when volatility spikes.... you want to suck it out... or place a 'reversion to mean' by selling the DEC puts.

So... wait for the 'panic selling', check the VIX regularly and take advantage of what most can not.

M~

I was confused but I think I get the point. IF there is no VIX spike in Aug, you never sell the Dec puts, so you are left with short aug puts that expire worthless, but long Sept puts that should retain some value to give you a profit, even if small? Is that it?

Edit: This is I think what yip1997 was getting at. What happens if you don't get the VIX spike in aug and never sell the Dec puts, as the play was written, "IF we get a big VIX spike in Aug then sell the Dec 1175p." We are assuming that we have already put on the short Aug 1225/long Sept 1220 play, and will only sell the Dec 1175p IF we get the VIX spike in Aug . . .

Beachie (lurker extraordinaire)

 

[Sailing]

Absolutely correct!

Quote from Beachie:

I was confused but I think I get the point. IF there is no VIX spike in Aug, you never sell the Dec puts, so you are left with short aug puts that expire worthless, but long Sept puts that should retain some value to give you a profit, even if small? Is that it?

Edit: This is I think what yip1997 was getting at. What happens if you don't get the VIX spike in aug and never sell the Dec puts, as the play was written, "IF we get a big VIX spike in Aug then sell the Dec 1175p." We are assuming that we have already put on the short Aug 1225/long Sept 1220 play, and will only sell the Dec 1175p IF we get the VIX spike in Aug . . .

Beachie (lurker extraordinaire)

 

[Beachie]

Quote from Sailing:

Absolutely correct!

Cool, I got it! Thanks much. Lots of great info here! Really appreciate it.

 

[ffa99]

Let's see if I can get this Put Diagonal entry/exit too. Is it advantageous to do a wider spread due to the volatility skew and smaller debit?

For example
Trade 1) Long 1185 / S 1200
Trade 2) Long 1195 / S 1200

Assuming the short put expires worthless and the trade is profitable:
Is it true that Trade 1 would return more than Trade 2?
While Trade 2 would have a larger debit but less risk?

And if the position was not profitable (market went way up):
Is it true that Trade 2 would lose more due to the larger debit up front?