SPX Credit Spread Trader

Quote from domestic:

coach (and other's...)

if anyone would be interested in starting(coach) a naked future option thread; i know i would really try to make it successful.
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You might be interested in going to woodiescciclub.com and join the stocks/options room (not the "main" room, as they trade index futures). They do alot of spreads, but woodie himself loves naked writing, and is very good at it. And he doesn't go much OTM either. He uses the CCI on daily/30 min charts to pick tops and bottoms. He is amazing. (And it is all free). Edit: But it is done
on stocks, not futures/indices.

Beachie (back to lurking)
 
Your margin doesn't really "go through the roof". It just moves to be similar to the margin requirement for being short the futures contract itself. And futures margins are crazy low anyway, given the power of a futures contract.

So the question becomes one of leverage. More precisely, have you levered yourself up to the neck? If so, then the margin increase will force liquidations by your broker. If you are not overleveraged, you are fine and can take whatever defensive measures you need to.

That is the real trap with FOTM naked puts. Its such easy money, people want to use every bit of margin they have to sell as many options as possible. Then when the 1 or 2 sigma event does happen, they've got their pants around their ankles. The same overleverage trap exists for credit spreads as well. Any system that is a high percentage win/loss and a terrible risk/reward ratio can sucker people into thinking that they will never lose. But 95% win/loss isn't 100% w/l. When the 5% comes to town, you'd better be ready for a fight.

Quote from domestic:

i even can argue that when my naked short is attacked, a roll down and out is easy and even profitable. yes, i understand that the margin for spreads is fixed, and my naked future options span margin will go through the roof
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I think you are just seeing small volume inside bid/ask values for part of the spread. This is a way of life on ES. You yourself are part of the problem :) When you bid higher than the MM bid, your bid becomes the number on everybody's screen. But if you're only bidding on 1 contract, it gives a false impression of the real market. This "false" market carries over to every spread that also uses that particular option.

Quote from RR:
Sometimes a deeper OTM put spread is showing a higher credit than a less OTM one, or a much higher credit than an only slightly more OTM one.
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An update on Coach's ES put diagonal for those interested, since today sees a +10 jump in ES and a 1 point drop in VIX.

Original position:
Sold 20 AUG ES 1225 Puts @ 8.75
Bought 20 SEP ES 1200 Puts @ 11.00
Net Debit = 2.25 or $2,250
VIX = 14.57

Yesterday (8/1):
ES 1276 VIX 15.06
ES AUG 1225P 3.00 x 3.35
ES SEP 1200P 6.25 x 7.00
(3.25) + 6.5 + (2.25) = 1

Today (8/2):
ES 1286 VIX 14.1
ES AUG 1225P 1.65 x 1.85
ES SEP 1200P 4.55 x 4.90
(1.8) + 4.7 + (2.25) = 0.65
 
Quote from jeffm:

Your margin doesn't really "go through the roof". It just moves to be similar to the margin requirement for being short the futures contract itself. And futures margins are crazy low anyway, given the power of a futures contract.

So the question becomes one of leverage. More precisely, have you levered yourself up to the neck? If so, then the margin increase will force liquidations by your broker. If you are not overleveraged, you are fine and can take whatever defensive measures you need to.

That is the real trap with FOTM naked puts. Its such easy money, people want to use every bit of margin they have to sell as many options as possible. Then when the 1 or 2 sigma event does happen, they've got their pants around their ankles. The same overleverage trap exists for credit spreads as well. Any system that is a high percentage win/loss and a terrible risk/reward ratio can sucker people into thinking that they will never lose. But 95% win/loss isn't 100% w/l. When the 5% comes to town, you'd better be ready for a fight.



I think you are just seeing small volume inside bid/ask values for part of the spread. This is a way of life on ES. You yourself are part of the problem :) When you bid higher than the MM bid, your bid becomes the number on everybody's screen. But if you're only bidding on 1 contract, it gives a false impression of the real market. This "false" market carries over to every spread that also uses that particular option.

 [/B]
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Jeff,

I used to sell naked options for stocks. It seems that the credit spread provides a great leverage as compared to naked puts.

With span margin, I probably can achieve a good leverage if I switch to future options. Am I right?

Is the margin for credit spread for spx the same as the corresponding es credit spread? If they are the same, I don't see any benefit of trading es credit spread.

Please educate me as I am trying to expand my horizon.
 
As Mo's post points out, ES spread margin is better than SPX. How much better also depends on the width of the spread. A 5 pt ES spread will have margin similar to a 5 pt SPX spread (remember that you will need 2 ES contracts to equal 1 SPX). A 20 point spread will be quite a bit higher with SPX vs ES. A 100 point spread would need huge margin on SPX, but not a big deal at all on ES. Taken to the logical conclusion...selling naked on SPX is a no-go, but as has been discussed, selling naked on futures is not a problem.

With SPX, Uncle Sam and Reg-T hold your hand to make sure you don't overleverage. SPAN is like Earl Campbell with a tear-away jersey :)

Neither one will help you if you walk off a cliff. SPAN just lets you get to the edge faster. Choose your path wisely :)

Quote from yip1997:

Is the margin for credit spread for spx the same as the corresponding es credit spread? If they are the same, I don't see any benefit of trading es credit spread.
More...
 
I understand that span is basically a software application where a broker can customize the parameters. The margins may be the same but one broker may be more conservative than another in configuring span.

I know one trader who purchased span and runs it on his positions, with the intent of using parameters to lower his position risk.
 
Thanks Jeff! As you can see, you do not necessarily need a move in your direction to squeeze out a profit.

The Call spread has even greater profits to add to the initial credit since I am now holding the lonf 1330 AUG ES Calls :)

Quote from jeffm:

An update on Coach's ES put diagonal for those interested, since today sees a +10 jump in ES and a 1 point drop in VIX.

Original position:
Sold 20 AUG ES 1225 Puts @ 8.75
Bought 20 SEP ES 1200 Puts @ 11.00
Net Debit = 2.25 or $2,250
VIX = 14.57

Yesterday (8/1):
ES 1276 VIX 15.06
ES AUG 1225P 3.00 x 3.35
ES SEP 1200P 6.25 x 7.00
(3.25) + 6.5 + (2.25) = 1

Today (8/2):
ES 1286 VIX 14.1
ES AUG 1225P 1.65 x 1.85
ES SEP 1200P 4.55 x 4.90
(1.8) + 4.7 + (2.25) = 0.65
More...
 
Quote from cdowis:

I understand that span is basically a software application where a broker can customize the parameters. The margins may be the same but one broker may be more conservative than another in configuring span.

I know one trader who purchased span and runs it on his positions, with the intent of using parameters to lower his position risk.
More...

There may be some confusion here. SPAN is a risk-based margin system. SPAN risk-arrays are calculated by the exchange e.g. CME, Euronext.LIFFE, SGX - they all use versions of SPAN risk-based margining. They also provide desktop software e.g. PC-SPAN so that you can decipher the risk-arrays that are disseminated from the exchanges on a daily basis in order to work out your margin requirements for yourself.

Brokers can also purchase software to work with these risk-arrays and therefore calculate directly for client accounts how much margin is required for each.

In other words, the margin requirements are set by the exchange and not the broker. The broker can certainly require more margin than SPAN dictates but in the instance of brokers like IB, exchange minimums are used. The IB trading platform updates margin requirements for clients. There is no separate software required. To be clear: SPAN is not a software application per se.

More from CME: http://www.cme.com/clearing/rmspan/span/index.html

MoMoney.
 
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