SPX Credit Spread Trader

[cdowis]

>But I don't see the IC as a good trade to put on all at once. Not on SPX.

Ok, so you are a leg-in type of trader. I just don't have the guts to leg into an IC, especially with the SP.

I lost so much of my account because I did not know how to make the adjustments. I was simply doing in and out.

Lesson learned == a small position size will lose alot of money, if you don't know what you are doing. I was doing 1-2 contracts in the big SP with a 36k account. I should have been doing one contract in the ES.

 

[cdowis]

>What I don't have a good feel for is when to get in. I understand that IV must be low, but I'm not clear if I need to get in about 4 weeks to expiration or can you still place a good trade even two weeks out.


Working on that myself. I am thinking that this is a long position, so get into the put diag when the market is up, and the debit premium is very low. Had the opportunity to get into a diag at almost even, but didn't take it. Now it is over 50 cents.

If I see a close to b/e diag, take it. This is truly a free trade. (I think....?)

 

[RichardRimes]

Quote from cdowis:

>But I don't see the IC as a good trade to put on all at once. Not on SPX.

Ok, so you are a leg-in type of trader. I just don't have the guts to leg into an IC, especially with the SP.

I lost so much of my account because I did not know how to make the adjustments. I was simply doing in and out.

Lesson learned == a small position size will lose alot of money, if you don't know what you are doing. I was doing 1-2 contracts in the big SP with a 36k account. I should have been doing one contract in the ES.

Good points...on a sub 50K account the SPY /ES should be used. On the SPX I think IF your going to end up with an IC you HAVE to leg in (agree with Jeffm) with doing one side on a countertrend move then the other side. Buying the long then selling the short is tricker and sometimes it works, sometimes it doesn't .

The single most important factor is having enough cash to manage the trade. I certainly learned that lesson in June. If I had not built up a cash cushion I don't think I could have traded my way out of trouble.

 

[arbtrader]

Quote from rdemyan:

I definately want to add diagonals to my arsenal... What I don't have a good feel for is when to get in.

I am having the same problem, any comments would benefit me as well

 

[momoneythansens]

Quote from cdowis:

If I see a close to b/e diag, take it. This is truly a free trade. (I think....?)

Alas, no free trade if I understand you correctly. Entering diagonals based on getting a credit/minimizing debit is potentially a dangerous exercise if not looked at in the context of the other variables IMHO.

One can think of diagonals as a reduced cost calendar spreads.

What reduces the cost/debit? The embedded credit spread gives you a credit which offsets some/all of the calendar's debit.

Where's the downside to this wonderful arrangement of getting a calendar for free? You've just increased your risk - think of the risk involved in a short vertical/credit spread.

A diagonal where the strike difference between the short leg and the long leg is large in order to reduce the debit of the diagonal etc. is tantamount to having a wide vertical embedded in the diagonal. We all know that wide verticals have larger risk than narrower verticals. This is reflected in Reg-T margin requirements of the position.

A diagonal where the short strike is FOTM is tantamount to having a FOTM embedded vertical in the diagonal. We all know what can happen with these: the embedded vertical sold for $0.50 can go to $9.50 if the underlying moves against you. Risk profile can look like a cliff almost as scary as front month FOTM credit spreads.

Most diagonals, especially if there are a number of months between front and back month, are however dominated by the calendar component day to day.

To echo RR comments on another thread, it is wise to understand calendars and verticals before looking at diagonals for multiple reasons...and then a double diagonal is yet another kind of animal as the two diagonals have opposing (delta) and complimentary (vega) desires.

2 cents.

MoMoney.

 

[yip1997]

Quote from jeffm:

Sheridan also places the vertical short at 1 sigma, and if that gets threatened, he rolls out another 1 sigma and doubles the position. If the 2nd position loses, then he calls it quits. In an extended upmove like last fall, you might have gotten zapped on call verticals when adjusted in this manner. But most times you would be ok.


Who is Sheridan? Why don't you start the short at 1.5 sigma or 2 sigma? For SPX, it still gives me a good profit to risk ratio. Where is your long leg if you place your short at 1 sigma?


Just take any basic oscillator (like rallymode's 5,3,3 stoch) . Sell your put verticals when it drops below 20 and sell the call vertical when it hits 80. You'll do fine 9 times out of 10, and the 10th time you can likely adjust to a b/e or small loss.


If you set the short strike at 1 sigma, I don't see how you can get 90% accuracy, until you enter at the reversal time using your stochastic.


For me, the most difficult thing about verticals is sitting in cash and waiting for the setup. If I get impatient and sell puts too early, they are so far OTM that they rarely get threatened. But if I get impatient and sell call spreads too soon...bleh! The put skew will save you from impatience. Not so for calls. So its even more important to wait for the right entry. I just adjusted some 1305 ES spreads up to 1320. Thing is...I shouldn't have been short at 1305 anyway. If I had maintained self control, I would have sold the calls a few days later, been short at 1330, made the same money and been much safer. Lesson learned? Time will tell...


I agree. You don't want to sitting with your cash waiting for the setup b/c your perfect setup will never come.

 

[yip1997]

Quote from Prevail:

jeff, great posts.

I feel, at this time, naked calls and vert spreads 1 sigma and further have little to no expectancy. But the call diagonals, even with the iv drop, have positive expectancy in my view. Call diagonals have my vote for now.

Actually I found that there is negative expectancy for nakes or vertical calls, but you can find naked puts or Vectical with positive expectancy even with strikes around 2 sigma.
Most of Coach's verticals have positive expectancy.

I am going to check and see if vert at 1 sigma has positive expectancy.

Percy

 

[yip1997]

Quote from momoneythansens:

Alas, no free trade if I understand you correctly. Entering diagonals based on getting a credit/minimizing debit is potentially a dangerous exercise if not looked at in the context of the other variables IMHO.

One can think of diagonals as a reduced cost calendar spreads.

What reduces the cost/debit? The embedded credit spread gives you a credit which offsets some/all of the calendar's debit.

Where's the downside to this wonderful arrangement of getting a calendar for free? You've just increased your risk - think of the risk involved in a short vertical/credit spread.

A diagonal where the strike difference between the short leg and the long leg is large in order to reduce the debit of the diagonal etc. is tantamount to having a wide vertical embedded in the diagonal. We all know that wide verticals have larger risk than narrower verticals. This is reflected in Reg-T margin requirements of the position.

A diagonal where the short strike is FOTM is tantamount to having a FOTM embedded vertical in the diagonal. We all know what can happen with these: the embedded vertical sold for $0.50 can go to $9.50 if the underlying moves against you. Risk profile can look like a cliff almost as scary as front month FOTM credit spreads.

Most diagonals, especially if there are a number of months between front and back month, are however dominated by the calendar component day to day.

To echo RR comments on another thread, it is wise to understand calendars and verticals before looking at diagonals for multiple reasons...and then a double diagonal is yet another kind of animal as the two diagonals have opposing (delta) and complimentary (vega) desires.

2 cents.

MoMoney.

Great post, MoMoney.

A diagonal is a combination of vertical spread and calendar. One can see the behavior of a diagonal by adding these two.

It has been posted that a diagonal gives you a better reward for some price range ( close to short strke). However a diagonal has a higher risk (strike difference + debit), and it has a narrower price range for profit. I still can't find out the expectancy of a diagonal because of the many future variables involved.

You need to have an opinion on what the price will end up and then decide the best strategy for your prediction.

Sometimes it is hard to compare two positions with the same strategy but different strikes (example two verticals with different strikes such as 1 sigma and 2 sigma), not to mention the comparison of diagonals and verticals.

 

[yip1997]

Quote from cdowis:

My two cents.

I lost 50% of my account using the vertical and IC, jumping out of a position when it approached my short. It is truly frustrating to jump out and then see the market move back in my direction.

I find it interesting now to sit back and watch as the market approaches the diagonal short. My max profit is when it touches, and perhaps goes beyond the short.

I just cannot see myself placing a vertical anymore without more thought and research. The risk/reward, as Dan Sheridan says, stinks.

The SP moves from 1245 to 1290 within a few weeks. That kind of movement, for me, does not fit the IC, but goes well with a double diag. The major danger is the IV crush, but I just wait for the low IV to place the trade.

I am very sorry to hear that. 50% seems a lot, but how much do you normally make? If you normally earn over 25% in a month, 50% loss in a month should be ok.

For positions with high probability winning such as verticals, an loss of 2 month profit is acceptable.

I had a huge loss in June b/c of my naked puts in OIH and VLO, but I make up half of it already in July.

Position sizing is the key to success in speculation.

 

[jeffm]

Dan Sheridan is a former CBOE MM who does coaching now. He did some webinars for CBOE that you can find here:
http://www.cboe.com/LearnCenter/webcast/archive.aspx

I was just mentioning what Sheridan does, which is place the short above 1 sigma, typically with a 10-15 pt spread. FOTM, CTM, ATM. Each has their benefits and drawbacks.

Quote from yip1997:
Who is Sheridan? Why don't you start the short at 1.5 sigma or 2 sigma? For SPX, it still gives me a good profit to risk ratio. Where is your long leg if you place your short at 1 sigma?

If you set the short strike at 1 sigma, I don't see how you can get 90% accuracy, until you enter at the reversal time using your stochastic.

That's wrong imo. Better to be in cash if you don't have the setup you want. But that's the nice thing about a FOTM trade. The setup doesn't need to be perfect since you are putting the %w/l so far in your favor. If your entry trigger is when the stoch hits 80, then just do the trade. You're not worried about picking the top with a perfect entry. It just needs to be "good enough". The entry is more important for a call spread, since you don't have the put skew to let you go farther otm.

Naturally, you are taking on extra risk and sacrificing profit to get a high %win/loss. Such is life for a FOTM credit spread.

I agree. You don't want to sitting with your cash waiting for the setup b/c your perfect setup will never come.