SPX Credit Spread Trader

[scoobie27]

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.

What..no free lunch ? :eek:

Always good to hear your thoughtful dissections of a strategy.

I too was actually thinking about these wider diagonals to pay less of a debit and was wondering what the catch was.

I like Murray's strikes of 20 or 25 points apart because the delta of the long cancels the short. Not perfectly, but close enough to cancel out the risk when the underlying head towards your short.

With the wider strikes the diagonal is cheaper or even give you a credit if you want to but there's isn't the same amount of delta protection from the long option if underlying moves towards your short strike. Hence one would sweat bullets just like a credit vertical scenario.

Now to look at FFOTM diagonal.....with 25 wide strikes

Just thinking aloud.

 

[dagnyt]

Quote from yip1997:

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

I find that having NO OPINION works well for me. I sell call spreads on rallies and put spreads on dips.

Because I sell all spreads for a credit, it's painless to pay out some of that cash to cover one of the spreads, if and when the strike is threatened.

Mark

 

[yip1997]

Quote from dagnyt:

I find that having NO OPINION works well for me. I sell call spreads on rallies and put spreads on dips.

Because I sell all spreads for a credit, it's painless to pay out some of that cash to cover one of the spreads, if and when the strike is threatened.

Mark

Mark,

You do have an opinion. After a huge rally, you think the rally is not sustainable (at least not as fast as before). After a sell-off, you think the sell-off will at least slow down.

You might not have a precise prediction, but you do have an opinion on the market behavior.

 

[scoobie27]

Quote from dagnyt:

I find that having NO OPINION works well for me. I sell call spreads on rallies and put spreads on dips.

Because I sell all spreads for a credit, it's painless to pay out some of that cash to cover one of the spreads, if and when the strike is threatened.

Mark

Mark, lets say you started with no position and the market was up and your first position was a call credit spread or diagonal spread opened for a credit. And lets assume the market did not move down after that and continued slowly moving up for the next two months.

Does that mean you will just keep selling calls if the market did not move down? Do you also sell larger number of call as the market moves up to cover your threatened shorts?

Also what distance would eg SPX have to move before you sold more calls

Thanks in advance

 

[El OchoCinco]

The volatility crush is not as big an issue. The diagonal, like the vertical is opened for a credit, but can actually increase in value as the index approaches the short strike with expiration not too far away. The vertical will keep growing as a loss as the index moves to the short strike.

So upside moves will affect both differently and the IV crush is not as severe on the diagonal in my opinion. For the vertical, delta/gamma far outweigh the IV changes such that the benefit is lost

Quote from Mustbehoudini:

As a long time lurker and first time poster I would like to thank Coach and all whom have contributed to this great journal.

It seems OTM vertical call credit spreads would be more rewarding then similar OTM diagonal call spreads due to the inherent volatility crush during upside moves in the S&P. Comments please.

 

[El OchoCinco]

Vertical spreads have their place and diagonals have their place. As my current open posiitons show I got a good entry for my put vertical spreads and I got decent positions for my diagonals. I like being able to mix up the two strategies together .

 

[scoobie27]

Quote from optioncoach:

Vertical spreads have their place and diagonals have their place. As my current open posiitons show I got a good entry for my put vertical spreads and I got decent positions for my diagonals. I like being able to mix up the two strategies together .

I agree Coach, mixing it is the way to go..

Tried to buy a 1222AUG/1200SEP diagonal yesterday at mid of 2.25 debit but did not get filled. Serves me right for being a tight arse as I didnt add a dime or two to the mid. I think the mid today is arond 2.65 when i looked an hour ago.

Currently have a SEP 1325/1335 Call Credit spread and im gettin a little worried already. Sold it when SPX was around 1261 on 25th July. Not to worry .. will implement risk managment when SPX hits 1300. Well i think i will anyway, as I havent had to in the past. Now if only SPX will fall a little... so i can open a PUT credit spread

But i do like Mark's strategy of progressively selling more puts or calls as dictated by the market's direction and not having an opinion.

 

[Prevail]

yup, in fact pos. ex. goes up as puts go otm.

Quote from yip1997:

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

 

[Cache Landing]

Finally, ToS allows you to superimpose the lower studies on the charts and isolate sectors performance.

I've been waiting for that. Now if they'd just get IV data and allow me to superimpose that on the charts I'd be set.

 

[dagnyt]

Quote from yip1997:

Mark,

You do have an opinion. After a huge rally, you think the rally is not sustainable (at least not as fast as before). After a sell-off, you think the sell-off will at least slow down.

You might not have a precise prediction, but you do have an opinion on the market behavior.

I sell call spreads on rallies - regardless of how bullish I am or how high I think the market is going. After 30 years in this business (most as a CBOE market maker), one thing I know for sure is that my predictions concerning market direction are worthless. Thus, I just keep scaling by selling calls as we rally and puts as we decline.

I stop selling when I have either used all the margin I care to use or portfolio risk is sufficient. This method does not work well in sustainable market moves, but has been successful recently.

Mark