SPX Credit Spread Trader

thanks ready that was me and I missed that chat...so am looking forward to it.

and Heather I think ugly boy and Mark are totally right. I've had success with both WM and C last year buying the stock and writing slightly OTM calls...however WM got away from me later on and of course was called out just before the div was paid..also had a call spread that was exercised on me putting me in a bind and somehow I ended up having to pay the dividend to the new owner...hummmm. The overall strategy of owning a dividend paying stock and writing call's is pretty good and on both of mine I think the over all return was better than 15% perhap's closer to 20% (over a years time). However you should write ATM or slightly OTM (if you think it may go up...slightly ITM if you think it could go down) Although I don't think writing calls is a very good way to hedge your risk. I waited until I felt the stocks were cheap to reasonably priced before I bought them and it worked out fine. I'll do it again when they are at their lows...right now they are too high imo.
 
My experience has been similar. My typical return on hedged div captures has been about 20% p.a. I usually set them up to hold as long as possible, and use them as the margin collateral for my options strategies - (double) diagonals and condors usually....

RR, What is your experience with volatility around the ex-dividend date? I'm looking at hedging with other synthetic option positions, but I don't want to get crushed.
 
Quote from Heatheranderson:

Mark
I intend to write LEAP Call that is deep ITM. I dont think option clearing corporation(OCC) can assign me that market makers call exercise until the leap becomes front month contract.
More...

The OCC does not make exercsie decisions. The owner of an option has the right to exercise ANY TIME before the option expires.

You cannot sell options under parity and expect to do anything but lose money.

Mark
 
You are making a very fatal and terrible mistake with respect to exercising of options and that is how mistakes are made and money is lost. If an option can be exercised at any time, why would you say that the OCC will not allow exercise until the option is a front month contract. This is a very dangerous mistake and I am pointing it out like this to really make sure you never make such assumptions again :D. The OCC cannot control when long option holders of AMERICAN style options can exercise. It is anytime up until expiration.

Quote from Heatheranderson:

Mark
I intend to write LEAP Call that is deep ITM. I dont think option clearing corporation(OCC) can assign me that market makers call exercise until the leap becomes front month contract.
Meanwhile, i will be collecting the fat dividend:D




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Yes, you are missing something important. If the stock is 40 and you sell the 20-strike call for $19, then you are selling the call at $1 BELOW PARITY.

Any market maker who buys the 20-strike call at 19 is going to do 2 things. First he is going to sell stock (short) at $40. Then he will immediately exercise the call he bought. That locks in a profit of $100 each time he can do this.

Thus, there is ZERO chance of receiving and dividends with this strategy.

Mark
More...
 
Quote from uglyboy:

My experience has been similar. My typical return on hedged div captures has been about 20% p.a. I usually set them up to hold as long as possible, and use them as the margin collateral for my options strategies - (double) diagonals and condors usually....

RR, What is your experience with volatility around the ex-dividend date? I'm looking at hedging with other synthetic option positions, but I don't want to get crushed.
More...

WM seemed to be the most volatile...C I didn't have problems with. I usually just let them get called out then buy back the stock before the next dividend play (if the stock was in range). Once completely out of my price range I just wait for it to come down. large financials are not that volatile but of course their dividend is around 3 to 4 % so I did rely on some growth and directional timing on my buys.
 
Thanks for your insight, I haven't really noticed a consistent pattern either. I'm going to see if I can get some quantitative data on that. Sorry for helping derail the thread.

I remain,

Ugly
 
Just a note to thank coach Phil for another great article in Option trader Mag (on line) I will be doing exactly that on my next stock rather than just sell the put I'll do a 1X2 ratiospread. Also I did do a call ratio spread on a stock that had been put to me last month and I'm pleased with that. Keep those article's coming!:)
 
I've done hedged dividend capture a few times and all were successful, but I gave it up because I had to drop the put side to make money, so I had downside risk and my profit was more a result of stock picking than anything inherent in the strategy. And if I could consistently pick stocks I would just swing trade :p so I took my money, deemed the experiment a good education and walked away. Return was also around 20% annualized, but had to go ATM or near ITM, with no put protection which of course has large downside risk (again, the reason I walked away).

Deep ITM on a fat div paying stock is a recipe for early assignment. Sorry, still no free lunch.

On deep ITM options the holder will hit you the day before exdate, so even if you have held the stock for 89 days on a quarterly div, you get nothing. If you want proof of this, just watch the OI the day before exdate and then, the day of. Watch the OI for the deep ITMs disappear as everyone exercises. Occasionally there will be some OI left, meaning someone was asleep at the wheel and left money on the table, so the strategy can work, just don’t think it automatically works, or that when it works, it will be lucky ol' you every time. As already mentioned, an American style option can be exercised ANYTIME the option holder wants. European style, such as the SPX discussed in this thread, cannot. That is why large ITM SPX options often trade with negative intrinsic value. They cannot be exercised early and those fat premiums have a large cost of carry. Before you ask, "ok what stocks have European style options?" None. All equity options are American style, and only a few index options trade European style. But even if there were, the option premium would reflect that fact (meaning you couldn’t sell it for much if its deep ITM on a fat div stock).

I've also tried picking stocks where the div was so fat, that when they reduced the stock on exdate, it would have a huge impact on the calls due to such a large adjustment. Seems like a great call to sell, right? You KNOW the stock is going down the next day. Before you ask, no you can't short it (well you can, but if you do you have to PAY the dividend, as someone earlier mentioned happened to them) but why not sell the calls? Option holders have no rights to dividends. Why not sell it? Because the MMs widen the spread big time and wont budge. The bid will have negative intrinsic in the amount of the dividend, while the ask will have a small premium. It’s a lose/lose.

Still I tried to play around with it, and tried selling the option and buying the stock the day before exdate, hoping I wouldn't get assigned same day. You can and will. Actually I got a partial assignment, so I made a little money but only broke even after commissions (so yes, it was VERY little). IIRC, the OI was around 250 the day before, and around 10 the day of. In other cases I watched the OI go to zero. Its hit or miss.

I'm no accountant (so check with yours first) but an interesting side note though, the strategy can have good tax benefits. The stock I picked (HIW) div was not fully taxable (at least not that particular year/payment) due to some return of capital, 1250 gains, or long term (15%) gains. So while the loss on the options/exercise sale was fully deductible vs. my income, the gain on the div which let me break even, was not fully taxable (or taxable at a lower rate) and I actually came out ahead at tax time :D

With the 15% tax on many div stocks, might work well to offset 28%+ short term gains. If you can get filled at a decent price and commissions were low enough it might work, but you'd have to do huge size to make a real impact. Well, assuming you HAVE short term gains to begin with :) otherwise you are capped at 3k per year in losses.
 
Just would like some opinion on this potential trade. I'm going to be travelling in Aug during Ex, so I'm not trading Aug Ex. Which means I have $$ burning a hole in the pocket.

I'm thinking of capturing some premium by entering a diagonal, selling Sept and buying Nov. Using TOS pricer, it looks like I could:
Sell the SEPT 1375
Buy the OCT 1400
for a debit of 0.40

Does this trade make sense? Or short I just continue to do vert's?

peace,
burr
 
Hi all,

Im trying to understand the greek numbers that Im seeing in the options analytics page in IB.

eg SPX at 1275 and im looking at AUG 1240 PUT

Mid price $3.45

Theta is -0.5232

Does that mean the option will lose $0.5232 (52cents) with each passing day or

it will loose 0.5232 of 1 cent each day. ie $0.005

If it decays by ~ 0.50cents, it seems too much as the options has around 10 days to expiry and in 10 days the decay will roughly be $5 all else being equal. This is more than the value of the option.

If it decays by ~ 0.5 of 1 cent, that means its losing half a cent a day which is too little. 10days = 50cents. I know the theta will increase exponentiallly as we approach expiration, but $0.005 cent at the moment is too small?

And is it the same with VEGA? Does 0.53 mean a 53 cent increase in option value for each 1 percent increase in VIX?

Sorry for the newbie question but i just cant get my head over this. Thanks in advance and i'll probably response tomorrrow as im signing out for the day.
 
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