SPX Credit Spread Trader
- Thread starter El OchoCinco
- Start date
I'm a newb, please have mercy.
It's been said a few times I've noticed, but I can't thank Coach enough for starting this thread and to most everyone else for keeping it productive and positive. What a great thing to "stumble" on.
A quick history on why I'm posting ....
It took me a number of years and stretches of losing money to help me figure the type of strategies that I can trade without losing sleep or feeling the urge to watch every tick (which means I'm too emotional and going to screw it up). Credit spreads seem right up my alley.
I started trading credit spreads just a few months ago with a bit of success. I traded options on ETFs (QQQQ, IWM, SPY) and wanted to branch into ICs. It didn't seem like I could get filled on any of the ICs, the spreads were huge and the credits were small. Then I started looking into three things that concerned me moving forward. First, how are people dealing with such wide spreads (SPX instead of SPY?), second, how could I enter the IC gradually (answered), and third how could I better manage risk when things don't go my way (unanswered). During my google search, I came across this thread, which has become verbal crack. I've been reading it for almost a week now. I read the first 200 or so pages and then realized that I should probably skim a bit. So I know I missed some nuggets along the way. I apologize for any repeat questions.
I hate losing money and I hate risk. I know this sounds like a 'duh' kind of statement, but it has really changed the way that I approach the market. I really spend a lot of time analyzing the risks and rewards. One thing that drew me into reading this thread is that given the option of buying a profitable spread back for 0.05 the day before expiration or holding until expiration, Coach buys it back if there's any reasonable likelihood that the SET could be at his short. I also like his rule of keeping the home from flooding by building the barrier at the road instead of at the front door. The amount potentially at risk really scared me out of doing credit spreads in earnest. I didn't really feel like I had a hedging plan that was worth a shit or at least not comfortable enough for me to start playing. So I'm still not going to do them in earnest until I have a stinker and can learn to hedge accordingly.
So anyway, back to some of my initial concerns/questions.
I'm literally going to trade one contract at a time until I build up a comfort level. I'm a retail trader with an IB account. As far as b/a and liquidity go, I see arguments for the SPX and the ES. What are the pros and cons these days? I was trading the ETFs before, but could move to the SPX. It does seem like the credit is decent on SPX FOTM. With the SPY, the credit doesn't exist.
Now back to my hedging strategy, oh wait, I don't really have one yet, but I have questions.
I saw hedging with SPYs mentioned (which I'm not sure if that's appropriate given my very limited size at this point), I saw rolling mentioned (and used) and I also found interest in the prego fly, although I don't find anyone that used it (but I could've missed that post). I typically feel that if the underlying is "all up in my grill", that I was wrong and the trade is done. Of course, this isn't always the case, but this is my bias. So what's the best way to get out w/ a minimal loss? Close the spread, roll up, roll over or prego fly? Of course, this is a general question, I realize that each situation is slightly different.
So, diagonals? The beginning of this thread had a good explanation of the credit spread strategy including a pretty detailed entry, exit and risk management strategy. It also
explained what to expect when the underlying moves toward your short. Is there a portion in this thread that outlines the diagonals in such detail? What's the difference between a diagonal and double/triple/(quadruple?) diagonal from a risk/reward perspective? I don't want anyone to have to do my homework for me, so if you could post some links, give some opinions or refer me back to a particular date range of this thread, I'll read it all night and day. As I mentioned, this has all been verbal crack for me. Are diagonals the way to go now, or are they used in conjunction with bull puts and bear calls?
I thank you all in advance and appreciate your patience.
P.S. Coach, ordered the book this evening (after I didn't find it in my local bookstore), looking forward to it.
It's been said a few times I've noticed, but I can't thank Coach enough for starting this thread and to most everyone else for keeping it productive and positive. What a great thing to "stumble" on.
A quick history on why I'm posting ....
It took me a number of years and stretches of losing money to help me figure the type of strategies that I can trade without losing sleep or feeling the urge to watch every tick (which means I'm too emotional and going to screw it up). Credit spreads seem right up my alley.
I started trading credit spreads just a few months ago with a bit of success. I traded options on ETFs (QQQQ, IWM, SPY) and wanted to branch into ICs. It didn't seem like I could get filled on any of the ICs, the spreads were huge and the credits were small. Then I started looking into three things that concerned me moving forward. First, how are people dealing with such wide spreads (SPX instead of SPY?), second, how could I enter the IC gradually (answered), and third how could I better manage risk when things don't go my way (unanswered). During my google search, I came across this thread, which has become verbal crack. I've been reading it for almost a week now. I read the first 200 or so pages and then realized that I should probably skim a bit. So I know I missed some nuggets along the way. I apologize for any repeat questions.
I hate losing money and I hate risk. I know this sounds like a 'duh' kind of statement, but it has really changed the way that I approach the market. I really spend a lot of time analyzing the risks and rewards. One thing that drew me into reading this thread is that given the option of buying a profitable spread back for 0.05 the day before expiration or holding until expiration, Coach buys it back if there's any reasonable likelihood that the SET could be at his short. I also like his rule of keeping the home from flooding by building the barrier at the road instead of at the front door. The amount potentially at risk really scared me out of doing credit spreads in earnest. I didn't really feel like I had a hedging plan that was worth a shit or at least not comfortable enough for me to start playing. So I'm still not going to do them in earnest until I have a stinker and can learn to hedge accordingly.
So anyway, back to some of my initial concerns/questions.
I'm literally going to trade one contract at a time until I build up a comfort level. I'm a retail trader with an IB account. As far as b/a and liquidity go, I see arguments for the SPX and the ES. What are the pros and cons these days? I was trading the ETFs before, but could move to the SPX. It does seem like the credit is decent on SPX FOTM. With the SPY, the credit doesn't exist.
Now back to my hedging strategy, oh wait, I don't really have one yet, but I have questions.
I saw hedging with SPYs mentioned (which I'm not sure if that's appropriate given my very limited size at this point), I saw rolling mentioned (and used) and I also found interest in the prego fly, although I don't find anyone that used it (but I could've missed that post). I typically feel that if the underlying is "all up in my grill", that I was wrong and the trade is done. Of course, this isn't always the case, but this is my bias. So what's the best way to get out w/ a minimal loss? Close the spread, roll up, roll over or prego fly? Of course, this is a general question, I realize that each situation is slightly different.
So, diagonals? The beginning of this thread had a good explanation of the credit spread strategy including a pretty detailed entry, exit and risk management strategy. It also
explained what to expect when the underlying moves toward your short. Is there a portion in this thread that outlines the diagonals in such detail? What's the difference between a diagonal and double/triple/(quadruple?) diagonal from a risk/reward perspective? I don't want anyone to have to do my homework for me, so if you could post some links, give some opinions or refer me back to a particular date range of this thread, I'll read it all night and day. As I mentioned, this has all been verbal crack for me. Are diagonals the way to go now, or are they used in conjunction with bull puts and bear calls?
I thank you all in advance and appreciate your patience.
P.S. Coach, ordered the book this evening (after I didn't find it in my local bookstore), looking forward to it.
IMO only...diagonals require a HUGH margin/maintenance/$$$ even more so than credit spreads. They are also a real VEGA play. To do them you need to be comfortable with both straight verticals, horizontal or time spreads and really understand and have a feel for volatility. I've been doing credit spreads for a year, calendars for 9 months and have a few $$ and I'M still not real comfortable with diagonals. You will get a great education from reading this and other threads and as you said with small number of contracts try out ideas.
Learn the basics and feel very comfortable trading them before going to more "advanced" strategies. Good luck.
ps.. Ben..I'll NEVER be mistakened for RISKARB and I did learn I can't spell pennies!
Thank you for that piece of information and your response. I'm certainly looking to start small and simple. Diagonals sound like something I need to keep my eye on and get educated on, but not start with.
I believe I read in this thread that adjustments are really only required one or two times a year. Given the infrequency of adjustments, I thought about actually doing a 1 contract spread and bringing it in a couple of strikes and testing to see how I do with my hedging.
Have you had to hedge over the year you've been trading credit spreads?
I believe I read in this thread that adjustments are really only required one or two times a year. Given the infrequency of adjustments, I thought about actually doing a 1 contract spread and bringing it in a couple of strikes and testing to see how I do with my hedging.
Have you had to hedge over the year you've been trading credit spreads?
oh come on...now what part DON't YOU understand
I have done everything including standing on my head and crossing fingers and toes during op exp week. I certainly have made adjustments more than once. Most adjustments were selling farther credit spreads when the market was encroaching my shorts and also selling the other side to balance the trade. Coach doesn't do IC's routinely, his is mostly put CS therefore he does hedge and has hedged in many different ways. Everyone here is still learning and no one has come up with a "fool" proof hedging strategy.
What I admire most about Coach is that he keeps his method (mostly) very simple and consistent. While some of his "experiments" haven't been blockbusters
his OTM credit spreads have done exactly what he set out to do over this last year.Yes, this makes sense as to why I haven't really come up with a strategy for hedging that I'm comfortable with. I suppose this is going to have to be another round of personal discovery.
ICs haven't turned me off (yet?), so I suppose that's a way to offset some of a potential loss. At this point, I'm just investigating my hedging options when things don't go my way. I basically want to have a list of options to hedge or exit and hopefully I'll be able to make a logical decision given my choices. I just need to build those choices and was hoping to draw from other's past experiences.
Although I hadn't considered the standing on head or crossing all fingers and toes as a strategy, I'll add it to my toolbox!
Thanks again!
ICs haven't turned me off (yet?), so I suppose that's a way to offset some of a potential loss. At this point, I'm just investigating my hedging options when things don't go my way. I basically want to have a list of options to hedge or exit and hopefully I'll be able to make a logical decision given my choices. I just need to build those choices and was hoping to draw from other's past experiences.
Although I hadn't considered the standing on head or crossing all fingers and toes as a strategy, I'll add it to my toolbox!
Thanks again!
Quote from RichardRimes:
I have done everything including standing on my head and crossing fingers and toes during op exp week. I certainly have made adjustments more than once. Most adjustments were selling farther credit spreads when the market was encroaching my shorts and also selling the other side to balance the trade. Coach doesn't do IC's routinely, his is mostly put CS therefore he does hedge and has hedged in many different ways. Everyone here is still learning and no one has come up with a "fool" proof hedging strategy.
What I admire most about Coach is that he keeps his method (mostly) very simple and consistent. While some of his "experiments" haven't been blockbusters
bringing this back up for the noob and me.... a bit of a diagonal to hedge the risk. again even tho the diagonal is done for a debt you will still have a hefty margin requirement. This might be an excellent play for the seasonally week sep/oct time period.
edit he's advocating a calendar but I was thinking diagonal to get it cheaper.