SPX Credit Spread Trader

momoneythansens · Sep 1, 2006

Quote from RichardRimes:

but having small success in the cash account with ES is going to my head

The ES position you documented here last month was a dream entry. It went big in your favor. That is the ideal for placing a hedge as you get to build up a comfort zone and can move stops up to entry or better and eliminate the whipsaw risk. I was very jealous!

spreadn00b · Sep 1, 2006

Thank you for the reply.

I think we're a bit different. I'm a bit more of a mechanical trader than discretionary. Also, I believe that I'm taking high probability trades. If the trade doesn't go in my favor, I want out with as small of a loss (or break even) as possible. I really don't want to stand around and hope it comes back or get whipsawed around, I just want out and I'll wait for another opportunity. It seems like a lot of folks start to get flustered (myself included) when they're losing money and really do nothing but lose more money trying to turn a loser into a winner.

Quote from RichardRimes:

Spreadnoob I'm struggling with it as well. What I have done is set a "mental" trigger. When I think my short strike is going to be threatened buy ES in a ratio of 1:10...one ES for every 10 SPX contracts. Or sell if the put side is threatened. The problem I have is that I'm more discretionary than mechanical and It seems to me with ES you have to be very mechanical. The other problem is do you want to make money on the ES trade or are you willing to lose money because after all it IS a hedge or insurance? That would make a difference in your closing strategy. I do agree that ES is probably the best/easiest way to hedge.

Coach you have been trading ES, are you still daytrading or are you just doing options on the futures? Any tips you want to pass our way

while I was typing this up Mo was giving the definitive answer! He is right and that is why in the IRA I don't try to hedge...just manage the trade, but having small success in the cash account with ES is going to my head

RichardRimes · Sep 1, 2006

Quote from momoneythansens:

The ES position you documented here last month was a dream entry. It went big in your favor. That is the ideal for placing a hedge as you get to build up a comfort zone and can move stops up to entry or better and eliminate the whipsaw risk. I was very jealous!

My problem is I can't remember HOW or WHY I did it at the time:eek: I was never comfortable with the trade at any time. Once it started in my favor I did set at stop loss so I wouldn't lose and I took it off just because I "felt" like it

all terrible "trades"

momoneythansens · Sep 1, 2006

Quote from spreadn00b:

I think when you say "moving into the short strike" you mean right around the time short strike is hit (i.e. short @ 1340, start hedging @ 1340.01) or do you mean shortly before the short strike is hit?

Sorry, I wasn't clear, even in my edited version! You're too quick on the response.

If your short strike is at say 1340, i'm suggesting you might want to consider hedging early e.g from 1310 perhaps. As the underlying moves towards your short strike, you can feasibly win on both the hedge and the credit spread if it expires worthless. This is what Riskarb calls convergence gains. It's a pseudo-short straddle at 1340.

Hedging earlier also means needing less contracts and thus reduces whipsaw risk.

The problem is, it's very tempting to leave the hedge too late.

You may also wish to consider static hedges e.g. long strangles that don't require constant babysitting. These will have the effect of reducing the credit received as a matter of course but with friendlier risk profiles.

Good luck.

MoMoney

RichardRimes · Sep 1, 2006

Quote from spreadn00b:

Thank you for the reply.

I think we're a bit different. I'm a bit more of a mechanical trader than discretionary. Also, I believe that I'm taking high probability trades. .

I'm actually very big on probability and I do know the "probability" of my SPX short at all times. How do you determine the probability on the ES? Do you compare it to the SPX? Also with the ES because it trades 24hrs setting a too tight stop WILL cause you to be tossed out of it.

momoneythansens · Sep 1, 2006

Quote from RichardRimes:

My problem is I can't remember HOW or WHY I did it at the time:eek: I was never comfortable with the trade at any time. Once it started in my favor I did set at stop loss so I wouldn't lose and I took it off just because I "felt" like it all terrible "trades"

LOL. I was laughing and seriously scratching my head at the time as it was an ultra-bullish position. You had a naked long CALLs AND a long ES "hedge". It would have made more sense to hedge your long CALLs whilst you legged into the credit spread with short ES!

As it turned out, there was a big rally so you made bank on both CALLs and futures

Just face it, you have the knack of making money.

RichardRimes · Sep 1, 2006

I've been trying to formulate a plan a'la Momoney's suggestions. Right now my short call for SEP is 1330...so tentatively IF the ES gets to say 1315 AND the oscillators are showing neutral to overSOLD I would buy. If the oscillators on the other had are overbought and other TA leads me to believe the odds are we will head down then I wouldn't buy. We will see more next week when the "big" boys get back into the market and either take it to new highs or sell the crap out of it.

spreadn00b · Sep 1, 2006

I was just using the ES options as an example, but you make me think I'm missing something. The ES value is 1/2 of SPX, correct? I assume the probabilities are the same. Is the ES more volatile?

I may be wrong, but isn't the ES trading at 24 hours an advantage? I think I might rather be tossed out instead of gapped against. I'd like to set wide stops to avoid whipsawing as much as possible, but when my stops are hit, that means I want out. It's no different than if it were the middle of the day, your stops are hit on the SPX options, SPX backs off the move, you curse.

Quote from RichardRimes:

I'm actually very big on probability and I do know the "probability" of my SPX short at all times. How do you determine the probability on the ES? Do you compare it to the SPX? Also with the ES because it trades 24hrs setting a too tight stop WILL cause you to be tossed out of it.

RichardRimes · Sep 1, 2006

Quote from momoneythansens:

LOL. I was laughing and seriously scratching my head at the time as it was an ultra-bullish position. You had a naked long CALLs AND a long ES "hedge". It would have made more sense to hedge your long CALLs whilst you legged into the credit spread with short ES!

I can't remember the naked long calls:eek:

spreadn00b · Sep 1, 2006

Thank you for the clarification. This sounds like something I'll need to do my homework on as it seems like it fits my risk profile. I'm sure I'll bother you later with questions.

Quote from momoneythansens:

Sorry, I wasn't clear, even in my edited version! You're too quick on the response.

If your short strike is at say 1340, i'm suggesting you might want to consider hedging early e.g from 1310 perhaps. As the underlying moves towards your short strike, you can feasibly win on both the hedge and the credit spread if it expires worthless. This is what Riskarb calls convergence gains. It's a pseudo-short straddle at 1340.

Hedging earlier also means needing less contracts and thus reduces whipsaw risk.

The problem is, it's very tempting to leave the hedge too late.

You may also wish to consider static hedges e.g. long strangles that don't require constant babysitting. These will have the effect of reducing the credit received as a matter of course but with friendlier risk profiles.

Good luck.

MoMoney