SPX Credit Spread Trader

[El OchoCinco]

Actually as I am studying it, I am looking to see if it is a way to play a run to the short strike in OCT and then close the position at the expiration of OCT. If I was not clear I apologize. I am looking to see if I can close the entire position after the OCT expiration for a net credit. Not necessarily run through NOV and DEC...

Quote from rallymode:

ahh phil, that long winded post wasnt necessary. I hope i didnt put you on the defense as i wasnt totally serious in my post. Perhaps, the smiley face didnt show that properly. I am sure your bottom line justifies doing all of it.

And since you asked about comments, let me polute your thread some more. My point was that, and its not so much of a point than it is a pet peeve lol, but you are throwing guesses on would happen in both months precisely. You are long vega, long theta in your front month position(left part of your fly), so you want the market to sit still or drift to your strike. Then all of a sudden the position reverses your forecast all at expiration hence the flip-flop term used. You become long gamma short vega, and need the market to make a big move, preferably to the upside. See what i am getting at? It requires too many things to happen exactly as you need them to so that the play can have some kind of "expectancy".

I am sure with your experience in adjustments, you can squeeze some $$ out of the position somewhere in there but is all the effort worth it. Frankly, i am more likely to find some entertainment value in these plays vs any serious financial gains. Just my 2 cents.

 

[dagnyt]

Quote from optioncoach:

Actually as I am studying it, I am looking to see if it is a way to play a run to the short strike in OCT and then close the position at the expiration of OCT. If I was not clear I apologize. I am looking to see if I can close the entire position after the OCT expiration for a net credit. Not necessarily run through NOV and DEC...

Your position is a typical calendar butterfly. The objective is for the near term short to expire worthless, leaving you with a 2:1 backspread (long lots of gamma and theta working against you).

You then have a choice: close the backspread for a profit, or hold, hoping (as one does with any backspread) for a significant market move in either direction.

Mark

 

[rallymode]

Quote from optioncoach:

Actually as I am studying it, I am looking to see if it is a way to play a run to the short strike in OCT and then close the position at the expiration of OCT. If I was not clear I apologize. I am looking to see if I can close the entire position after the OCT expiration for a net credit. Not necessarily run through NOV and DEC...

Phil, knowing your trading style and after running this through Optioncoach's Position and Hedge Financing Calculator the position appears clearer. You are trying to "finance" a call calendar by reversing it in the back months. Being a risk/reward kinda guy, benefits over other alternatives are still unknown to me.

 

[El OchoCinco]

Better said then I tried to lol....

I think my initial goal is to close the backspread for a profit at OCT expiration. Quasi getting the calendar for no cost and not having the market fall too far away.

Based on rudimentary modeling, if the market moves much lower with IV increase, the backspread could only be closed for a net debit (loss). I am looking for what adjustments to make in that situation (possibly sell further OTM calls to take in premium.)

I may have to do a 1/2/1 to test out since the cost and risk will be quite small....

Quote from dagnyt:

Your position is a typical calendar butterfly. The objective is for the near term short to expire worthless, leaving you with a 2:1 backspread (long lots of gamma and theta working against you).

You then have a choice: close the backspread for a profit, or hold, hoping (as one does with any backspread) for a significant market move in either direction.

Mark

 

[El OchoCinco]

AHHHHHH finally someone put my thoughts into English. yes that is what i was thinking in a way. Crap I have turned into riskarb except what I say truly makes no sense...

yes rally, that is what my mind was hovering over but I cannot articulate very well today.

Benefits are still unknown to me as it is hard to predict and model but it is raising my interest....

Quote from rallymode:

Phil, knowing your trading style and after running this through Optioncoach's Position and Hedge Financing Calculator the position appears clearer. You are trying to "finance" a call calendar by reversing it in the back months. Being a risk/reward kinda guy, benefits over other alternatives are still unknown to me.

 

[rallymode]

Quote from optioncoach:

AHHHHHH finally someone put my thoughts into English. yes that is what i was thinking in a way. Crap I have turned into riskarb except what I say truly makes no sense...

yes rally, that is what my mind was hovering over but I cannot articulate very well today.

Benefits are still unknown to me as it is hard to predict and model but it is raising my interest....

Well, we all know you dont speak greeks. Instead, you speak in financing margin and hedges with other positions LOL

As far as benefits, short of any mispricings or volty skews that could be exploited if they exist, i highly doubt there are any but i'd be glad to learn something new if you discover some hidden edge

 

[momoneythansens]

Quote from optioncoach:


So initially the Greeks are pretty flat.

That makes sense. The long and short calendars are counteracting against each other.

As the short OCT options decay, the long calendar will gain deltas. The optimal place to be at OCT expiration has to be 1360 IMO. So the deltas will eventually start to reflect that.

If the market crashes, I am not concerned with the deltas because my goal is to open for even/no cost. So I will not see a net debit shrink away to nothing.

I see, that would explain why you aren't simply looking at 2 x 1360 OCT/NOV calendars and then writing a DEC 1360 CALL if/when we get there.

However, unless I'm mistaken, opening the position for even/no cost does not prevent you from possibly suffering a loss by OCT expiration.

If the market crashes, that would I suspect be better than if the market sits still. A market crash would benefit the short calendar component (ignoring vols). In other words, the long calendar wants a move up to 1360 and the short calendar wants a large move away from 1360. This is likely to result in a risk hole somewhere in between these two despite putting the position on for no cost. In fact, you're having me believe that the entire OCT risk profile is at or above zero (or equal to net debit on the trade). My spidey sense says no...otherwise I might join in

TBC

MoMoney.

 

[El OchoCinco]

No you nailed the risk, if the market falls too far, the OCT is worthless and the NOVs are not rich enough to cover the DEC and you have a net debit to close and a loss. There is where I wonder about follow up steps...

If the market moves to the short strike, the zero cost to enter coudl become a huge net ceditr after OCT expires worthless.

Quote from momoneythansens:



If the market crashes, that would I suspect be better than if the market sits still. A market crash would benefit the short calendar component (ignoring vols). In other words, the long calendar wants a move up to 1360 and the short calendar wants a large move away from 1360. This is likely to result in a risk hole somewhere in between these two despite putting the position on for no cost. In fact, you're having me believe that the entire OCT risk profile is at or above zero (or equal to net debit on the trade). My spidey sense says no...otherwise I might join in

TBC

MoMoney.

 

[El OchoCinco]

Not so much an edge, just another way to play the move higher or sideways in the S&P.

I imagine doing OTM call and put cross month FLYs would over complicate things so I might look at it and see what it ultimately ends up being...

Quote from rallymode:

Well, we all know you dont speak greeks. Instead, you speak in financing margin and hedges with other positions LOL

As far as benefits, short of any mispricings or volty skews that could be exploited if they exist, i highly doubt there are any but i'd be glad to learn something new if you discover some hidden edge

 

[rallymode]

Quote from optioncoach:



I imagine doing OTM call and put cross month FLYs would over complicate things so I might look at it and see what it ultimately ends up being...

Overcomplicate is an understatement IMO. I am sure you have considered this but any leg/position you add to your already existing leg/position will trade off reward for risk in one way or another. The only ones who benefit from these searches to "the perfect option position" are brokerages and MM's. Just my opinion.

I need to stop peeking in this thread.