SPX Credit Spread Trader

Sailing · Sep 24, 2006

Rally,

We're coming in to town early 9am, Thursday, to see MAV and boys... We'd have Mav drive up to see us.... but.... well... you'll have to ask Mav about his car. lol

We're going to look at some software needs for the prop account and work out some details with Mav....

We're planning to ride back to town in the afternoon.

What we should do... is plan a meeting with everyone here on ET... and attend a trading show as a group. It would be fun to be around similar minds.... for a weekend... say VEGAS.

Just a thought...

M~

Quote from rallymode:

murray,

are you guys staying overnight? We have some nice joints in chicago.

Maverick74 · Sep 24, 2006

Quote from tplast:

Mav, I you don't mind could you shed some light on the following?

From the discussions here, I understand that haircut is similar to SPAN in the sense that the margin is not fixed, but based on portfolio risk. Does haircut use risk arrays and then takes the worst possible case as SPAN, or does it use a function where you input things like delta, volatility, etc. and get margin as output?

Also, I seems to me like the main advantage of haircut vs SPAN (besides SPAN being only for futures) is that it allows cross-margin of different underlying. Is this restricted to specific sets of underlying (i.e. SPX,ES,SPY,etc. but not IBM) or does it beta weight the whole portfolio against an index and then calculates margin on the whole thing?

Thanks !

Let me start out first by saying, if you use the search function and put in my name and the word haircut, you will probably get 20 pages of posts about haircuts as I have gone over all this before. But since I'm a nice and generous guy, I'll go over it once more. But please do use the search function as it is one of the better features here on ET.

Span and haircuts have many similarities and many differences. The similarities are that they are both risk based. They both change as the underlying moves up and down. And they both provide greater leverage then retail margin.

The differences are one, span margin provides no offset for long premium where as haircut does. In fact, one of the best features of haircuts is that with enough curvature on, you have no haircut!!!!

Also, the haircut formula is very easy to calculate because it is fixed. That does not mean your haircut does not change from day to day, it means that for equities it's 15% up and down, and for indices it's 6% to 10% depending on the index. Span uses a proprietary formula that they have licensed and you have to pay to use their span calculator.

The other difference is that the span numbers change. It's very possible that you could be holding a very leveraged position and the CME could raise their span margin over night in a volatile market that could force you into a margin call. The salt in the open wound here is that this will usually occur at a moment in time when you least want this to happen. Millions upon millions have been lost by traders who were forced into margin calls because of unforeseen changes in span margin. This will never happen with haircuts.

Also as you pointed out are the cross margining capabilities. One could trade SPY options, ES options, SPX options, plus ES futures and SPY ETF's all in one position with one consolidated haircut. Span does not allow this because it has no jurisdiction over NASD products.

So there you have it, more info to add to the ET archives for anyone that uses the ET search engine!

tplast · Sep 25, 2006

Quote from Maverick74:

Let me start out first by saying, if you use the search function and put in my name and the word haircut, you will probably get 20 pages of posts about haircuts as I have gone over all this before. But since I'm a nice and generous guy, I'll go over it once more. But please do use the search function as it is one of the better features here on ET.

Span and haircuts have many similarities and many differences. The similarities are that they are both risk based. They both change as the underlying moves up and down. And they both provide greater leverage then retail margin.

The differences are one, span margin provides no offset for long premium where as haircut does. In fact, one of the best features of haircuts is that with enough curvature on, you have no haircut!!!!

Also, the haircut formula is very easy to calculate because it is fixed. That does not mean your haircut does not change from day to day, it means that for equities it's 15% up and down, and for indices it's 6% to 10% depending on the index. Span uses a proprietary formula that they have licensed and you have to pay to use their span calculator.

The other difference is that the span numbers change. It's very possible that you could be holding a very leveraged position and the CME could raise their span margin over night in a volatile market that could force you into a margin call. The salt in the open wound here is that this will usually occur at a moment in time when you least want this to happen. Millions upon millions have been lost by traders who were forced into margin calls because of unforeseen changes in span margin. This will never happen with haircuts.

Also as you pointed out are the cross margining capabilities. One could trade SPY options, ES options, SPX options, plus ES futures and SPY ETF's all in one position with one consolidated haircut. Span does not allow this because it has no jurisdiction over NASD products.

So there you have it, more info to add to the ET archives for anyone that uses the ET search engine!

Guilty as charged. Thanks very much for taking the time to answer ... again

rdemyan · Sep 25, 2006

Knowing when to get into a diagonal is frustrating and then once the decision is made actually executing the trade near the midpoint isn't so easy either.

For example, the Oct STO 1275 Put and the Nov BTO 1250 Put currently has a mid of around $2.20 debit.

However, the Nov STO 1275 Put and the Dec BTO 1250 Put has a midpoint around $0.80 debit (natural though is $2.10)

Also, the Nov 1375/Dec 1400 Call diagonal has a midpoint of a $0.20 credit while the Oct 1350/Nov 1375 Call diagonal has a midpoint of a $0.55 debit.

So, I'm not clear on why I shouldn't look at the Nov/Dec diagonals at this point in time. Is it just the prolonged exposure that is making people shy away from the Nov/Dec diagonals at this point in time?

Mark: Don't you already have some Nov/Dec diagonals?

El OchoCinco · Sep 25, 2006

Fellas... when I want the market to finally bleed higher this week it decides to take a downturn lol

For those of you following my 1340 SEP EW/1360 OCT ES diagonal I have come up with a nice adjustment now that theta and deltas have done their job. I will wait a bit since we bounced off of the bottom and will see if we move higher. But basically I want to see the futures move to 1340 by the end of the week

dagnyt · Sep 25, 2006

Quote from rdemyan:

Knowing when to get into a diagonal is frustrating...

Mark: Don't you already have some Nov/Dec diagonals?

I'm virtually 100% invested. About half in Nov/Oct and the remaidner in Dec/Nov.

To me, avoiding paying a debit for my positions is an essential element of my methodology. Why? If the market runs away from my strikes, I'm guaranteed a profit. One less thing to worry about. I'll trade the risk of being forced to hold positions longer to avoid paying debits.

I'm also willing to hold spreads with a larger distance between the strikes. Again this gives me the credits I seek. Yes, the risk of a substantial loss is increased, but barring a big gap, I feel protected. I have the discipline to close my position for a loss if and when the short, near-term strike is breached. And even that loss does not hurt because I simultaneously roll into a spread further OTM and out one month.

Thus, I gave up on Nov/Oct earlier (too difficult to get a decent credit) and moved to Dec/Novs.

This may not be for everyone, but it fits my confort zone.

Mark

rdemyan · Sep 25, 2006

My trading style seems to fit yours. For example, I typically put on my bear call spreads about 6 to 8 weeks before expiration.

Do you mind sharing a typical Nov/Dec diagonal that you placed. Details such as the credit received and the date the trade was placed are very helpful. Also do you typically leg in or do you place the spread in one transaction?

Appreciate any information you care to share.

Thanks.

Quote from dagnyt:

I'm virtually 100% invested. About half in Nov/Oct and the remaidner in Dec/Nov.

To me, avoiding paying a debit for my positions is an essential element of my methodology. Why? If the market runs away from my strikes, I'm guaranteed a profit. One less thing to worry about. I'll trade the risk of being forced to hold positions longer to avoid paying debits.

I'm also willing to hold spreads with a larger distance between the strikes. Again this gives me the credits I seek. Yes, the risk of a substantial loss is increased, but barring a big gap, I feel protected. I have the discipline to close my position for a loss if and when the short, near-term strike is breached. And even that loss does not hurt because I simultaneously roll into a spread further OTM and out one month.

Thus, I gave up on Nov/Oct earlier (too difficult to get a decent credit) and moved to Dec/Novs.

This may not be for everyone, but it fits my confort zone.

Mark

Sailing · Sep 25, 2006

Gentlemen.... Ladies....

We're not playing DELTAs here..... either for credit or debit... you're playing VEGA.

You can enter a diagonal for $4.00 debit... and when VEGA increases... sell it for $6.00. Or.. you can enter for $0.20 credit... and let vega drain out.. and collect your $ .20. It's not what you enter as... but rather how you exit.

As far as which months.... again... it's a VEGA play. I would personally want to enter with VEGA low, and play the VEGA spike anytime during the month. Sell on the spike.. and re-enter at lower levels.

You certainly can play Nov/Dec... but you're not taking advantage of the full skew in THETA/VEGA. I would suggest you play Oct/Dec... at an opportune time, exit on a VEGA spike, and re-enter... maybe back into Oct or maybe Nov...

Too many of you are caught up in DELTA.... . it's not a DELTA play.

The advantage of going further out... ie, Oct/Dec or Nov/March would be further Break evens at expiration (if you're still in the trade) or a longer period of time to look for a VEGA spike to sell into.... (this trade is really not a buy and hold until expiration as some of you found out last month).. the comfort zone should not rest in the movement... but rather the outlook of the strategy... and diagonals are a pure play on VEGA.

One of the nicest features of the Double Diagonal... is the fact that is can be morphed into an Iron Condor, easily.... , and then into Credit Butterflies. WHY? if you have a VEGA spike... you can lock your profits by rolling into an Iron Condor.... now... when the VEGA dips lower... you can either re-enter the Diagonal... or convert into two "BATMAN" butterflies.... usually for some good credit. Two credit butterflies is awesome... positive expectancy..... and .... besides making a small guaranteed profit... you have two huge lottery tickets... which could net you.... 10:1 returns on investment.

Playing positive expectancy... ie, not closing trades for profits, but rather rolling them into locked profits with higher potential returns.... is where we're missing the 'leg' here on this discussion board. But we'll go there another day.

If you're interested in trading DELTAs... there are much more profitable strategies to consider, ie, long calls, puts, bull calls, etc.

If you have any doubts... just play with your 'vol' feature within ToS's platform..... it's all in the picture if calculating isn't your thing.

M~

Quote from dagnyt:

I'm virtually 100% invested. About half in Nov/Oct and the remaidner in Dec/Nov.

To me, avoiding paying a debit for my positions is an essential element of my methodology. Why? If the market runs away from my strikes, I'm guaranteed a profit. One less thing to worry about. I'll trade the risk of being forced to hold positions longer to avoid paying debits.

I'm also willing to hold spreads with a larger distance between the strikes. Again this gives me the credits I seek. Yes, the risk of a substantial loss is increased, but barring a big gap, I feel protected. I have the discipline to close my position for a loss if and when the short, near-term strike is breached. And even that loss does not hurt because I simultaneously roll into a spread further OTM and out one month.

Thus, I gave up on Nov/Oct earlier (too difficult to get a decent credit) and moved to Dec/Novs.

This may not be for everyone, but it fits my confort zone.

Mark

dqtmg2 · Sep 25, 2006

Murray,

Another great informative post- thanks. Some questions:

1) What do you consider low volatility for entering the trade? VIX<13? Or just a relative spike, i.e. a day when VIX is down 2+ points?

2) What strategy do you switch to when VIX stays higher for a period of time?

3) When you exit on a VEGA spike are you saying completely exit the entire position, or just a portion of the position? Also how do you define a spike?

Tim

Quote from Sailing:

Gentlemen.... Ladies....

We're not playing DELTAs here..... either for credit or debit... you're playing VEGA.

You can enter a diagonal for $4.00 debit... and when VEGA increases... sell it for $6.00. Or.. you can enter for $0.20 credit... and let vega drain out.. and collect your $ .20. It's not what you enter as... but rather how you exit.

As far as which months.... again... it's a VEGA play. I would personally want to enter with VEGA low, and play the VEGA spike anytime during the month. Sell on the spike.. and re-enter at lower levels.

You certainly can play Nov/Dec... but you're not taking advantage of the full skew in THETA/VEGA. I would suggest you play Oct/Dec... at an opportune time, exit on a VEGA spike, and re-enter... maybe back into Oct or maybe Nov...

Too many of you are caught up in DELTA.... . it's not a DELTA play.

The advantage of going further out... ie, Oct/Dec or Nov/March would be further Break evens at expiration (if you're still in the trade) or a longer period of time to look for a VEGA spike to sell into.... (this trade is really not a buy and hold until expiration as some of you found out last month).. the comfort zone should not rest in the movement... but rather the outlook of the strategy... and diagonals are a pure play on VEGA.

One of the nicest features of the Double Diagonal... is the fact that is can be morphed into an Iron Condor, easily.... , and then into Credit Butterflies. WHY? if you have a VEGA spike... you can lock your profits by rolling into an Iron Condor.... now... when the VEGA dips lower... you can either re-enter the Diagonal... or convert into two "BATMAN" butterflies.... usually for some good credit. Two credit butterflies is awesome... positive expectancy..... and .... besides making a small guaranteed profit... you have two huge lottery tickets... which could net you.... 10:1 returns on investment.

Playing positive expectancy... ie, not closing trades for profits, but rather rolling them into locked profits with higher potential returns.... is where we're missing the 'leg' here on this discussion board. But we'll go there another day.

If you're interested in trading DELTAs... there are much more profitable strategies to consider, ie, long calls, puts, bull calls, etc.

If you have any doubts... just play with your 'vol' feature within ToS's platform..... it's all in the picture if calculating isn't your thing.

M~

tplast · Sep 25, 2006

Quote from optioncoach:

Fellas... when I want the market to finally bleed higher this week it decides to take a downturn lol

For those of you following my 1340 SEP EW/1360 OCT ES diagonal I have come up with a nice adjustment now that theta and deltas have done their job. I will wait a bit since we bounced off of the bottom and will see if we move higher. But basically I want to see the futures move to 1340 by the end of the week

There you have it. Now could you please close your diagonal and let it crash ?