SPX Credit Spread Trader

DIAGONAL SPREAD UPDATE - ADJUSTMENT

Ok I finally have time to write up my adjustment on Friday to my 1340EW/1360ES diagonal.

Original position ultimately was:

- 270 SEP EW 1340 Calls
+ 270 OCT ES 1360 Calls

Original net credit is wiped out on my original mistaken adjustment which was actually a small loss of $3k or $3k but I cannot track it right now so will just treat it as no credit at all for now for simplicity. The loss is swallowed lol.

With ES at 1348 on Friday I did the following:

1) For an effective credit of .50 I closed the 270 SEP EW Calls at 8.00 and sold 270 OCT ES 1355 Calls @ 8.50.

Resulting Net Credit = .50 or $6,750

2) I sold the 270 OCT ES 1360 Calls for6.75 and bought the OCT EW 1375 Calls for 4.35.

Resulting Net Credit = 2.40 or $32,400[/]

3) In essence I moved the strikes up 15 points each and out one expiration cycle from a SEPEW/OCTES to an OCTES/OCTEW Daigonal Spread

Current position:

- 270 OCT ES 1355 Calls
+ 270 OCT EW 1375 Calls

Net Credit = 2.90 or $39,150[/g]





So I rolled my diagonal up and out for a huge net credit without increasing my risk. I have another 3 weeks of time which is not a great thing but I feel we will have some pullback after this huge rally and a break.

If the market closes at or below 1355 at expiration, I make a huge profit that more than makes up for the mistaken earlier adjustment and produces a very nice return stretched out over 1.5 months.

If the market keeps moving higher and is above 1355, I will make the same adjustments and move the diagonal to OCTEW/NOVES if possible for more of a credit and higher strikes. Preferably the market will cool off some and I can adjust out of the current spread for a small profit.

On a pat myself on the back issue, ES closed at 1346 and my short strike was 1340. So for 2 months I am getting good at picking the general target for ES at expiration. BUT, 2 times is meaningless and I just thought it was cool. Anyway, looking forward to a large payoff potentially in a few weeks.

DISCUSSION TOPIC: If market keeps rallying, can I keep rolling the strikes up and out with the EW and ES choices and keep taking in credit for months generating nice income until the market finally moves below the short strikes? It is not a Martingale because I am not increasing the risk each time, just shifting strikes higher. Well I have no definitive answer cause I only did this once and future months may prove harder to get a decent credit for rolling up since the ES and EW have different times between their expirations. But just a though to throw out there to Murray and all about how to deal with the Call Daigonals and just to keep rolling higher. Maybe easier if I start out with a ratio.
 
Phil,

I have you locking in a $162,000 loss in 3 weeks if that happens man. I guess this would be the appropriate time to ask this, do you have any options analysis software? Because you are not pricing these options correctly. You can roll all you want till the end of time, but every time you roll, you lock in a loss. And the loss will get squared over time. Another words, it will get infinitesimally bigger and bigger. Bringing in John Maynard's quote, "the market can stay irrational longer then you can stay solvent". If such a strategy could work, everyone would do it. The idea of deferred losses is very attractive for most of ET. It's a psychological phenomena of not wanting to admit you are wrong. Some guys will just size up bigger and bigger till they are right. Other guys will keep averaging in.

I've done the math and even though it's based on theoreticals, it looks to be accurate. You will lock in a 12.00 loss on the spread at Oct expiration if ES is at 1375. Now if you roll it again from there, you loss will be substantially larger the next month if your short strike gets hit for the max loss.

I guess I have not been paying attention to this thread as much as I should have been. How did we go from doing credit spreads which in their own right were very risky to playing the same risk only with ATM options? I guess this thread has evolved over the last year.

And Phil, if you don't have any options analysis software, with your size account man, you really need to buy some. I would recommend Optionvue, Pro-opticus, Hoadley, anything. Just get something. You have put a lot of risk on your sheets in 3 weeks in a market that is moving in one direction against you. This trade could wipe out every credit spread you have done the last 3 years. I want you think about this today.
 
If the market is below 1355 in 3 weeks, I do not see how I have locked in loss of that magnitude since the OCT ES options will expire worthless and the OCT long EW options will have some time value premium.

If you treat this as two different spreads, I closed out the 1340/1360 spread for a debit of 8.50 - 6.75 = 1.75 = $23,625. If I did not wipe out my original net credit with the mistaken adjustment it would have been a lower net debit.

I sold the OCT ES 1355 for 8.50 and bought the OCT EW 1375 for 4.35 for a net credit of 4.15 or $56,025.

My net credit for the combined trades is $32,400 net credit.

Where do you get such a big loss from?






Quote from Maverick74:

Phil,

I have you locking in a $162,000 loss in 3 weeks if that happens man.
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Quote from optioncoach:

If the market is below 1355 in 3 weeks, I do not see how I have locked in loss of that magnitude since the OCT ES options will expire worthless and the OCT long EW options will have some time value premium.

If you treat this as two different spreads, I closed out the 1340/1360 spread for a debit of 8.50 - 6.75 = 1.75 = $23,625. If I did not wipe out my original net credit with the mistaken adjustment it would have been a lower net debit.

I sold the OCT ES 1355 for 8.50 and bought the OCT EW 1375 for 4.35 for a net credit of 4.15 or $56,025.

My net credit for the combined trades is $32,400 net credit.

Where do you get such a big loss from?
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Phil,

You have already locked in the small loss for your Sept/Oct spread. That is off the books now. With this new trade, and that is what it is, if ES closes at 1375, I have this spread costing you 14.50 minus the 2.50 or so credit you took in leaving you a net debit of 12.00 x 50 x 270 = 162,000.

Yes, if ES closes below 1355 at exp you are in good shape. But whoa Nelly is this a departure from you taking the same amount of risk only with the ES being 100 pts OTM not ATM. You basically went from taking huge risks far out in price to taking huge risks right at the money. Can I ask you why you made this change?

You are making assumptions about the market which were fine when your short strikes were 90 pts away, but when you make a directional bet like this, you need to do so with as little leverage and risk as possible. This is a huge directional play you are making that if you are wrong, it will wipe out at least 3 years of credit spreads.

I don't follow the logic here. This position is way too risky and way too directional. Why not just take the small loss from the last month and move your spread 100 pts out like you were doing before. I didn't like it much better but at least your risk is more manageable. You really have no way to hedge this bad boy if we get another leg up. You are putting your account in the hands of fate here. Not a good position to be in. This really goes against everything I have taught my traders about trading. It violates every risk rule in the book and it's the cardinal sin of trading. You have been trading too long to make this kind of trade.

If you really think this is a top and we are going lower, there are better ways for you to play this. Just leg into your old condor by selling the DOTM call spread and let the ES come in 30 handles and slap on the put spread and enjoy the rest of your time with your family. You don't need to be taking these kinds of risks.

I just don't see the logic in what you are doing here. You have no edge to be putting this trade on and you are risking a substantial amount of money on an assumption that we will be lower. Just think it over a little bit more.
 
Well that is a different story then saying I lock in a $162K loss if the market is below 1355 at expiration....

My 1340/1360 only went ITM close to expiration and that is the reason I held on to suck out the time value premium before adjusting.

I do not intend to let the current 1355/1375 spread get far ITM with 3 weeks left. I can convert the short call into a long FLY, sell the long option for a nice profit and lock in a much much smaller loss for the additional risk. I could also roll the short call out to a credit spread in the OCT EW for more premium and the same risk as a precursor to closing out if it should continue moving higher. If I move the strike higher, the total risk drops giving me a better chance to close out the position if needed.

I could also take half the net credit and purchase 1355 Calls in the EW cycle or NOV ES cycle to add more deltas or do bull call spreads to provide a partial hedge if we start to move above 1355 this coming week.

Since market do not crash higher, I think I still have plenty of adjustments left to lock in the limited loss and move on while still having a chance at a profit based on my market expectation.

Just like credit spreads, I would not sit there and watch the market move to 1375 at expiration. At the current spread I was ready to adjust if we closed above 1350 (1/2 way point) but we never got there really.

I threw out for disucssion the idea of rolling higher each time but as with my credit spreads I would only roll once, maybe twice at most before closing out and it would depend on time to expiration and my risk. Same with this diagonal. I rolled once, small chance I may do it once more but not continuously.
 
Quote from optioncoach:

Well that is a different story then saying I lock in a $162K loss if the market is below 1355 at expiration....
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I didn't say you lock in that loss if ES is below 1355, I said you lock in that loss if ES is at 1375. BTW, your loss is over 200k if we rally above that. I just want to make sure you know what the loss amount is if we rally just 30 handles from this level which we could do in 2 days. A lot of guys on this thread Phil have no idea what they are doing and I want to make it very clear to every single person reading this thread. You never never ever ever want the underlying to go through your short strike when you are trading this kind of leveraged position with little upside. The idea here is not to trade hard deltas, it's to avoid them at all costs. I'm directing this comment to all those that are reading this thread.
 
Good point to bring up as I would hope no beginner here ever tries to follow an advanced strategy blindly. I made that speech several times and gave up on it but it never hurts to remind people.

I am not using my entire capital in the prop nor am I using money I cannot afford to lose. So me taking a drawdown may be a lot different than many people here taking using retirement or their sole capital so please read along but do not follow.
 
Quote from optioncoach:

I do not intend to let the current 1355/1375 spread get far ITM with 3 weeks left. I can convert the short call into a long FLY, sell the long option for a nice profit and lock in a much much smaller loss for the additional risk. I could also roll the short call out to a credit spread in the OCT EW for more premium and the same risk as a precursor to closing out if it should continue moving higher. If I move the strike higher, the total risk drops giving me a better chance to close out the position if needed.

I could also take half the net credit and purchase 1355 Calls in the EW cycle or NOV ES cycle to add more deltas or do bull call spreads to provide a partial hedge if we start to move above 1355 this coming week.

Since market do not crash higher, I think I still have plenty of adjustments left to lock in the limited loss and move on while still having a chance at a profit based on my market expectation.





OC, I don't quite get your explanation on rolling out the strikes, or buying a fly and selling the long at a profit. Whenever you do a repair job on an option position that is under water,(your sold call spread goes iTM) all that is left is to 1) prevent further pnl bleeding by locking in a loss 2) capture some or all the profit at a far higher risk profile. Such an example would be averaging down. By doing so, you might have the illusion of bringing down your cost basis BUT doubling your risk. Unless you have found a structural arbitrage not found by any other mkt participants, you couldn't possibly repair a position while keeping the same profit w/o the concomtant risk increase. If there was such a "magical " position, no one would trade equities . Everyone would put on a position in options, book any profit , repair any losing positions to extend the day of reckoing indefintely.

Markets are not structured like that.

A word to inexperienced option traders. These kind of spreads are meant to be winners 90% of the time. In addition, they are also designed to give much if not all of the winnings back , so trade accordingly. Credit spreads such as these have their place in your arsenal but only under limited circumstances, unique distribution patterns of the underlying.
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You misunderstood. The conversion to the FLY when the short is slightly ITM is a way to lock in a much lower loss while still having the potential for significant profit v. taking the larger loss and closing out the position entirely.

I have never claimed I can adjust a loser into a winner. The market has to cooperate and I have repeated this many times. A repair is meaningless without an expected movement in the uunderlying market. The FLY adjustments I mentioned above (not the ones I spoke of much earlier, are to reduce the risk significantly and accept a lower loss v. simply closing the spread. Moreover, the conversion to a long FLY means I can leave the position in place and still have a chance at taking a credit out of the position to reduce the loss or even result in a profit.
 
Quote from optioncoach:

You misunderstood. The conversion to the FLY when the short is slightly ITM is a way to lock in a much lower loss while still having the potential for significant profit v. taking the larger loss and closing out the position entirely.

I have never claimed I can adjust a loser into a winner. The market has to cooperate and I have repeated this many times. A repair is meaningless without an expected movement in the uunderlying market. The FLY adjustments I mentioned above (not the ones I spoke of much earlier, are to reduce the risk significantly and accept a lower loss v. simply closing the spread. Moreover, the conversion to a long FLY means I can leave the position in place and still have a chance at taking a credit out of the position to reduce the loss or even result in a profit.
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how can you convert spread into fly ? You already own long wing (1375) , no ? Maybe you referring to box (sell put when call = ITM) ?
 
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