SPX Credit Spread Trader

[El OchoCinco]

Edit in the above chart which had increasing vols.

At expiration with static vols, the breakevens appear to be 1336 and 1366 but this assumes the position opened was an ATM position for a net debit. I have to change it so kind of ignore the above.....

 

[momoneythansens]

Quote from optioncoach:

Guys, I never proclaimed this a risk free trade, I just conveyed what I have found. That is why I was saying theoretical v. realistic. I am looking at actual number to determine where the risk lies. I know in theory no position is risk free but you guys are saying in a blanket statement that the profit zone is very narrow. My numbers are showing otherwise so I am throwing it out there to see what our collective heads can come up with.

Yikes! I wasn't attacking you. I won't speak for Rally though LOL.

I think it's an interesting position so when you have investigated the numbers, my two questions still stand:

1) Where is the risk hole at front month expiration?
2) What is the risk/reward on the trade at expiration?

Current implied volatilities.

Actually, I'm quite sure the profit zone can be quite large outside of the risk hole a la short calendar. However, the main profit zone will most likely be around the short strike a la long calendar. You won't get as much profit potential as a long calendar due to the short calendar but at the same time you don't have the net debit of a long calendar for the same reasons.

MoMoney.

 

[El OchoCinco]

Here is the corrected screen shot based on if I entered the position now for a net credit.

Profit Zone is wide and loss zone is narrow and pretty small given initial net credit. Net credit of $3,000 in this example with maximum loss of $1,000 or so with huge profit potential.

I should add the loss zone gets narrow as IV drops which is what occurs on a run up. Assuming ToS models this correctly given that it has time components and different month expirations.

 

[rallymode]

Quote from momoneythansens:

Yikes! I wasn't attacking you. I won't speak for Rally though LOL.

I have phil's picture on my wall and throw darts at it everytime i need a directional signal.

 

[Sailing]

coach,

Maverick would be proud of this trade. It has curvature, he's big on curvature....

M~

Quote from optioncoach:

Here is the corrected screen shot based on if I entered the position now for a net credit.

Profit Zone is wide and loss zone is narrow and pretty small given initial net credit. Net credit of $3,000 in this example with maximum loss of $1,000 or so with huge profit potential.

I should add the loss zone gets narrow as IV drops which is what occurs on a run up. Assuming ToS models this correctly given that it has time components and different month expirations.

 

[Sailing]

The Haircut Margin on this trade is interesting also...

M~

Quote from Sailing:

coach,

Maverick would be proud of this trade. It has curvature, he's big on curvature....

M~

 

[riskarb]

Quote from optioncoach:

I should add the loss zone gets narrow as IV drops which is what occurs on a run up. Assuming ToS models this correctly given that it has time components and different month expirations.

The 1395 strike vols will rise on a trade to 1395 due to the shape of the vol smile. At least 150bp based upon the smile and a small contraction in the strip vols.

 

[riskarb]

I'll add that the PnL distro is probably >$1500 overestimated at the high based upon likely fills and rise in smile vol. The otm becomes atm vol. Also, the loss likely reaches $2,000 on a rise in vol at the trough of the curve.

It's a nice r/r, regardless. I estimate more like a 4:1 than a 8:1.

 

[momoneythansens]

Quote from optioncoach:

Here is the corrected screen shot based on if I entered the position now for a net credit.

Profit Zone is wide and loss zone is narrow and pretty small given initial net credit. Net credit of $3,000 in this example with maximum loss of $1,000 or so with huge profit potential.

I should add the loss zone gets narrow as IV drops which is what occurs on a run up. Assuming ToS models this correctly given that it has time components and different month expirations.

I took the liberty of highlighting the break-even points etc. The green line is expiration risk profile. The white line is today's:

So, the end result is: 55% probability of winning something. About 1:10 max risk/reward at current implied volatilities.

Understanding the risk in this thing is a little difficult. If we have a sell-off and an increase in implied volatility, the risk hole follows you and gets a little wider and shallower. On the other hand, if you're right on direction and implied volatility decreases, the risk hole can get deeper but narrower.

Worst case scenario is if we go nowhere.

MoMoney.

 

[riskarb]

Can one of you guys model a 1.50 gain on 1395 vols and post the output?