SPX Credit Spread Trader

[Crucis]

I was discussing tactics with an acquaintance. He trades ETFs on probability of expiration. For instance, he will sell a credit spread of the probability of expiring OTM is equal to or greater than 65%.

If the trade goes against him, rather than close or roll the trade/short, he sells another credit spread at a higher strike. The goal is to have more credit than debit at expiration.

Assuming you have sufficient capital, does this sound like a viable methodology?

Cru

 

[El OchoCinco]

Forgot to add the GREEKS..

First Test of Cross-Month Short Fly

Here are the Greeks of the position which I forgot to add to my post. (ivolatility has ES and EW end of day greeks)

SHORT 25 OCT EW 1385 Calls @ 2.50 (+$3,125.00)

LONG 50 NOV EW 1385 Calls @ 9.75 (-$24,375.00)

SHORT 25 DEC EW 1385 Calls @ 21.00 (+$26,250.00)

NET CREDIT = $5,000 or 4.00 * 25


NET SPREAD DELTA = .0083 [Flat to positive, OTM calls]

NET SPREAD GAMMA = -0.0008 [Flat to barely negative]

NET SPREAD THETA = -.0014 [Flat to barely any theta]

NET SPREAD VEGA = .2088 [Positive vega!]



I will monitor the Greeks as the position moves. My assumptions are that the Deltas will stay mostly flat and VEGA will increase. However we would need market moving higher and IV moving higher which rarely happens. Thetas too will stay somewhat flat to slightly negative.

PLUS, I will see if I can leg into a position which raises the loss dip on the charts we displayed.... After a nice move in the market perhaps.

EDIT: HAIRCUT UPDATE

After a brief chat with MAV and some estimations of my own, I think the haircut for this position will be around $15,000. Pretty sweet and cheap but will know better tomorrow.

 

[ryank]

Quote from Crucis:

I was discussing tactics with an acquaintance. He trades ETFs on probability of expiration. For instance, he will sell a credit spread of the probability of expiring OTM is equal to or greater than 65%.

If the trade goes against him, rather than close or roll the trade/short, he sells another credit spread at a higher strike. The goal is to have more credit than debit at expiration.

Assuming you have sufficient capital, does this sound like a viable methodology?

Cru

That is basically what ToS teaches at their seminars. I did a quick model using Nov expirations and here is what I got:

10 lot 1330/1340 Nov put = $2.50
10 lot 1370/1380 Nov call = $4.10

Max profit = $6600
Max loss = $3400

You have to work to keep ahead of the market and make sure you size your trades properly so you can sell additional verticals as needed. The probability is lower than FOTM spreads but the r/r is better.

 

[LeonPhelps]

Quote from Crucis:

I was discussing tactics with an acquaintance. He trades ETFs on probability of expiration. For instance, he will sell a credit spread of the probability of expiring OTM is equal to or greater than 65%.

If the trade goes against him, rather than close or roll the trade/short, he sells another credit spread at a higher strike. The goal is to have more credit than debit at expiration.

Assuming you have sufficient capital, does this sound like a viable methodology?

Cru

Are you referring to put or call credit spreads or both at some time? When "sell credit spread at higher strike" (?call spread I assume), is this in response to movement against the position upwards or downwards? An example may make it more clear.

 

[Crucis]

Quote from LeonPhelps:

Are you referring to put or call credit spreads or both at some time? When "sell credit spread at higher strike" (?call spread I assume), is this in response to movement against the position upwards or downwards? An example may make it more clear.

I amend that to be "sell credit spread at higher/lower strike as appropriate for a put/call spread."

The intent is to increase the available credit to offset the loss for the trade that went ITM.

Cru

 

[LeonPhelps]

Quote from Crucis:

I amend that to be "sell credit spread at higher/lower strike as appropriate for a put/call spread."

The intent is to increase the available credit to offset the loss for the trade that went ITM.

Cru

So you are following the trend by selling more and more put credit spreads as the market rises. Great move for the past few weeks. What about the next few weeks?

"The trend is your friend until it bends, then it ends."

 

[tplast]

Quote from optioncoach:

Forgot to add the GREEKS..

First Test of Cross-Month Short Fly

Here are the Greeks of the position which I forgot to add to my post. (ivolatility has ES and EW end of day greeks)

SHORT 25 OCT EW 1385 Calls @ 2.50 (+$3,125.00)

LONG 50 NOV EW 1385 Calls @ 9.75 (-$24,375.00)

SHORT 25 DEC EW 1385 Calls @ 21.00 (+$26,250.00)

NET CREDIT = $5,000 or 4.00 * 25


NET SPREAD DELTA = .0083 [Flat to positive, OTM calls]

NET SPREAD GAMMA = -0.0008 [Flat to barely negative]

NET SPREAD THETA = -.0014 [Flat to barely any theta]

NET SPREAD VEGA = .2088 [Positive vega!]



I will monitor the Greeks as the position moves. My assumptions are that the Deltas will stay mostly flat and VEGA will increase. However we would need market moving higher and IV moving higher which rarely happens. Thetas too will stay somewhat flat to slightly negative.

PLUS, I will see if I can leg into a position which raises the loss dip on the charts we displayed.... After a nice move in the market perhaps.

EDIT: HAIRCUT UPDATE

After a brief chat with MAV and some estimations of my own, I think the haircut for this position will be around $15,000. Pretty sweet and cheap but will know better tomorrow.

Coach, I modeled it on OptionVue and this is what I got. Greeks at entry are -23 delta, -2.48 gamma, 21.54 theta and 382.8 vega. Span margin is 11,423 initial and 9,359 maintenance.

I also modeled some of the other horizontal flys you guys were discussing during the weekend and I don't get anything as optimistic. I'm not sure why the huge difference between TOS and OptionVue, but I suspect that TOS is using the same volatility for all strikes.

 

[El OchoCinco]

THank you for testing it out. However, your chart seems off.

How could the whole right side be under the $0 line if the market jumps above 1400 at October expiration? Tell us what you did so we can see if there is an error.

makes no sense why the position only makes money if the market crashes since it is a FLY.

 

[riskarb]

Yeah, T+0 starts massively underwater. Vols marked higher?

 

[El OchoCinco]

T+21 should not be so far underwater either. In fact anything higher than the current price is a profit at OCT expiration...