SPX Credit Spread Trader

Quote from tplast:

I think I solved the mystery. And there's a big gotcha !
More...

Well spotted. So the solution is to write the appropriate strike in December e.g. 1395 instead:

-1 OCT EW 1385
+2 NOV EW 1385
-1 DEC EW 1395

Net credit on the trade will be smaller.
 
Ahh mystery solved. THANKS TPLAST!

Unique problem when using EWs. Thanks for the heads up. Even at those prices the loss is still limited (about 6 points when the credit is deducted.) Witin my loss cushion (about $7,500)

I think the right approach then is to make an adjustment as the index moves past the strike to cover that scenario. Since we were too close to ES I went with EW and will be aware of the adjustment. I will price out the ES strikes in the future and stick with those to avoid that.

Good thing is that not only is the loss limited but I do not see us at 1440 in 3 weeks lol... If we hit 1400 I will simply adjust and remove that risk.

Mo already demonstrated a good fix for that as well.

See... that is why I bring this stuff here, enough smart minds to solve any option problem!

Quote from tplast:

I think I solved the mystery. And there's a big gotcha !

This is what it looks like on OV with no slippage. The drop on the right is correct. The reason is that the DEC EW options are based on the march futures contract. When all the options go deep on the money, they'll go for close to their intrinsic value. But the march contract will be higher by about 10 points, which will be reflected on the december options when DITM.

[EDIT] With the ES december contract at 1440. The OCT EW will go for 54, the NOV EW will go for 55 and the DEC EW will go for 69 !
More...
 
Very similar to a combo long backspread graph, but a better PnL distro. The Coach position has an added benefit of mid-duration +dgamma and +smile over the long combo backspread.
 
Quote from IV_Trader:

true , but ramp in vega will come with inverse of price ( market goes down) , and then gamma gains will be ahead , no ?
More...

delta, not gamma. You're reducing gamma if reducing Oct and increasing Dec. Speed decreases via an increase in mag of initial delta.
 
There really is no need for a bearish bias in the call spread. I could simply OTM Put cross month FLYs and have a nice profit on the downside as well :).

Adding both makes it look like kind of a batman spread.
 
Based on mid prices for the cross month AUG-SEP-OCT as of 7/25/06 SPX 1268.88

1275 S10 aug / L20 sep / S10 oct
7/25/06 12.9 22.8 33.4
8/17/06 23.0 33.4 45.5
8/17/06 -101 212 -121 total loss -1000

1300 S10 aug / L20 sep / S10 oct
7/25/06 3.6 10.9 20.1
8/17/06 3.0 15.6 28.5
8/17/06 6.0 94.0 -84 total gain 1600 (which is a lot less as suggested by enclosed price model)

1325 S10 aug / L20 sep / S10 oct
7/25/06 0.7 3.8 10.5
8/17/06 0.0 5.1 15.0
8/17/06 7.0 26 -45.0 total loss -1200
 

Attachments

You must log in or register to reply here.
Back
Top