SPX Credit Spread Trader

[blk]

Quote from rdemyan:

I've been doing some analysis on this and it seems like it would probably be preferable to use indices that don't have next morning expiration (i.e. SET for the SPX), particularly if these straddle/strangle swaps are put on within the last week or two.

So as the underlying moves away from the peak on the expiration curve, the adjustment would be to buy back the straddle and sell a new straddle that moves the peak in the direction the underlying is moving (repositioning the tent pole).
Is that correct?

Although I'm no expert in double diagonals / straddle-strangle swaps, I've done some work with them.

Why would you want to trade them close to expiration - to increase probability of landing on the short strike? If you go out in time (say post expiration week), then you may be able to collect more premium on the short straddle thus reducing risk - but the underlying has more time to move out.

Other point about moving the tent pole up/down depends on the availability of strikes and your long strike selection and the underlying's behaviour. Some may choose to just close the whole trade around breakeven (depends on vega action at the time) if the underlying moves out of the profitability range.

 

[IV_Trader]

Quote from blk:

Looks like we've come a long way since this thread started. Time flies, right? (pun intented)

I had to ask this fundamental question in the current environment:

Are we getting paid enough for the risk we're assuming from selling call spreads?

It's not the low VIX levels that bother me. VIX has been sub-twelve for years... but during those days, the market (SPX) was going sideways. So there was low risk, hence the low premiums were fine.

But now, the market's been rallying like nobody's business and the VIX is sub-eleven! The cheap short call spreads are getting hammered.

Is this an environment for iron condors or even (double) diagonals (where that elusive IV spike hasnt come for expirations together) etc? Murray recently put on a diagonal trade bcos "VIX was low at 14". VIX is now 10.75.

Any thoughts / views on this? Thank you.

The answer to many of your questions is here ( from Riskless):
"don't trade options w/o a directional or volatility bias".

 

[blk]

Quote from IV_Trader:

The answer to many of your questions is here ( from Riskless):
"don't trade options w/o a directional or volatility bias".

Pardon my ignorance, but would you be kind enough to explain that in the context of the SPX IC / DD?

By trading a short iron condor, the premise is: the market remains within the short strikes (direction bias) AND the OTM options are overpriced (volatility bias).

But the problem here is the (call) options are not overpriced. So how does one be seller and yet market neutral? Too many (unrelated) questions? Apologies...

 

[rdemyan]

I think I've seen this question asked before but didn't really give it any thought.

Since the SPX has a SET expiration value on Fridays, why not consider buying an ATM straddle on Thursday just prior to close.

Unfortunately, I'm having trouble modeling this in ToS. How would I go about estimating the price of an ATM straddle on the last day of SPX trading in October.

EDIT: I guess one of the issues is that the SPX is only traded in 5 point increments, therefore, it would probably be difficult to buy an actual straddle (could be off by several points either way). This would mean that the cost would be relatively high to account for the ITM side.

 

[IV_Trader]

Quote from blk:

Pardon my ignorance, but would you be kind enough to explain that in the context of the SPX IC / DD?

By trading a short iron condor, the premise is: the market remains within the short strikes (direction bias) AND the OTM options are overpriced (volatility bias).

But the problem here is the (call) options are not overpriced. So how does one be seller and yet market neutral? Too many (unrelated) questions? Apologies...

overpriced for whom , buyer or seller ? You are paying higher vols on your long strike than you selling on your short one in IC (for puts) , no ?

 

[rdemyan]

With regards to the edit. As I rethink this, although the cost might seem relatively high, if the SET is exactly the same as the SPX close on Thursday, then most of that ITM amount would be received back upon settlement. So the risk would be an opposite move that doesn't go ITM enough on the opposite side leading to a loss of most or all of the premium paid because one side was ITM when the near-ATM straddle was purchased.

Quote from rdemyan:

I think I've seen this question asked before but didn't really give it any thought.

Since the SPX has a SET expiration value on Fridays, why not consider buying an ATM straddle on Thursday just prior to close.

Unfortunately, I'm having trouble modeling this in ToS. How would I go about estimating the price of an ATM straddle on the last day of SPX trading in October.

EDIT: I guess one of the issues is that the SPX is only traded in 5 point increments, therefore, it would probably be difficult to buy an actual straddle (could be off by several points either way). This would mean that the cost would be relatively high to account for the ITM side.

 

[blk]

Quote from IV_Trader:

overpriced for whom , buyer or seller ? You are paying higher vols on your long strike than you selling on your short one in IC (for puts) , no ?

My concern is that we're selling under-priced call spreads in a bull market, as part of the iron condor.

Why under-priced (for seller)? Because VIX is so low and the probability of the short call ending up ITM is quite high (due to the bull market run). Even in the wild bubble chase days, VIX was over 20.

Are the current market conditions ideal for ICs and DDs? All these days (even with low VIX) they were, because the market was actually being neutral. But it no longer isnt. Thank you.

 

[RichardRimes]

Quote from blk:


Are the current market conditions ideal for ICs and DDs? All these days (even with low VIX) they were, because the market was actually being neutral. But it no longer isn't. Thank you.

I believe this is the question we are ALL asking ourselves. We have had a bull run of 90 days or so, does it make this a true "bull" market in the time frame of say.... a year? Certainly Year over Year we are up 200 pts from SPX Oct 05. This run began when the Fed quit raising rates. The larger macro economic picture however is not overly bullish therefore perhaps it is reasonable to believe in the next 60 or so days the market will either slow or even reverse toward a more sustainable trend. I'm seriously considering a Put calendar on the SPX since buying a calendar is a play on volatility (although not as aggressive as a diagonal).

The other thing that gives me pause is this current channel looks a great deal like the mini-bull of earlier this year (Jan Feb Mar and part of April). However the slope of that trend wasn't as sharp as this slope of the current channel. We all know how that one ended, my concern is will this end in a steeper longer correction?

 

[ryank]

Quote from blk:



Why under-priced (for seller)? Because VIX is so low and the probability of the short call ending up ITM is quite high (due to the bull market run). Even in the wild bubble chase days, VIX was over 20.

The probability of a short call going in the money doesn't necessarily increase because of a bull market. The probability of a short call with a delta of .10 has a roughly 10% chance of being in the money. This is true at the time your order is placed. Obviously this changes over time as we head towards expiration, the market moves and volatility changes. I think right now we are experiencing more of a "fat tail" type event in a sense over the last few months which has caught people (me included) that place trades 1-2SD out.

 

[andysmith]

Great environent for buying calls.....

Quote from blk:

Looks like we've come a long way since this thread started. Time flies, right? (pun intented)

I had to ask this fundamental question in the current environment:

Are we getting paid enough for the risk we're assuming from selling call spreads?

It's not the low VIX levels that bother me. VIX has been sub-twelve for years... but during those days, the market (SPX) was going sideways. So there was low risk, hence the low premiums were fine.

But now, the market's been rallying like nobody's business and the VIX is sub-eleven! The cheap short call spreads are getting hammered.

Is this an environment for iron condors or even (double) diagonals (where that elusive IV spike hasnt come for expirations together) etc? Murray recently put on a diagonal trade bcos "VIX was low at 14". VIX is now 10.75.

Any thoughts / views on this? Thank you.