SPX Credit Spread Trader

Quote from optioncoach:

It seems an interesting way to play any pumped up IV stock with news expected but curious as to your experience on the risk side.
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FWIW: As discussed before, under the right circumstances shorting volatility can be a high probability play. Earnings, FDA,court rulings etc. Events where you know volatility is going to collapse. Why not take advantage of that?

1) Short calendar - long GAMMA, short VEGA
2) Short time fly - long GAMMA, short VEGA
3) Diagonalized christmas tree - long GAMMA, short more VEGA
4) etc.

Pick the strategy that matches your VEGA preference. For the heavier short VEGA strategies, risk-based haircut is obviously advantageous to make it effective.

If you do your homework like IV_Trader you can have a very good idea of what is going to happen to IV pre and post event and therefore model a most likely max risk even if no movement occurs. The long GAMMA in the position is the kicker that really pays off on large moves not uncommon post-event.

You also have to do your homework to find good candidates. It's more involved than just doing credit spreads on an index month to month.

As IV_Trader posted, the event really needs to be in the right part of the expiration cycle. In addition, the tenor skew has to meet certain criteria.

Murray has discussed short calendars on indexes after corrections but it requires top picking VIX to some degree - it's not the same high probability play IMO compared to an event based IV crush. However, if you have legged into the short calendar/short time fly through already owning the long front month options then it's not a bad play. Risk-based margin required.

Tha analagous approach on stocks with known events is to use a long calendar for the volatility run up as an alternative to gamma scalping a long straddle, then use the long leg as the anchor for the short calendar. Straddle/Strangle calendars can offer more flexibility when legged-out.

There is a large amount written about short calendars, earnings plays et al in the Options Forum archives. Your friend Maverick is responsible for a lot of it.

Good luck!

MoMoney.
 
Quote from rdemyan:

Mark:

Diagonals or verticals on the recent trades?
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Diagonals. I bought one month further out than I sold.

RUT strikes 30 points apart, SPX 55 points apart.

Mark
 
Quote from yip1997:

Mark,

Do you have a long leg with each short? Does your selection of short strikes depend on your long strike too?
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Yes. There is a long leg. Diagonal spreads.

Yes. I choose my strikes by finding a spread that suits my needs.

I prefer a minimum credit (2% of margin requirement for the spread). I prefer to go 'reasonably' (your definition is as good as mine) far OTM. I prefer one month out, but will go 2 months out (that's Jan/Dec, not Jan/Nov) if cannot get credit for near-term spread.

I will sell spreads for smaller credits, especially if there are fewer than 4 weeks to go. So far I have not done any spreads for debits and I'm pleased with the results.

Mark
 
If the short strike gets in trouble it seems that there would be virtually no hedging power from the long (maybe on the put side since VIX would be increasing).

In your experience have you found such wide spreads to be a problem when you need to adjust out of them?

Quote from dagnyt:

Diagonals. I bought one month further out than I sold.

RUT strikes 30 points apart, SPX 55 points apart.

Mark
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Quote from dagnyt:

Yes. There is a long leg. Diagonal spreads.

Yes. I choose my strikes by finding a spread that suits my needs.

I prefer a minimum credit (2% of margin requirement for the spread). I prefer to go 'reasonably' (your definition is as good as mine) far OTM. I prefer one month out, but will go 2 months out (that's Jan/Dec, not Jan/Nov) if cannot get credit for near-term spread.

I will sell spreads for smaller credits, especially if there are fewer than 4 weeks to go. So far I have not done any spreads for debits and I'm pleased with the results.

Mark
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It is great to see the two different styles of diagonals being done, yours and Murray's. Your style seems to be a little less sensitive to VEGA (but still plays a good part) than Murray's because you have a greater distance between your shorts and longs. The trade-offs are that your loss becomes greater faster as you go past your long (not that you would let it get that far) and the margin required is greater. With your background you certainly know what you are doing and are very good at getting yourself out of trouble. I know you used to trade a lot of credit spreads, do you feel the diagonals are a better strategy for you going forward based on your recent experience?

Quick question on your Dec/Jan diagonals, are you holding these until closer to Dec expiration (i.e. not closing at Nov expiration)? I would assume this is the case because at Nov expiration your profit window would be much narrower than Dec.

Thanks for adding another twist to our recent diagonal discussions and positions, it has all been very fun to watch.
 
Quote from rdemyan:

If the short strike gets in trouble it seems that there would be virtually no hedging power from the long (maybe on the put side since VIX would be increasing).

In your experience have you found such wide spreads to be a problem when you need to adjust out of them?
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No. No serious problem. And there is a small, offsetting bonus. If my calls are breached, I have a profit from the puts. Not having to be concerned with a losing put spread when the call spread is in trouble is just a bonus for this style.

Obviously, I must take a loss when the strike is breached. And this takes discipline. I am pretty much forced to adjust (for me, that means close the spread) when the strike is breached, or soon thereafter. When strikes are closer together, one can hold out longer, looking for a market reversal. With these disant strikes, I cannot afford to allow the short to get too far ITM.

To me, collecting credits, instead of paying debits, makles it all worthwhile. You would have to judge for yourself. Try a few one lots, along with your other positions and see how they work for you.

Mark
 
Quote from optioncoach:

Rally:

What would have happened to your double calendar if GOOG stayed flat and IV dropped? I think you said you sold it for $14 and it was worth $9 after the news and move. Since it was a credit spread combo, do you have an idea what the cost to close would have been.

Actually it was sold for 17 and bought back for 9 hypothetically. An 8 point gain. I didnt trade the position because the modeled loss with a flat open was about 4-5 points. That is a lil over my risk threshold.(see below) IV trader and i modeled it in chat and we were short a few hundred bp in vols, so we didnt do it as it was too risky.


It seems an interesting way to play any pumped up IV stock with news expected but curious as to your experience on the risk side.

In my experience the return distribution of this strat if put under the right conditions looks something like this. Off the top of my head, out of 100 short calendars i've been hittting something like this:

20 10-30 cent losers
20 10-30 cent winners
20 breakevens
40 31-90 cent winners


These returns can be improved even further by legging into positive expectancy positions as mo mentioned earlier. As you can see it is very lucrative if you set these up properly. Alot of research goes into those if you want to earn over a large sample.
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