SPX Credit Spread Trader

Quote from Heatheranderson:

Isn't it self-explanatory?. Yeeeesh!:p
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Yeah Andy, Yeeeeeeeesh! If you can't simply spend 30 seconds ET searching "cheap gamma"....:D Joke.

Simplistically, if you sell a $10 spread for 50c that's cheap gamma. The 50c can go to 10$!!! Fantastic leverage...but in the wrong direction :mad:

Gamma magnitude peaks ATM and dwindles as you go further out a la bell curve. So, as an OTM option moves ATM, the gamma magnitude for that option goes from small to big.

The gamma magnitude obviously has implications or rather describes the rate of accumulation of deltas on the position.

More on the shape of the gamma curve and implications here:

http://www.elitetrader.com/vb/showthread.php?s=&postid=982460#post982460

More on the discussion of "cheap gamma" here:

http://www.elitetrader.com/vb/showthread.php?s=&postid=965200#post965200

Rallymode, may have a different interpretation/spin on the cheap gamma concept.

Good luck!

MoMoney.
 
Do not overlook one obvious flaw in the strategy to play expiration day options in SPX....

Quote from optioncoach:

Wouldnt the market makers price in SPX premiums to account for SET. I cannto imagine ATM options are trading for $0.50 and you can buy small amount and profit on a 4 point set.

Included in this study should be average cost of ATM or near strike calls and puts on expiration day and te horrible slippage of the wide b/a spreads for SPX.
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Quote from optioncoach:

Wouldnt the market makers price in SPX premiums to account for SET. I cannto imagine ATM options are trading for $0.50 and you can buy small amount and profit on a 4 point set.

Included in this study should be average cost of ATM or near strike calls and puts on expiration day and te horrible slippage of the wide b/a spreads for SPX.
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If memory serves the premium even up to the last minute of trading is in the $2.00 range. A while back I'd thought the same thing, thinking that I could buy a straddle for almost nothing just before the close and a decent SET move would make money. The price for the ATM straddle was almost $5 though so I didn't take the risk.

Also, experience in trying to close a vertical spread that is close to ATM to avoid SET issues, has shown that it is crazy tough to get a decent fill on a massively wide spread just before expiry.
 
Quote from optioncoach:

Do not overlook one obvious flaw in the strategy to play expiration day options in SPX....
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sorry about the flaw. the flaw is that at I didn't realize that the the ATM call could run more than $2.00 minutes before the close .
My assumption was that the cost of ATM CALL was going for less than $2.00 . .If the ATM call is going for $2.00 or more you will lose money overall. If you pay for the SPX ATM CALL less than $2.00 every single month
you will make money overall.
sorry I was naive to think the market makers will let it go for $1 or less. I will try XSP ATM CAL may be. i can get the ATM call for less than .15

to be profitable

The settlement of the underline has to exceed the closing value by more than whatever you pay for any extrinsic vale of any call option. The same thing goes for the put option The settlement value has to be less than the closing value by more points than what you paid in extrinsic value for any put option.

Labib Imtanes
 
Quote from Cache Landing:

If memory serves the premium even up to the last minute of trading is in the $2.00 range. A while back I'd thought the same thing, thinking that I could buy a straddle for almost nothing just before the close and a decent SET move would make money. The price for the ATM straddle was almost $5 though so I didn't take the risk.

Also, experience in trying to close a vertical spread that is close to ATM to avoid SET issues, has shown that it is crazy tough to get a decent fill on a massively wide spread just before expiry.
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On a massively wide spread it makes no sense to me to even attempt to sell back the longs in the last day of trading. This is a panic scenario and I want to get out of my shorts.

When I get in this scenario with a 10 point spread I just let the longs get eaten at exp and just focus on closing the shorts. I want to buy them back for something less that what I think SET is going to get me into if near the money or into the money. If the market was trending hard into my short at near the close I'll gladly take a $3 premium on buying back JUST the shorts rather than risk an average gap up by about $4.5 on SET. If the market move is weakening and near the short I'll sometimes just go ahead an take the risk of SET doing a trend reversal or slight advance.

Of course the best thing is to not be in this situation in the first place. I usually try to punch out of the position mid period if it penetrates my short at anytime by more than 1 point on the next dip or if only sideways and slightly into the strike for up to 3 days. In the last week I will sell half if I am half half way to the short (relative to a 10 point spread - 5 points). If the market is trending strong toward a short position and is 10 points from my short and closing in the last week I take the hit and close the position at 1/2 the bid/ask but try to get a small reversal. It hurts like hell but its better than paying up to the full spread at expiration.

Oct was hell to the upside for us condor players...

TS
 
Well, yeeeeeeeesh! OK, since that's out of the way....

Coach's gamma curve plot coupled with your comment "when you're ATM, gamma has nowhere to go but DOWN - this is a good thing from an exposure point of view." says it all.

I think ATM spreads (or ATM flies) hae their clear advantage but they require constant monitoring which makes them difficult for some of us "hobbyists". Now if you can suggest ATM spreads which require the miniscule attention that an OTM credit spread needs, then we have a winner...



Quote from momoneythansens:

Yeah Andy, Yeeeeeeeesh! If you can't simply spend 30 seconds ET searching "cheap gamma"....:D Joke.

Simplistically, if you sell a $10 spread for 50c that's cheap gamma. The 50c can go to 10$!!! Fantastic leverage...but in the wrong direction :mad:

Gamma magnitude peaks ATM and dwindles as you go further out a la bell curve. So, as an OTM option moves ATM, the gamma magnitude for that option goes from small to big.

The gamma magnitude obviously has implications or rather describes the rate of accumulation of deltas on the position.

More on the shape of the gamma curve and implications here:

http://www.elitetrader.com/vb/showthread.php?s=&postid=982460#post982460

More on the discussion of "cheap gamma" here:

http://www.elitetrader.com/vb/showthread.php?s=&postid=965200#post965200

Rallymode, may have a different interpretation/spin on the cheap gamma concept.

Good luck!

MoMoney.
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Mark, Murray and others,

Just because I like to beat dead horses, here's a JPG file of a credit DD overlaid with a condor with a twist both two days before Dec expiration. The DD is Dec/Jan with shorts at 800 and 710 (on the RUT). Widths 30 on the calls, 40 on the puts.

I created a condor of a size that would yield the same maximum dollar risk within 2 STD's as the DD. The condor is wider, 820 and 690, both sides at 10 point widths. I added enough extra longs to simulate the P&L of the DD within 2 STD's movement. (Ratio of 17:15, long to short)

The question I'm trying to answer is whether the long gamma of the further months is the most efficient way to hedge the short gamma from the short strikes. Adapting a condor the way I did (ie., wider shorts, extra wings) appears to accomplish that task.

Anytime before expiration, the P&L's match up nicely. At expiration, the DD has its 2 characteristic peaks. The condor profit zone is wider and has much less 'swan risk', ie., the winged condor is superior outside of about 2-2.5 sigma.

Also note gamma at the short DD strikes. If you tell yourself you're going to exit at those points (short strikes for the DD = 20 points OOM for the condor), you see that gamma is less for this condor than for the DD anywhere in that range including right before expiration.

Although I did this analysis by equalizing dollar risk, margin usage (for us poor Reg-T'ers) is vastly better for the condor.

If you aren't making a vega bet, aren't you better served with the winged condor?

I know Murray does these for vega opportunity. I'm more in Mark's credit collection camp. Food for thought? Any thoughts would be appreciated.
 

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