SPX Credit Spread Trader
- Thread starter El OchoCinco
- Start date
1) I like the fact that the condor allows you to be further OTM.
2) I don't like having to sell additional spreads to obtain the same profit potential.
3) DD can occasionally reward you with a very nice bonus. That means one does not really know, in advance, the profit potential from the DD.
Thus, which do you prefer - the safety of being further OTM,or the chance for the bonus. For me, it's easy - I like the DD. But this is not a 'right or wrong' answer. Each invetor needs to find his own comfort level.
Mark
You're comparing apples to oranges here. Assuming a single set of market characteristics the two do not perform similarily. IOW, you're comparing strategies that are pretty much polar opposites.
The DD is better when:
-IV is low and you expect an increase.
-You want the underlying to move toward your shorts.
-You want a low probability, High reward/Low risk scenario.
The IC is better when:
-IV is high and you expect decrease.
-You want the underlying to remain still.
-You want a high prob, Low reward/High risk scenario.
IMO, right now choosing the OTM IC is suicide. An ATM vertical played directionally is ok, but not the topic of discussion here. You'll not get nearly enough credit on the OTM IC right now to reward you for the risk taken.
With the DD, this is the perfect set of circumstances. Extremely low IV that will likely increase on a move in either direction. Just remember to determine whether you are using this as a delta play or a vega play. Personally I consider it a vega play and would take profit on any decent VIX jump.
Cache,
I agree with you. I was holding vega aside, which of course, you can't do. With low IV's now, I would prefer the Double Diag as well. I was trying to see if you could mitigate the gamma curvature with a few extra long wings and found you probably could. Mind you, paying for the extra longs reduced the credit to where I might be indifferent (again, IV constant) between the two strategies as I laid them out.
I know that you, Rally and others have spoken persuasively about the problem of selling cheap gamma - how the increased probability doesn't compensate you for going FOTM. I'm analyzing different ways to pick up gamma: coming closer to the money on the shorts as well as purchasing more gamma (either wings or deferred months). Still wrapping my brain around these issues. If I have anything interesting to share, I'll post it.
Thanks,
I agree with you. I was holding vega aside, which of course, you can't do. With low IV's now, I would prefer the Double Diag as well. I was trying to see if you could mitigate the gamma curvature with a few extra long wings and found you probably could. Mind you, paying for the extra longs reduced the credit to where I might be indifferent (again, IV constant) between the two strategies as I laid them out.
I know that you, Rally and others have spoken persuasively about the problem of selling cheap gamma - how the increased probability doesn't compensate you for going FOTM. I'm analyzing different ways to pick up gamma: coming closer to the money on the shorts as well as purchasing more gamma (either wings or deferred months). Still wrapping my brain around these issues. If I have anything interesting to share, I'll post it.
Thanks,
Hoesntly i think the decision of whether a credit is enough for the risk taken is a subjective one. There is no real objective criteria to make this determination since one' person's risk is another person's conservative.
Unfortunately OC is right. Purely subjective and risk is definitely a relative term.
A couple considerations.
What is the average historical volty (SV) over the last couple years? If the current IV is even close to that, I try to stay away from selling premium.
Some traders measure the gap between IV and SV and make the decision by that. Personally, I think this is completely unreliable.
You'll also want to know the SV from this time of year over the past decade or so. November is typically one of those months that moves quick. Sure that doesn't mean this time will be the same. But I wouldn't press my luck.
A good trader will switch his/her strat to match the current market conditions. The basic rule is, when options are expensive sell them, when they are cheap buy them.
ha-ha. In twisted way of looking at things Iron Condors let me do both at the same time in any market since I am always buying long and selling short irrespective of the market (just not optimally).
I guess we should just flip from credit to debit if we had the wherewithal to know exactly "what" the market really is going to do in any period...
On a different topic. Anyone comfy with VIX being a good estimator of market volatility? I just don't feel comfy with the volatility measures since last Oct VIX was down but we had HUGE REAL upside volatility. The problem I have with volatility estimators like VIX is these are generally negatively correlated with market direction and that is the thing that often fails in practise.
TS
Quote from TrendSailor:
ha-ha. In twisted way of looking at things Iron Condors let me do both at the same time in any market since I am always buying long and selling short irrespective of the market (just not optimally).
I guess we should just flip from credit to debit if we had the wherewithal to know exactly "what" the market really is going to do in any period...
On a different topic. Anyone comfy with VIX being a good estimator of market volatility? I just don't feel comfy with the volatility measures since last Oct VIX was down but we had HUGE REAL upside volatility. The problem I have with volatility estimators like VIX is these are generally negatively correlated with market direction and that is the thing that often fails in practise.
TS
I don't want to be a pain in the neck, but no, you aren't doing both. An IC is simply a naked strangle with a hedge thrown in. Technically you are selling and buying gamma, but synthetically you are only doing one.
The built in hedge will reduce the pain, but not eliminate it. If you get far enough OTM, your hedge leg provides no protection. It only serves the purpose of freeing up margin.
In regards to VIX. You really have to consider how it is calculated. Saying it is a lousy predictor of volatility is the same as saying that ATM IV on the SPX for NOV and DEC is a lousy predictor.
But I agree with you. Current IV is a lousy predictor of future volatility. IV merely represents how much of a credit you are going to recieve for selling premium. So if we assume that VIX is a bad indicator of vols, then we must assume future vols to be random. If that is the case, why would anyone sell premium when we are at the bottom of the premium price range?
You really have to know how VIX is calculated.