SPX Credit Spread Trader
- Thread starter El OchoCinco
- Start date
To win as an option buyer, the underlying must move in the right direction. AND it must move quickly. AND it must move far enough - depending on how long you hold the option.
When selling, all you need to win, is for the stock to move in the right direction OR time to pass OR the stock to move in the wrong direction, but not too far.
Sellers win much more often. That's not to say they are always ahead at the end of the game; they just have more wins and fewer losses than option buyers.
Mark
Agree with mark - the underlying option price structure/equation favors by a factor of 80% the seller. You need a rapid underlying directional movement as well as a 1.5-2 sigma change in price to make money on the buying side.
TS
Yes, it is easy to get into a premium selling groove. Having a little cushion makes you all warm and fuzzy while the market bounces around. Everyone here knows that I am a fan of the basic credit vertical.
But.....
Anytime I look to open a trade I want to know if vols are relatively high or low. IOW, are they likely to increase or decrease. This is a little harder on SPX than equities because vols can be very low and still go lower for an extended period of time. In equities it is likely that when vols are at the lows you will see an increase in the near future.
Anyway, put simply it is the same old sell expensive/ buy cheap.
The bigger reason to buy puts here instead of selling the bear call is the type of trade you're looking for. If you think we are gonna sit at this level with relatively minor movement, then more power to you, but the b-fly/condor would've been the better trade.
If you think SPX will move lower then the long puts are the better play under all circumstances.
-an adverse move is more controllable in terms of stops.
-they cost 1/2 commiss
-if we see a quick correction it will likely be followed by another bounce back toward highs. You'll have a tough time capturing profits with the CTM credit vertical because the MMs are leaning bullish. Long puts would be easily sold for a profit.
-if the correction is sustained then the long puts are still the better way to go because they don't limit the profit potential and you can set a trailstop.
- long puts are helped by a vol jump that will certainly accompany a negative print.
But.....Anytime I look to open a trade I want to know if vols are relatively high or low. IOW, are they likely to increase or decrease. This is a little harder on SPX than equities because vols can be very low and still go lower for an extended period of time. In equities it is likely that when vols are at the lows you will see an increase in the near future.
Anyway, put simply it is the same old sell expensive/ buy cheap.
The bigger reason to buy puts here instead of selling the bear call is the type of trade you're looking for. If you think we are gonna sit at this level with relatively minor movement, then more power to you, but the b-fly/condor would've been the better trade.
If you think SPX will move lower then the long puts are the better play under all circumstances.
-an adverse move is more controllable in terms of stops.
-they cost 1/2 commiss
-if we see a quick correction it will likely be followed by another bounce back toward highs. You'll have a tough time capturing profits with the CTM credit vertical because the MMs are leaning bullish. Long puts would be easily sold for a profit.
-if the correction is sustained then the long puts are still the better way to go because they don't limit the profit potential and you can set a trailstop.
- long puts are helped by a vol jump that will certainly accompany a negative print.
deja vu. I swear i've asked you this question before without getting a satisfying answer. Last time you said trend expectation was instantaneously built into the pricing of options, now there's an 80% bias to the seller. What is this new pricing model you have been using and posting about?
I don't think is that simple. The magnitude of the gains/losses must also be considered, not just the probability of profit.
Instinctively I would say that at any given time for any give option, both the seller and the buyer have an expectancy of 0. Otherwise the options would be mispriced.
The odds of success are higher if you don't consider the credit (debit) received (paid). More accurately stated:
On a single trade, probability of profit is higher on an OTM credit spread than its debit counterpart.
In the long run however, if placed randomly they both return equally (negative after commissions) as the markets are priced quite efficiently.
I just started reading this thread and at the moment I'm at page 300+ so only 1600 pages left 
I'm very interested in setting up Bear Call Spreads and Bull Put Spreads. But there is one thing! what's the best way to adjust your position when the market moves close to your short option. What's your experience with this strategy?
At the moment I think you have 4 possibilities.
1. You don't adjust, you sell far OTM Calls and Puts so the risk is small they will get ITM. If they do it's part of the game.
2. when the underlying is app. 1% of your Calls / Puts you make it a Butterfly (no risk and no margin) and you can setup a new one.
3. Like OptionCoach: hedge the position when the underlying is around 1% of your shorts
4. When the underlying is around 1% of your shorts you close it and setup a new one.
Thanks,
FT79
PS. Perhaps the question that I ask is already discussed but I haven't found it yet.
I'm very interested in setting up Bear Call Spreads and Bull Put Spreads. But there is one thing! what's the best way to adjust your position when the market moves close to your short option. What's your experience with this strategy?
At the moment I think you have 4 possibilities.
1. You don't adjust, you sell far OTM Calls and Puts so the risk is small they will get ITM. If they do it's part of the game.
2. when the underlying is app. 1% of your Calls / Puts you make it a Butterfly (no risk and no margin) and you can setup a new one.
3. Like OptionCoach: hedge the position when the underlying is around 1% of your shorts
4. When the underlying is around 1% of your shorts you close it and setup a new one.
Thanks,
FT79
PS. Perhaps the question that I ask is already discussed but I haven't found it yet.
Rallly, sorry I am not selling an option on satisfaction so I don't owe a debt for no received premium nor can be freely assigned. There is a fundamental principal hiding here within the structure of this reply.
To get an empirical hint why not just look at the percentage of losers and winner who are buying options verses the loss rate for writers of options. I think you will find that the majority of buyers on average lose about 80% more of the time than do options writers. Of course there are different degrees of loss - but I think you get my thinking. Of course there are a lessor number of traders who can temporarily beat this loss rate with superior trending and intelligent guessing or by offsetting risk and partially enjoying the writer advantage by forming a hybrid long position (e.g. by also participating on the short side as a naked writer farther out).
But options originally were written for simple hedging insurance and were just "another business expense" to mitigate risk. As such they were "consumables" and many buyers hoped to never need them since if they did that meant market calamity. The motivation for options and the character has since changed over the years however. Now there are a large number of traders only buying options primarily with the intention of second guessing the market and to beat the market to generate profits with the change in value of the option instrument itself. But the fundamental character of options are still "insurance products" and the price structure mirrors this with a time for premium and volatility and the time attrition mechanism that decisively favors writers.
The real reason most buy options now is for the generally less than 50% (45% win rate is considered stellar performance) probability of winning large to offset the higher win rate advantage that sellers have. If the loss frequency was par no one would write options. If this where not true why would they put their very expensive underlying on the line for a pittance of premium. Or would they? There are of course some of us who sell options with the intention of getting paid to wait for an assignment/sale.
At any rate the win-loss numbers should give a general idea of the average probability distribution and price relationship advantage to writers without even algebraically dissecting the price model. Call it proof by live fire Monte Carlo. I know that you are still not satisfied but I am also not trying to sell anyone anything or impress anyone here either.
TS