SPX Credit Spread Trader

[TrendSailor]

Quote from Maverick74:

No, we are saying trading in general is a losers game (90% of all traders lose).

haha - you are right back to my original complaint that if there is no positive expectation to be found due to unfair pricing of derivatives (poor spreads) and equities (with all the implied manipulation at all levels including analysts, CEOS and underwriters) then it really is a suckers game. In that case even the mythical super hero upper 3% "trader" (really a Jedi Knight tuned into the mysticism of force) is the only one who can beat the system by generating an edge (implies insider knowledge or superior crystal ball); but in the long run even he can lose due to the 1/n trade phenomena and a fat tail wipe out event (markets do crash now and then after all). This does sound more and more like religion and a battle between good and evil.

For the 90% person are you making a case for not trading and instead do what a lot of the conventional wisdom suggests and not trade (generalizing - reducing frequency of bets) by "buying and holding" and going indeterminately long in LEAPS or equities?

What's a mother to do? Perhaps the old casino wagering concept of "bold play" with one huge bet on one position to drive 1/n=>1 - win big then retire or lose big and save the frustration of slow death by a thousand cuts.

I am enjoying the dialog and learning a lot. Will try to summarize a few concepts and what appear to be "universal truths" later.

TS

 

[domestic]

Quote from jeffm:

When I get a break between real work tasks, I will take a look at the b/a spreads on fotm ES and ER2 options. If I spot a super tight spread, I will often take the inside bid or offer and use that to make a cheap debit spread as crash insurance. This month, I have a bunch of ER2 NOV705/702.5 put spreads that I picked up for 0.05. You can do this kind of trade on globex, where you participate more directly in the market, compared to sending an order down to the SPX pit. Cheap partial-insurance against a black swan.

thanks jeffm,

i now have a rut 690/680 debit bought for .40. for every three short er2 puts @692.5. anyway, i would still do the old roll if or when my shorts are threatened. i also have (ala taleb) sort ctm puts ratioed with long otm puts. all this is experimental of course. like coach said, you cannot always do credits 100% of the time...

 

[iprph90]

after looking at a 10yr weekly chart on the spx concentrating on the big moves, [8-12% post lows] i am evaluating if selling 1 sigma away on the spx 3-4 months out, specifically march '07 1450-1475 (~6.50 credit ) or even 1425-1450 (~9.50 credit < 1 sigma) is good strategy at this point. not so much from the perspective that my reasoning is that the spx will not get to these levels by march, but as i see it from the charts there always tends to be a consolidation period before the next move up or down. enuf grinding to eat away the premium. a bonus would be a nice 5-10% move down. in any case, it is not my intention to hold the trade to expiry and any substantial move above 1390 near-term would delay putting on this trade. any thoughts?

 

[andysmith]

Exactly right. Your broker makes money on your winning and losing trades. Your mutual fund takes fees whether it goes up or down, etc. etc.

Quote from TrendSailor:

OK so you are now telling me its all like a casino and only the MM and brokers ever win because they are the house and get a piece on every roll?

TS

 

[TrendSailor]

Quote from iprph90:

after looking at a 10yr weekly chart on the spx concentrating on the big moves, [8-12% post lows] i am evaluating if selling 1 sigma away on the spx 3-4 months out, specifically march '07 1450-1475 (~6.50 credit ) or even 1425-1450 (~9.50 credit < 1 sigma) is good strategy at this point. not so much from the perspective that my reasoning is that the spx will not get to these levels by march, but as i see it from the charts there always tends to be a consolidation period before the next move up or down. enuf grinding to eat away the premium. a bonus would be a nice 5-10% move down. in any case, it is not my intention to hold the trade to expiry and any substantial move above 1390 near-term would delay putting on this trade. any thoughts?

My thoughts are that I personally am getting very uncomfortable writing spreads to the upside. I am all but certain we are into a major bull up for 2007 at large with periodic spikes down. I may go long in equities rather than risk the upside volatility with credit spreads. Got bulldozed in Oct already with a 60 points upside rise that pulverized my credits. That same pattern seems possible going forward with 1% daily SPX upside volatility. Too much excitement for a non-alcoholic that still has a full head of non-grey hair lol

TS

 

[Eric99]

From what I understand, Mav has Taleb's strategy correct. Tony Saliba (in 'Market Wizards', among other places) did similar things (short ATM, net long wings) and he was able to bring in theta most of the time yet profit from extraordinary events. His strategy was able to take advantage of rare upside events as well as the more well-known crashes.

Is this just leptokurtosis at work here? Overpriced options within 1 STD, underpriced beyond 2 STD? Not to take another thwack at the great expectancy debate, but would like to have Mav's comments on this. Note that if everyone know the distro is shaped this way, then Wall Street, with a few Cray computers in their respective basements, would have exploited the inefficiency way - again leaving zero net expectancy to pricing. Mav? Others?

 

[TrendSailor]

Quote from optioncoach:

...
As many here can attest I am 100% when it comes to placing partial hedges. everytime I put one on the market reverses and my short strike is safe. The market knows what I am doing and reacts LOL

I swear I had the exact same experience in October's wild bull ride when the bull run up forced me into an expensive out on an upside credit spread position. When the market turned sharply down and gave up 10 points in less than 2 hours I wrote a new credit spread 10 points higher than the original in an attempt to reduce losses. The market IMMEDIATELY reversed and chased me down with a 12 points spike to the upside in less than 1 hr and I ate another loss.

This market behavior suggests an underlying belligerent intelligence. But that has given me an idea. My idea is anytime I see one of my Iron Condor positions being assault on one side by the market I will immediately write a small contract parasitic spread position close to the marker but on the opposite side from the large spread that I want to close and escape from. The idea is to reduce the premium to close it out. Now if I can get the market to take the bait and go after that sacrificial position just long enough it should be a LOT cheaper to shut down the larger position that was previously under assault. It's the old toss a bone and see what happens escape strategy lol

Does this count as a valid risk management strategy if I can get a 50% success rate?

TS

 

[Sailing]

Gathering gamma curvature long before the outbreak to the up or down side.... would cure your problem. Now, getting that curvature will require trading skills.... not THETA skills.

M~

Quote from TrendSailor:

I swear I had the exact same experience in October's wild bull ride when the bull run up forced me into an expensive out on an upside credit spread position. When the market turned sharply down and gave up 10 points in less than 2 hours I wrote a new credit spread 10 points higher than the original in an attempt to reduce losses. The market IMMEDIATELY reversed and chased me down with a 12 points spike to the upside in less than 1 hr and I ate another loss.

This market behavior suggests an underlying belligerent intelligence. But that has given me an idea. My idea is anytime I see one of my Iron Condor positions being assault on one side by the market I will immediately write a small contract parasitic spread position close to the marker but on the opposite side from the large spread that I want to close and escape from. The idea is to reduce the premium to close it out. Now if I can get the market to take the bait and go after that sacrificial position just long enough it should be a LOT cheaper to shut down the larger position that was previously under assault. It's the old toss a bone and see what happens escape strategy lol

Does this count as a valid risk management strategy if I can get a 50% success rate?

TS

 

[RCMLLC]

You trying to sell more cheap gamma? Am I misinterpreting you?

Quote from TrendSailor:

...

My idea is anytime I see one of my Iron Condor positions being assault on one side by the market I will immediately write a small contract parasitic spread position close to the marker but on the opposite side from the large spread that I want to close and escape from. The idea is to reduce the premium to close it out. Now if I can get the market to take the bait and go after that sacrificial position just long enough it should be a LOT cheaper to shut down the larger position that was previously under assault. It's the old toss a bone and see what happens escape strategy lol

Does this count as a valid risk management strategy if I can get a 50% success rate?

TS

 

[TrendSailor]

Quote from RCMLLC:

You trying to sell more cheap gamma? Am I misinterpreting you?

Actually I was trying to make a joke here. I was casting the market in the role of a bad but intelligent attack (bull)dog who's trainers had taught it to optimally sweep out and devour all short positions within a plausible striking range to optimize premium for its masters. I was using the analogy of creating a relatively small but tasty dog biscuit (or a bone) to toss away from my larger position just on the other side of the market but at a much closer distance as an easy and tempting target for the bad dog. The whimsical notion was to get the bad dog to run the other way and give me time to close out my larger position for less debit as it temporarily ran the other way while I knew that once it ate the diversion it would come running back to eat my shorts. This whole thesis is based on the neurotic possibility that a market maker or largely capitalized hedge fund is manipulating the underlying (SPX) through intelligent trading which is optimized to use plausible random but high-sigma walks to take out as many winning positions as it could close to expiration (which was my particular scenario) by intelligently lengthening and shortening the dog's chain to efficiently attack all positions in a way that could only be perceived as really amazingly "bad luck".

This is mostly a joke but I think it is somewhat amusing and a deviantly creative form of risk management to construct a real-time hedge against the possibility of market manipulation by using a smaller but easier to reach position as the bait to change the market's short term course; all to open up a time window to escape larger positions. I'd try this just for fun except I am not sure I am really ready to accept what truth about this thesis that I might find.

One thing I have noted of late however is that there does appear to be a constant up/down sweeping motion/pattern in the SPX that would be quite effective at taking out relatively close to the money and moderately out of the money shorts on either side of any given day's current position that does not seem entirely random with respect to normal market patterns of motion. Of course a rational mind would have to conclude that this is all just "random" and any thoughts of intelligence behind the pattern must be contrived or neurotic right?

TS