SPX Credit Spread Trader

Quote from Maverick74:

Remote Market Makers are members of an exchange and on a seat and pushes quotes through the exchanges. A remote trader is just someone that trades from a remote location. Huge difference.
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Mav,

I knew they are exchange members. Do they have to supply both bid and ask for each quote? More specific, what advantages do they have over remote traders beside commissions?

Just want to let you know. I have changed from a pure naked writer to a bounded gamma trader. I appreciate if you will continue to contribute your knowledge to benefit those who will listen and learn.
 
Quote from segv:

I think this will be very illustrative.

Assuming the SPX is at 1385, what is the $risk of holding one short 1385 combo versus owning a $equivalent amount of SPY at -1/2/3 sigma? Which position would you prefer to own and why?

-segv
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Well segv, you are the only person on here who has given me an example to work with. Jeffm apparently did not want to self incriminate himself. LOL. Smart move on his part actually.

Selling the ATM combo is a hard delta bet. You are basically long half the equivalent underlying position. This position will outperform the SPY position with the same number of contracts all the way down and underperform it all the way up.

The difference will present itself more clearly if we adjust for margin. In other words, if we sell the same marginable amount of combos as to the SPY shares.

Now we are talking a completely different story as the combo will provide considerable more risk. So let's use real world numbers shall we?

Let's say we bought 1,000 shares of SPY at the current closing price of 138.58 for a margin of 69k. Now let's construct a position that has a similar margin amount using the SPX options. BTW, SPX is more restrictive then ES options which uses Span margin, which I will also compare.

Long 1000 SPY (margin 69K) at 1215.00 = 17k loss
short 2 SPX ATM DEC straddles (55k margin) at 1215.00 =27k loss

Short 4 ATM DEC ES straddles ( 69k) span margin at 1215.00 =136k loss!!!!!

These are using real numbers folks. So what is the point to this demonstration. If we compare the risk of owning the underlying to the naked option position with the SAME margin, you can get an idea of how the risk gets leveraged substantially on a selloff.

The best position to own in this example would be the long 1000 SPY. It carries the largest upside vs the risk taken.
 
Mark and Sailing,

How are your diagonals holding up for Nov? I'm sitting in a pretty good spot right now, will probably jump out sometime before expiration but not sure when. If market drives higher based on CPI or PPI then I am out, I have a short at 1400. A dip with a vol increase would be a bonus! I've kind of got a Goldilocks position right now, I want the market to go up or down a little but not too much, move just right :). I'm just starting my search for Dec positions. Mark, you are probably looking at Jan positions at this point aren't you?
 
Quote from yip1997:

Mav,

I knew they are exchange members. Do they have to supply both bid and ask for each quote? More specific, what advantages do they have over remote traders beside commissions?

Just want to let you know. I have changed from a pure naked writer to a bounded gamma trader. I appreciate if you will continue to contribute your knowledge to benefit those who will listen and learn.
More...

Yes, they are required to make a market in every stock they are assigned. They usually have 20 to 30 stocks in their bin. They have to quote a continuous market. They are usually bidding and offering a vol level. This is not the same thing as trading remote. A RMM is obligated by the exchange to make a market all day every day in his/her chosen stocks. They have to lease a seat for 5k a month on the CBOE for example and pay about 2,500 a month for the quoting software. So their overhead is 7,500 or so. The remote trader can trade any product he wants, does not have to make a market and has almost no overhead. They really are two totally different fields.
 
Mav,
First, thank you for being here—and keeping us all honest.

Do you know if the SEC will follow through on plans to allow (a total) risk-based margin on retail accounts. A WSJ article by Mohammaed Hadi, (from sep 23rd) mentioned these plans, but I haven't seen anything passed that.

Many thanks

Ben

Quote from Maverick74:

Well segv, you are the only person on here who has given me an example to work with. Jeffm apparently did not want to self incriminate himself. LOL. Smart move on his part actually.

Selling the ATM combo is a hard delta bet. You are basically long half the equivalent underlying position. This position will outperform the SPY position with the same number of contracts all the way down and underperform it all the way up.

The difference will present itself more clearly if we adjust for margin. In other words, if we sell the same marginable amount of combos as to the SPY shares.

Now we are talking a completely different story as the combo will provide considerable more risk. So let's use real world numbers shall we?

Let's say we bought 1,000 shares of SPY at the current closing price of 138.58 for a margin of 69k. Now let's construct a position that has a similar margin amount using the SPX options. BTW, SPX is more restrictive then ES options which uses Span margin, which I will also compare.

Long 1000 SPY (margin 69K) at 1215.00 = 17k loss
short 2 SPX ATM DEC straddles (55k margin) at 1215.00 =27k loss

Short 4 ATM DEC ES straddles ( 69k) span margin at 1215.00 =136k loss!!!!!

These are using real numbers folks. So what is the point to this demonstration. If we compare the risk of owning the underlying to the naked option position with the SAME margin, you can get an idea of how the risk gets leveraged substantially on a selloff.

The best position to own in this example would be the long 1000 SPY. It carries the largest upside vs the risk taken.
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Quote from Maverick74:

Are you sure you have that right? The odds of getting killed are actually higher in the car then the plane. You want to re-phrase that?
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The ratio of car vs. airline fatalities is 240:1 over the last 60 years. I can assure you there is more than 240x auto drivers/passengers than airline travelers. Airline safety is a fallacy. The majority of car accidents do not result in fatalities. The vast majority of airline accidents result in fatalities. Something on the order of 95%.
 
Quote from polecanthus:

The ratio of car vs. airline fatalities is 240:1 over the last 60 years. I can assure you there is more than 240x auto drivers/passengers than airline travelers. Airline safety is a fallacy. The majority of car accidents do not result in fatalities. The vast majority of airline accidents result in fatalities. Something on the order of 95%.
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Sorry Riskarb, the stats do not confirm that.

http://www.umtri.umich.edu/content/rr33_3.pdf
 
Diagonals are doing well. PLaced a 1375 Put Calendar in between the 1325 and 1400 short strikes.

Currently 5K return on about 28K.

Looking to exit on any VOL spike going into expiration.

M~



Quote from ryank:

Mark and Sailing,

How are your diagonals holding up for Nov? I'm sitting in a pretty good spot right now, will probably jump out sometime before expiration but not sure when. If market drives higher based on CPI or PPI then I am out, I have a short at 1400. A dip with a vol increase would be a bonus! I've kind of got a Goldilocks position right now, I want the market to go up or down a little but not too much, move just right :). I'm just starting my search for Dec positions. Mark, you are probably looking at Jan positions at this point aren't you?
More...
 
Quote from Maverick74:


Let's say we bought 1,000 shares of SPY at the current closing price of 138.58 for a margin of 69k. Now let's construct a position that has a similar margin amount using the SPX options. BTW, SPX is more restrictive then ES options which uses Span margin, which I will also compare.

Long 1000 SPY (margin 69K) at 1215.00 = 17k loss
short 2 SPX ATM DEC straddles (55k margin) at 1215.00 =27k loss

Short 4 ATM DEC ES straddles ( 69k) span margin at 1215.00 =136k loss!!!!!

These are using real numbers folks.
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Thanks Mav for taking the time to walk through the example. I was originally asking for 1 short ATM SPX combo versus long 1000 SPY shares to highlight the point that they are $risk-equivalent different payoff structures. Your point about leverage is very important, but leverage is another factor. Selling un-leveraged naked combos might be a perfectly valid means of creating enhanced risk-adjusted returns, who is to say? But "naked" does not amount to "blow-up".

-segv
 
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