SPX Credit Spread Trader

[uglyboy]

Quote from RichardRimes:

Re article-
Unfortunately what put me off is the phrase AFTER you sell the ATM straddle THEN you buy the wings. Totally not doable in a retail account.

I have been working very diligently on establishing condors/B-flys PRIOR to selling the FOTM as a hedge. The goal has been to do the B-fly for credit and the condor for tiny debit. Using the few days that do have movement I find I can do it on the put side but the call side is more difficult as the vols (premium) shrink when the market moves in your direction. Still a work in progress.

There is one more element to this option business that all you algorithmic/math/left brain types forget about. Constructing and managing options I believe (very strongly) also require the use of the "right" brain. There is a creative process involved and the ability of the right brain to develop, visualize and constantly evaluate depending on market movement /conditions is a critical part of option trading.

Perhaps this is what makes option trading so very difficult...it requires the use of the "whole" brain?

edit...snow is fantastic in all the rockies

As I understand you you:
1)Create fly
2)create condor
3)Buy FOTM?

Thats an interesting idea. Are you able to put up risk diagrams for your different stages?

I think in the OTM article they meant that you put the butterfly on essentially at once. I modelled this for a few months using optionvue and it looked okay. Obviously, if you could leg into it, or a condor successfully it would improve your expected outcome significantly - IF you're capable of legging well.

With respect to brains, I'd be happy just to have a full half of a brain. Very happy to here that the Rockies are getting good snow this year - I haven't skied there in a decade, might be time to try again.

 

[dagnyt]

Quote from uglyboy:

I think in the OTM article they meant that you put the butterfly on essentially at once. I modelled this for a few months using optionvue and it looked okay.
[/B]

If article's strategy of opening ATM butterflies apparently results in decent profits, how about combining this method with the previous discussion?

The question becomes, would a butterfly strategy provide better results if instead of centering the bfly ATM, one opened both a call and put bfly with the high priced wing being ATM?

Example: If SPX is 1400 and if one sigma = 50 points, then:

Buy 1400 straddle (NOT sell it as in magazine's methodology) and sell 2 1350 puts; sell 2 1450 calls, buy one 1300 put and one 1500 call.

The above position can be broken down into equivalents, but let's ignore that and consider the question: If buying both a call and put bfly, is it better to sell the ATM straddle, or buy it?

Haven't a clue, just wondering. (This is purely academic for me. I don't want to trade either methodology.) This does not 'feel' as comfortable as selling the ATM straddle. Can you model this in OptionVue?

Mark

 

[RichardRimes]

Yes, that is my visualization of it and sorry can't do the analysis/pretty picture pages very well and they aren't meaningful to me anyway. I absolutely do try to leg into them. Three ways to build them :

1) buy the debit spread time/price "looks", feels right.... give mkt some time to move in correct direction then add the credit spread.

2) unbalanced fly 2/5/3...for a credit. When theta has sufficently reduced the price of the credit spread...buy it back . (or part of it). You may have a debit spread paid for or at least a free fly.

3) Pg. or "broken wing" B-fly then if/when mkt moves you can manage it as in #2

I see building the "hedge" 60-45 days out then within the 30-45 day range place the FOTM CS.

A final way as Murray has stated is buying the calendar or diagonal then coverting to fly.

so far thats all I can think of...certainly not easily accomplished. You need good timing and cooperative market.

 

[uglyboy]

Quote from dagnyt:

If article's strategy of opening ATM butterflies apparently results in decent profits, how about combining this method with the previous discussion?

The question becomes, would a butterfly strategy provide better results if instead of centering the bfly ATM, one opened both a call and put bfly with the high priced wing being ATM?

Example: If SPX is 1400 and if one sigma = 50 points, then:

Buy 1400 straddle (NOT sell it as in magazine's methodology) and sell 2 1350 puts; sell 2 1450 calls, buy one 1300 put and one 1500 call.

The above position can be broken down into equivalents, but let's ignore that and consider the question: If buying both a call and put bfly, is it better to sell the ATM straddle, or buy it?

Haven't a clue, just wondering. (This is purely academic for me. I don't want to trade either methodology.) This does not 'feel' as comfortable as selling the ATM straddle. Can you model this in OptionVue?

Mark

This is a bit of what I've been looking at. It can be modelled in OV - I'll put it on the list. Either of these strategies will be somewhat dependent on your volatility forecast, which is an area I'm trying to sort out.

These are cool ideas, and I think that they are just a logical extension of the CS/IC strategy on this thread, but attempting to make rational use of local volatility.

Bill

 

[uglyboy]

Quote from RichardRimes:

Yes, that is my visualization of it and sorry can't do the analysis/pretty picture pages very well and they aren't meaningful to me anyway. I absolutely do try to leg into them. Three ways to build them :

1) buy the debit spread time/price "looks", feels right.... give mkt some time to move in correct direction then add the credit spread.

2) unbalanced fly 2/5/3...for a credit. When theta has sufficently reduced the price of the credit spread...buy it back . (or part of it). You may have a debit spread paid for or at least a free fly.

3) Pg. or "broken wing" B-fly then if/when mkt moves you can manage it as in #2

I see building the "hedge" 60-45 days out then within the 30-45 day range place the FOTM CS.

A final way as Murray has stated is buying the calendar or diagonal then coverting to fly.

so far thats all I can think of...certainly not easily accomplished. You need good timing and cooperative market.

Nice! I particularly like #3 - it fits well with a strategy I currently use with BWBs. Are you making fun of my kindergarten-like need for pictures?

 

[cohenmichaela]

Quote from uglyboy:

This kind of comment is totally un-needed. You obviously have some insight. Why not elaborate on the statistical matter at hand rather than trying to kill the discussion?

I'm not trying to be confrontational or abusive. I just thought the second question was a bit deprecating.

As for the first question my only insight probably isn't very helpful. The modeling (and distribution) in this discussion are based on flawed assumptions. This is known. There are mechanisms in the real-world that counter these flawed assumptions to create a market to customers with no real edge.

I personally haven't found any benefit in looking for an edge (or advantage) in option pricing flaws and inaccuracies. It's possible that I am not knowledgeable enough for this type of trading but I don't think many people can do this successfully (especially at the retail level) regardless of claims from the ET greats. IV will increase and decrease at the whims of the crowds but I don't believe they cause pricing inaccuracies. I think markets are always priced fairly at present value. If they aren't, then they will be so quickly it won't benefit me anyways.

I do think it is beneficial to learn about models, distributions, and there flaws however, I don't believe there are advantages to be gained directly from them. In other words, there's no free ride. I believe you still need a directional or volatility bias in the underlying to be profitable over the long term.

There was a recent thread regarding perceived vs. real edge. I found it very interesting...

 

[uglyboy]

Quote from cohenmichaela:

I'm not trying to be confrontational or abusive. I just thought the second question was a bit deprecating...

....I do think it is beneficial to learn about models, distributions, and there flaws however, I don't believe there are advantages to be gained directly from them. In other words, there's no free ride. I believe you still need a directional or volatility bias in the underlying to be profitable over the long term.

There was a recent thread regarding perceived vs. real edge. I found it very interesting...

No problem, I apologize. My two-finger typing style sometimes makes me out to be a bit of an ass (or even more of one perhaps). I can see why it might have sounded that way.

I agree with your comments about fair pricing at any current time, and I completely agree that if you are retail, trying to capture any ephemeral "discrepancy" is not going to be effective. I'm certainly not going to find an anomaly that the thousands of PhDs and quants working full time in this area haven't found and killed.

You're right, you still have to predict volty or direction to win. I brought up these "academic" issues simply because a deeper understanding is always good (and kind of fun). It may not help you find a winning strategy, but it may help you avoid a losing one?

 

[uglyboy]

Quote from cohenmichaela:

There are mechanisms in the real-world that counter these flawed assumptions to create a market to customers with no real edge.

I think that this is a really interesting reality. We (i.e. model users) have consistently ignored more complex models that are more "accurate", in favour of the BSM model with some somewhat "ad hoc" additions to help it match reality better. I find it remarkable that such a simple formula is so powerful.

 

[ryank]

Quote from dagnyt:


Haven't a clue, just wondering. (This is purely academic for me. I don't want to trade either methodology.) This does not 'feel' as comfortable as selling the ATM straddle. Can you model this in OptionVue?

Mark

Is this what you are looking for? If I've got it right, this doesn't look that good.

 

[cohenmichaela]

Quote from uglyboy:

I think that this is a really interesting reality. We (i.e. model users) have consistently ignored more complex models that are more "accurate", in favour of the BSM model with some somewhat "ad hoc" additions to help it match reality better. I find it remarkable that such a simple formula is so powerful.

Agreed. I think simplicity is its benefit. Regardless of how complex the models and statistics become we still can't model human behavior without flaws. Therefore it is easier and more effective to account for those flaws in a catch-all (volatility) than it is to solve them.

To further your point on the benefit of understanding models I recently finished reading Neil Chriss' "Black-Scholes and Beyond" which speaks to BSM and the modern pricing models it has spawned. I recommend it. It has certainly given me a greater awareness (both in theory and practice) of option pricing however, nothing to exploit directly for profit.

Back to your point I agree that it is always beneficial to gain as much knowledge as possible for the subject one is engaged in even if it doesn't carry a direct impact.