SPX Credit Spread Trader
- Thread starter El OchoCinco
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A good question would be what are you trying to accomplish by using different distributions?
The effort of finding a more accurate (accurate to real) distribution would flatten the skew and possibly expose a market opinion that is different from the projected (and "maybe" more accurate) distribution.
The only question then is, who is right? The market or your distribution? Certainly there are possibilities here but this still draws back to the perceived edge vs. real edge discussion.
What is the right price? When everyone thinks it is x, the price will be x forever with very little change because of the arbitrage. Everyone will jump in to buy it when it is a lot below x, and to sell it when it is a lot above x. Same thing happens to option pricing. Since everyone believes in the efficient option pricing, the option price agrees very closely with the theretical price. If you buy and sell the options (though not in the same time), you won't make money because the market is efficient.
Suppose I know the "true" price, I won't make money because there is no sellers below the market "perceived" price, and no buyers above the market "perceived" price.
There actually are no "perceived" edge, but "perceived" price.
In fact, I have explained what you should do if you know the "real" distribution.
I'm not following your logic. Market prices are for the moment, they are not static. If you know the "true" value of an option (volatility and distribution) and the present market price differs (either more or less expensive) then surely there are ways to profit.
It's a moot point regardless as I believe knowing the "true" value of an option is not possible unless in hindsight. Due to this fact, in my opinion any model output that differs from current market price is indeed a perceived edge. I do think people can be profitable with a perceived edge but it's important to realise that these individuals are indeed taking a directional or volatility based position. It is this position that is likely profitable and not their perceived edge in option pricing.
Sorry to hear about your hand injury. How did such an inconvenient encumberance manifest itself? I hope you did not relinquish being master of your domain to the dark side.
Quote from MechTrade:
Due to a hand injury, I often times "shortcut" the quoting process by skipping ths Shift key. But it is not a big deal for me to make the effort.
Sounds like good words of wisdom. I find that sometimes "keeping costs low" means not entering a position at all till the premium improves or it means resisting closing out a position too early just to be "ultra safe". I'll personally take a wee bit of risk on a winning position now and then when its close to expiration and the underlying just starts to turn threatening without opening a hedge or closing it early.
I find that my personal threshold of indifference and tolerance is about a dime per contract. No matter how far out of the money I am if I can get out a week or two early for under a dime net debit I'll generally take it if the market has been directionally testing with 5-10 points probes. But since I am fundamentally selling time I try to rely on the time burn relationship and will generally let a position ride when remaining credit per contract is at least .15. That is, when I am at least 15-20 points out of the money to the underlying (relative to SPX).
I am learning a lot here and looking into some of the other ideas presented by others. But I find that setting up a simple condor credit spread can take a lot of "time in the saddle" work. It was "fun" up till when I had my first large loss. Now its "work".
I don't know about the rest here but with all the SPX up-down action I am often physically exhausted at the end of the day trying to get in each period (deodorant is a must). Therefor I am not sure I have the luxury of time nor the stamina to spend yet more time squeezing out a bit more credit or seriously entertaining some of the more complex and advanced strategies that sound like more work. Frankly there is a risk-reward inflection point in trying to optimize and squeeze out credit verses missing an entry just for an extra nickle or a dime of credit. But percentage wise that is indeed sometimes huge when VIX is down like it was not long ago. But I think its fundamentally a matter of nickles vs. dimes though and not a nickles vs pennies game.
I do however feel like I really earn every nickle of what I can squeeze into the small credit premiums through hard work and fast order adjustments to changing market circumstances. I also do a lot of offline work in technical analysis as well as macro economic research etc. to make it comfortable enough for me to enter each period. It's real work and I consider that time as part of the cost as well. Since I am selling time I therefore want fair compensation for ALL of my time. I have a target average $/hr rate in mind for philosophical, ego satisfaction & lifestyle reasons. My yardstick is how much I use to earn in corporate America working $60hrs/week. But the pragmatic truth is sometimes "some" premium is better than none when VIX is lean and every premium seller is in a famine situation. I'm not yet good enough at the long game to reliably make a living at it when short premiums are low.
I'd be interested in knowing how long it takes some of you others to get in at a "good price". Sometimes it can take me only minutes or hours. Other times it can take be up to 2 weeks to get a favorable market swing and a favorable IV spike to get into a "reasonable" IC position. Legging in seems like as much an art as it is a skill but due to margin requirements that usually means its too risky to step in short first and just accept the compromise on forming one side of the full spread all in one trading motion . So now I just often "average in". I'll also admit that sometimes the market and trading volume herds me toward a different strike that what I originally intended. So as a front month trader, due to time erosion I will sometimes capitulate to "market flow" if I am not "in" within 7-10 trading days into the front month. I swear its a lot like surfing crappy choppy waves at the beach down here in FL - but we do what we can for the current conditions.
All I know is since I am working toward a monthly income bogey I personally can't rest till I can get legged in properly each front month options period. But after I am in the entire tone changes over to "mother hen" mode. That's a different game since its watch over and defending the nest eggs to get them through incubation; sometimes triage to necessary salvage half the nest.
But during the incubation period there is often time for fun
and that's when I'll try some of the low-risk low-effort "fun things" to pass the time (e.g. like buying a block of really low priced lotto tickets on an underlying I know well and think has a reasonable shot at coming in). This fun unfortunately more often than not erodes the net thin premium - but what the heck, there is a cost to entertainment.
I did want to mention that with a "mother hen" diligence I feel that the many of the condemnations of large "margin at risk" vs. cheap gamma of credit spreads are manageable in 98% of the cases. So I strongly agree with OptionsCoach that risk management is a huge huge part of it. But it can be "hard work". Also, what some of us lack in "trading skills" and in the size of our bag of tricks we can often make up for in perspiration, diligence, single focus and iron will to succeed and risk mitigation. For example I already learned an expensive lesson early on about position sizing for the 2% fat tail events. That truth is simply to not have too large a position in any particular options period. This precludes a non-recoverable account wipe out during a fast moving market cascade event that is physically impossible to efficiently manage in real-time. It also represents a balanced and deliberately thought out opportunity loss.
But it would really be nice if some brokerage or the CBOE invented a "guaranteed" stop-loss limit order/option and charged a reasonable trading premium so I could leave the nest egg on auto pilot now and then. Then life would be very easy and low stress indeed and I could just about count on a steady paycheck each month from those hedging or taking lotto tickets on fat tails and putting out the negative juju newsletters and news stories on the SPX to torment us and test our metal.
TS
Sorry i didn't make my point clear. For example, What is the right price for a book?
suppose everyone thinks the price of a book = 0001*no_of_pages*cost_of_paper_per_ton
If I buy a book now and want to sell it for a profit in the future, I am betting on the cost_of_paper_per_ton to increase. At any point in time, there is only one "right" price. Nobody will buy above the "right" price, and sell below the "right" price. So the "right" price is a perceived price, or market expectation price.
Same thing happens to the option premium. If one thinks it should follows the BS model, a trader is betting on the volatility or direction if he buys an option and sells it in the future.
However, the payoff at expiration doesn't depend on volatility. It depends on the price and the strike. If one holds the option without closing it, it is betting on the probability of the option expired in the money different from the "perceived" probability. In other words, if you know the "real" distribution of the stock instead of the market expected distribution of the stock, you should never close your option. Of course nobody knows the future distribution, and so I want to use the historical distribution (i.e. statistics) to give meself a "perceived" edge.
I don't know if anyone can follow my logic. I am just trying to explain a strategy I will trade if I know the historical distribution. Anyway it might not be very helpful to anyone, and so I'll stop here.