thinkorswim
Interactivebrokers
Optionsxpress
Beginners go at their own risk and not recommended
Interactivebrokers
Optionsxpress
Beginners go at their own risk and not recommended
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SPX Credit Spread Trader
- Thread starter El OchoCinco
- Start date
Quote from dagnyt:
Hi,
The CTM spread will lose big time (from this point forward) before the other spread loses.
Mark
I don't want to draw this discussion out because it has all been discussed before but this statement isn't totally correct. In this discussion the effects of time cannot be overlooked.
IF...
.....there are 36 days till expiry and you've just opened two SPX credit verticals (SPX @ 1415).
10 1430/1435 calls @ $2.30
46 1470/1475 calls @ $0.50
Profit potential is the same, but absolute risk is of course higher on the further OTM. If there is a 20point jump tomorrow, you'll have lost about $700 on the CTM spread. OTOH, you'll have lost about $2000 on the FOTM spread. Paper losses are still losses.
So in that case the FOTM loses money faster. But.... if 28 days passes and the underlying is relatively unchanged you'll be sitting on a gain in both positions. With only a week left till expiry if there was a 20 point jump in the underlying, the CTM spread would show a loss of about $600, where the FOTM spread would still show a gain.
I would caution anyone against getting in the habit of thinking that FOTM spreads lose money slower than CTM spreads.
Quote from Fay:
are you guys trading the SPX cash or futures? i know on the cash market you can't play a condor with a one side margin requirement as opposed to futures you will only need margin for either call side or put side...
A good broker will only require margin on one side of the condor regardless of whether it's cash or futures.
Quote from Cache Landing:
I don't want to draw this discussion out because it has all been discussed before but this statement isn't totally correct. In this discussion the effects of time cannot be overlooked.
The discussion was not meant to encompass the whole world of option trading. We were comparing 2 spreads that expire in 6 trading days (+SET)
I agree totally that is is often a much better stratgy to sell fewer spreads closer to the money than a greater number further out. But that was not the point here.
I stand by my statement regarding the Jan positions: The Jan 770/760 will show a huge loss before the 740/730 is threatened.
I would caution anyone against getting in the habit of thinking that FOTM spreads lose money slower than CTM spreads.
Agree. And I also agree that paper losses are real losses. But, I caution anyone not to try to make statments made about a position near expiration and extend them to positions with a much greater lifetime.
Mark
Quote from dagnyt:
Quote from Cache Landing:
I don't want to draw this discussion out because it has all been discussed before but this statement isn't totally correct. In this discussion the effects of time cannot be overlooked.
The discussion was not meant to encompass the whole world of option trading. We were comparing 2 spreads that expire in 6 trading days (+SET)
I agree totally that is is often a much better stratgy to sell fewer spreads closer to the money than a greater number further out. But that was not the point here.
I stand by my statement regarding the Jan positions: The Jan 770/760 will show a huge loss before the 740/730 is threatened.
I would caution anyone against getting in the habit of thinking that FOTM spreads lose money slower than CTM spreads.
Agree. And I also agree that paper losses are real losses. But, I caution anyone not to try to make statments made about a position near expiration and extend them to positions with a much greater lifetime.
Mark
I agree with your remarks unless the person is opening both spreads with only 6 days till expiry. What I said only holds true if the positions were open earlier and time has elapsed.
If the positions are just now being opened then the FOTM spread loses the advantage and now loses money faster on an big adverse move. That will generally be the case. An FOTM spread requires greater leverage to make the same amount of money. Leverage = faster losses.
Quote from Cache Landing:
... Paper losses are still losses.
...
I would caution anyone against getting in the habit of thinking that FOTM spreads lose money slower than CTM spreads.
Just another perspective:
I don't trade to optimize every $1 of my available trading margin like some others here do. So paper losses do not mean a lot to me if my position sentiments remain good. In fact, as a front month trader I usually have to wait till the 3rd week (in 4 week expiration period) in an ideal market (e.g. sideways motion for the iron condor) to see the first real signs of life of a paper gain. If I focused on paper losses in the first few weeks I'd go crazy over all the the red in my trading ledger resulting from obscenely wide B/A spreads resulting in thinly traded far OOM positions. Contrary to expectation it can even worsen paper losses as the position improves. There is always some joker who managed to pay a premium on a a wild trade at your long strike to kick up prices on a single contract trade. That will drive first time credit spread traders insane with worry.
What I focus on is the motion and volume of the SPX relative to my expectations and especially any scheduled or unscheduled macro level events/news.
Frankly, my pragmatic challenge with credit spread trading is in trying to get out early on WINNING positions. When I am on the right side of the market it can be very challenging to get enough trading volume and interest in the wide b/a spreads at anything close to exit profitable exit debits. That can make owning IC positions a real love-hate relationship when one is winning and wanting to suck out earned equity early to move on. Normally one must pay an hefty extra trading premium off center (e.g. toward the debit side of the trade) of the B/A to get out early with winning positions.
This is why I tend to play only front month and try to do all my trading and risk management up front and leave it the hell alone when I can. Due to trading overhead my adjustments are normally limited to opportunistically adding to positions on short IV runs or partially or fully closing them when expectations or news begin to change. This trading constraint is also the pragmatic reason why I am comfortable usually holding through expiration on my wins even when they begin to form very early.
Its emotionally difficult to give up 10-20% to slippage on winning a credit spread to get out early as it is and my bias is to look for expiration to normalize that effect (considering SET variability). But sometimes you just got to pay the MM a very hefty premium as the only way to get out of a winner early on an "all or none order" formed around a position with a substantial number of open contracts.
Seeing red paper losses is a way of life for front month credit spread traders even when winning...
TS
IF...
.....there are 36 days till expiry and you've just opened two SPX credit verticals (SPX @ 1415).
10 1430/1435 calls @ $2.30
46 1470/1475 calls @ $0.50
Profit potential is the same, but absolute risk is of course higher on the further OTM. If there is a 20point jump tomorrow, you'll have lost about $700 on the CTM spread. OTOH, you'll have lost about $2000 on the FOTM spread. Paper losses are still losses.
Does it really matter if the FOTM spread "loses" on paper by a relatively small adverse move? The CTM spread guy now has to pray to the Market Gods that the index will reverse and go back in his favor, while the FOTM guy just has to wait for expiry. I think CTM is great if you're an expert at TA and prediciting market direction, but for the rest of us...FOTM works really well.