SPX Credit Spread Trader

[dagnyt]

Quote from kalikahuna:

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.

I agree to a point. I am much more comfortable with positions that are not too close to the money. Each trader must find his own comfort zone.

But, be careful here: "just waiting for expiry" can be very dangerous. Not saying that the 20 point move requires that the spread be adjusted. Just stating that "gutting it out" is occasionaly very costly.

And I know from exprience. During the 70s and 80's I held huge positions, waiting and waiting. Made lots of money. But, on more than one occasion, I held until all my money had disappered.

Finally, now that I am trading much smaller positions, I know better.

Mark

 

[El OchoCinco]

good discussions for others to review for understanding of different viewpoints in risk tolerance and management.

And as was said before, a credit spreader has to live with red ink in their account until they close their position due to wide SPX bid/ask spreads lol.

 

[dagnyt]

Quote from optioncoach:

...And as was said before, a credit spreader has to live with red ink in their account until they close their position due to wide SPX bid/ask spreads lol.

True, but TS (as usual) was way off the mark. When I state that paper losses are real, I am not talking about bad marks. I am talking about losses resulting from an adverse movement in the price of the underlying.

True, waiting it out can solve all problems involving paper losses (Unless there is a margin call). Or it can compound them.

Mark

 

[El OchoCinco]

well what I meant was more lighthearted that sometimes my spreads will show a $30,000 loss on paper with the index moving maybe 10 points towards my spread which is still 75 points OTM.

I try real hard to ignore the paper values and focus on where the index is since OX might take the actual b/a to close the spread which is way off lol.

Quote from dagnyt:

True, but TS (as usual) was way off the mark. When I state that paper losses are real, I am not talking about bad marks. I am talking about losses resulting from an adverse movement in the price of the underlying.

True, waiting it out can solve all problems involving paper losses (Unless there is a margin call). Or it can compound them.

Mark

 

[Cache Landing]

Quote from dagnyt:

I agree to a point. I am much more comfortable with positions that are not too close to the money. Each trader must find his own comfort zone.

But, be careful here: "just waiting for expiry" can be very dangerous. Not saying that the 20 point move requires that the spread be adjusted. Just stating that "gutting it out" is occasionaly very costly.

And I know from exprience. During the 70s and 80's I held huge positions, waiting and waiting. Made lots of money. But, on more than one occasion, I held until all my money had disappered.

Finally, now that I am trading much smaller positions, I know better.

Mark

That's all I was trying to say. You can't just say that you'll wait it out all the time. A big adverse move the day after you open a position just created a really bad situation for you. A position that already had a slight negative expectancy now has a huge -expect. Your FOTM spread that only had a 10% chance of going ITM, now has a 30% chance. The CTM spread once had a 40% chance of going ITM, but now has a 70% chance of staying ITM. Personally I'll take a 70% chance of losing $2,500 over a 30% of losing $20,000. In a nutshell, if the underlying makes a big adverse move within a day or two of opening the position. The -expect jump is much larger on the FOTM spread.

If two spreads are 40 points apart and the CTM one goes 20 points ITM a week from expiry, sure the trader is praying for a reversal. But I would suggest that the OTM guys is praying just as hard for one, because at that point he is sitting on a loss that is about 4X bigger than the CTM guy's loss. IMO, this situation is one in which the FOTM guy is on the wrong side of the curve. As the underlying moves, he is losing money quickly and making money slowly. The CTM guy is losing money slowly and making money quickly on the same price action.

 

[cdowis]

Newbie mistake.

Opened a calendar spread on MA. Did not realize how wide the spread was, and saw a paper loss of 50 cents on the very first day and got out.

It was a still a very sound position.

Newbie panic over paper losses.

 

[piccon]

I am with you Cache. I observed it last 2-3 days. That's where came my explanation.

I I am not good at the Greeks stuff but I know I prefer loosing in a ITM trade than a FOTM. If I can lose 7.5K, I will take it everyday than waiting to lose 20K.

That's my third month of combining ITM, CTM OTM strategies and so far I am not disappointed.

Quote from Cache Landing:

That's all I was trying to say. You can't just say that you'll wait it out all the time. A big adverse move the day after you open a position just created a really bad situation for you. A position that already had a slight negative expectancy now has a huge -expect. Your FOTM spread that only had a 10% chance of going ITM, now has a 30% chance. The CTM spread once had a 40% chance of going ITM, but now has a 70% chance of staying ITM. Personally I'll take a 70% chance of losing $2,500 over a 30% of losing $20,000. In a nutshell, if the underlying makes a big adverse move within a day or two of opening the position. The -expect jump is much larger on the FOTM spread.

If two spreads are 40 points apart and the CTM one goes 20 points ITM a week from expiry, sure the trader is praying for a reversal. But I would suggest that the OTM guys is praying just as hard for one, because at that point he is sitting on a loss that is about 4X bigger than the CTM guy's loss. IMO, this situation is one in which the FOTM guy is on the wrong side of the curve. As the underlying moves, he is losing money quickly and making money slowly. The CTM guy is losing money slowly and making money quickly on the same price action.

 

[aa35360]

Quote from kalikahuna:

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.

The TOS guys who favor closer to the money wingspreads do so not because of an ability to predict market direction, but because the larger credit allows one to tolerate more pain as the underlying bounces around.

Personally I sweat paper losses more than real ones after closing a position because I know that the paper ones can continue to grow. The larger credit lets me more objectively view my position, and decide based on movement in the underlying, support/resistance points, etc whether I should stay in the trade or not.
Having been cut by the short gamma knife a few times, I prefer to sell expensive premium to compensate myself for this pain.
ST

 

[rallymode]

Quote from aa35360:


Having been cut by the short gamma knife a few times, I prefer to sell expensive premium to compensate myself for this pain.
ST

Thats a great line of thinking, keep following it in your trading and you will do fine. Lower chance of a strike being ATM/ITM doesnt translate to low risk. Anyone who tells you otherwise should not be listened to.

Only new/bad traders sell cheap gamma and think their are safer.

 

[dagnyt]

Quote from rallymode:

Hi Rally,

Your reasoing is sound, but, I believe you make unwarranted assumptions that lead to erroneous conclusions.

Lower chance of a strike being ATM/ITM doesnt translate to low risk.


Your conclusion is based on the assumption that those who trade FOTM spreads sell a greater number of spreads than those who sell CTM spreads. If that were true, I'd agree with your conclusion.

I can only speak for myself, but: I sell the same number of spreads regardless of how far out of the money they are.

I dedicate a certain amount of margin to my DD strategy. I try to be fully invested at all times. To minimize risk, I sell spreads that are further OTM. What's wrong with that?

I find I have a good chance to meet my earnings goal each month with this method. I am not going to sell closer to the money spreads in an effort to make more money. And although you might argue that selling fewer CTM spreads is a better strategy, but it's not for me. It does not fit my comfort zone. I don't like managing those spreads. I don't like the fact that they go ITM much more often. I don't believe I can predict market direction correctly, so I would never know which CTM strikes to choose. I select strikes that are far enough OTM to give me the potential to meet my monthly objectives. If premium is lower in some months, that's ok. I don't force anything, but take what the market offers. Besides, with diagonals, I never know the profit potential of a position. Those who choose to sell vertical spreads know the maximum they can make. I can do much better, but never know how much better in advance.

In my situation, further OTM spreads are very much less risky than closer the money spreads. In any reasonable move short of a market collapse, my FOTM spreads lose less money than an equal number of CTM spreads. To me, that means they are less risky.

Anyone who tells you otherwise should not be listened to.

An angry statement from an otherwise rational contributor.

Only new/bad traders sell cheap gamma and think their are safer.

You are not correct, if the portfolios you are comparing contain an equal number of spreads.

Mark