SPX Credit Spread Trader

Thanks, Mark. That's very interesting. Two things of further curiosity for me.... The 'extra calls' - I know you buy upside curvature that way but doesn't buying extra calls overwhelm the smallish credits taken in? Are they really needed given your "close at short strike" risk management? And why not buy extra puts as well?

This fall/winter was probably an interesting test case for your strategy. Did you have any issues with that rally? With the rally, you must have been a) closing lots of spreads early and b) establishing new spreads at increasingly favorable volatility levels. How did that work out?

On the downside, I see more risk. You have wider spreads, thus more absolute risk and lower vega. Downside moves are faster. And if you continue to establish additional put spreads, you'd be doing it at unfavorable volatilities.
 
Quote from Eric99:

.... The 'extra calls' - I know you buy upside curvature that way but doesn't buying extra calls overwhelm the smallish credits taken in? Are they really needed given your "close at short strike" risk management?

They many not be needed in a vacuum, but I prefer the insurance. And there is a bonus to owning the extras. I can continue to sell call spreads on continuing rallies because I have a (false??) sense of security from the extras.

They do not overwhelm the credit. When buying extras, my longs go one strike further out. Thus, a 30-point wide spread that I normally do 1:1 I now do the 40-point spread on some ratio - but always for cash credit. Yes, the downside profit potential is reduced per margin dollar, but that's the price I pay for insurance.

And why not buy extra puts as well?

IV just too high for me. And the cheap dollar options are so far OTM that I am unwilling to pay the price for catastrophe protection.

This fall/winter was probably an interesting test case for your strategy. Did you have any issues with that rally? With the rally, you must have been a) closing lots of spreads early and b) establishing new spreads at increasingly favorable volatility levels. How did that work out?

It worked out great. But that's because I was lucky enough to never have to close a spread for a loss. Not claiming any skill in strike selection - just lucky that every short remained OTM.

On the downside, I see more risk. You have wider spreads, thus more absolute risk and lower vega. Downside moves are faster. And if you continue to establish additional put spreads, you'd be doing it at unfavorable volatilities.

True. But I sell fewer put spreads and the cash credits are higher. Bottom line: I am exposed to a big selloff.

Mark
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Yipp,

I wasn't trying to offend you. I thought you were trying to enter a
Bull PUT to protect a call vertical 800/810 or 810/820. What I meant in my original message, If you are trying to adjust every time the market moves against you, you will be saturated wiyh positions. But if you trade with good indicators, you tend not to panic when the market moves against you.

Yesterday I wanted to enter some 800/810 calls but my indicators were not there yet so I decidede to stay out. It was 3:30 when I had a signal So I decided to enter 2 RUT 800/810@2.60.

You see, even tough the market was beaten up, I decided to enter but small.

I am just trying to understand your concept and learn from you too.


Me I try to enter on signals, You on guts or outlook, I am trying to understand your technics.

Sorry, if I hurt your feelings


Quote from yip1997:

piccon,

I didn't get my 780/770 fill. Instead, I opened a put diagonal Apr/Feb 760/790.

My portfolio was negative delta, with negative gamma. The negative delta was so big that I was uncomfortable and was worried that the market would continue move up (no confidence with my directional outlook). If the 780/770 vertical was opened, my delta would be reduced to a very comfortable level. When IV went lower, I decided to open a put diagonal that would reduce the delta a little bit, but bet on an increase on IV.

Today the market went back to my initial outlook. Though my hedge (put diagonal) did lose half of the value in one day, I am happy with my decision made yesterday.

I can't predict the market well, and so I hedge my book when necessary regardless my directional outlook. I like my hedging strategy and it serves me well.

I am learning to predict the market, but I will continue to use my adjustment strategy to protect myself from big loss.

[edit] I did look at 790 call calendar or put calendar as a potential candidate for betting on IV. Didn't understand the synthetic well enough to open the trade.

http://www.elitetrader.com/vb/showthread.php?s=&threadid=85504
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Quote from piccon:

Yipp,

I wasn't trying to offend you. I thought you were trying to enter a
Bull PUT to protect a call vertical 800/810 or 810/820. What I meant in my original message, If you are trying to adjust every time the market moves against you, you will be saturated wiyh positions. But if you trade with good indicators, you tend not to panic when the market moves against you.

Yesterday I wanted to enter some 800/810 calls but my indicators were not there yet so I decidede to stay out. It was 3:30 when I had a signal So I decided to enter 2 RUT 800/810@2.60.

You see, even tough the market was beaten up, I decided to enter but small.

I am just trying to understand your concept and learn from you too.


Me I try to enter on signals, You on guts or outlook, I am trying to understand your technics.

Sorry, if I hurt your feelings
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piccon,

I don't feel your message offensive. I am trying to learn from you so we continue our discussion here. It is great to discuss different ideas (though I am not a great trader yet).

In the beginning of the month, I usually open positions (usually with ratioed diagonals) to give me about 3 to 5% of my portfolio as my monthly income. Once I have my income trades, I will try to [/B]control my risk[/B] and adjust my positions if necessary (I usually don't adjust to delta neural). I don't expect to make money with these adjustment trades.

My bottom line is to have around 2% to 5% as my return with a very tight risk control. This tight risk control allows me to stay in the game without any big loss.

I don't have 800/810 verticals. I have Feb 790, 800, 810 short calls protected by many long calls at back months (similar to the Marks' diagonal with extra calls). The difference is the selection of short strikes. I tried in these 2 months to open CTM short calls instead of OTM short calls. I can open CTM short calls with smaller size to get the same credit for OTM short calls with larger size. The main reason is the margin requirement. By opening short calls with smaller size, my margin requirement is smaller.

In short, I don't open my position by guts. I think my strength comes from tight risk control and leverage (or margin) management. I am trying to learn to use indicators for my entry and exit too. Even without good directional indicators, my risk and margin management serve me well so far.
 
So you short FEB 800 call and long MAR 800 or 810? call

Quote from yip1997:

piccon,

I don't feel your message offensive. I am trying to learn from you so we continue our discussion here. It is great to discuss different ideas (though I am not a great trader yet).

In the beginning of the month, I usually open positions (usually with ratioed diagonals) to give me about 3 to 5% of my portfolio as my monthly income. Once I have my income trades, I will try to control my risk[/B] and adjust my positions if necessary (I usually don't adjust to delta neural). I don't expect to make money with these adjustment trades.

My bottom line is to have around 2% to 5% as my return with a very tight risk control. This tight risk control allows me to stay in the game without any big loss.

I don't have 800/810 verticals. I have Feb 790, 800, 810 short calls protected by many long calls at back months (similar to the Marks' diagonal with extra calls). The difference is the selection of short strikes. I tried in these 2 months to open CTM short calls instead of OTM short calls. I can open CTM short calls with smaller size to get the same credit for OTM short calls with larger size. The main reason is the margin requirement. By opening short calls with smaller size, my margin requirement is smaller.

In short, I don't open my position by guts. I think my strength comes from tight risk control and leverage (or margin) management. I am trying to learn to use indicators for my entry and exit too. Even without good directional indicators, my risk and margin management serve me well so far. [/B]
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Quote from optioncoach:

If you picked up Mark's book, then take a look at the back where there are reviews of the book :)
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You sounded halfway intelligent in your quote, Mark must have written it for you lol! :D
 
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