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SPX Credit Spread Trader
- Thread starter El OchoCinco
- Start date
Quote from Cache Landing:
My experience over the past couple days says otherwise. Today for instance, we're talking about 3.00 change in VIX on a little more than 10pt SPX rally from the lows. Before the rebound the SPY MAR 143/144 mid was bouncing between 0.275 and 0.30 and after a +1.20pt jump the same spread was still 0.30 credit. We continued up the rest of the day and the mid is currently 0.32. We're talking about the equivalent of a little more than 20pt jump in spoos that yielded about 0.02 extra credit.
Right now they could sell the SPY 144/145 for 0.15 and if they wait till monday hoping for another 10.00 SPX jump, they will get the same spread for 0.15 after the jump. Granted a big jump would get them a better position, but the point still remains that any small rallies from here aren't going to add much to the credit.
The fact that you saw it once does not mean that is what happens all the time. The fact of the matter is, call skews in indices are usually quite negative. Which means as call options move ATM, vols rise substantially. What could have happened to you is the call skew flattened.
When you model vol you not only model the ATM vols but also the shape of the skew. Skews can steepen or flatten all depending on order flow.
Quote from yip1997:
Will the shape of the curve change? IOW with a drop of 1% of spx, will the vol curve be steeper?
When atm(March) increases by 10%, will atm(April) increases by only 5%?
Yes, the shape of the vol curve changes daily, hourly, even minute by minute. Most guys on the floor are actually trading around the changes in the skew.
Remember there is a vertical skew and a horizontal skew. Horizontal meaning month to month, vertical meaning by strike.
Anybody want to venture a guess on how far we rally after Bernanke speaks?
Quote from Maverick74:
The fact that you saw it once does not mean that is what happens all the time. The fact of the matter is, call skews in indices are usually quite negative.
Not to answer for cache, but just because you saw it happen once doesnt mean it happens all the time either. Whether vols change up or down will depend on the magnitude of the strip vol decrease and the skew slope. As you said, a very steep skew will cause a net rise in vols while the flatter skew will be overwhelmed by the strip vol drop. It's not always one or the other. If you felt the need to call cache incorrect then your statement was just as wrong. =)
Quote from rallymode:
Not to answer for cache, but just because you saw it happen once doesn't mean it happens all the time either. Whether vols change up or down will depend on the magnitude of the strip vol decrease and the skew slope. As you said, a very steep skew will cause a net rise in vols while the flatter skew will be overwhelmed by the strip vol drop. It's not always one or the other. If you felt the need to call cache incorrect then your statement was just as wrong. =)
Rally, you missed my point. I never what said happens all the time. I simply said the fact that he saw it once does not mean that it happens all the time. I explicitly said it depends on the order flow. The skew changes changes constantly. It can change because of a sharp move in the market or it can change if the market trades flat. So I never said what happens all the time. nothing in the market happens all the time. THAT WAS MY POINT!
Quote from Cache Landing:
Anybody want to venture a guess on how far we rally after Bernanke speaks?
For selfish reasons I am hoping "Gentle Ben's" reassuring calm will buoy us up to reform around the 1405-1410 level - sooner rather than later. I think Ben is good for at least 5 points (monday?). What I don't want to see is the current creep toward an arbitrary round number base like 1400. Sidelined cash that missed the bull in Aug should start stepping in with baby steps. Those fund managers are not rewarded to simply put cash in 4.55% 10 Year treasuries but rather to find good risk-reward. I think that low bond yield number is what will drive this market up just as soon as the trade thing and anxiety unwinds. I am now of the consensus that this blip will be short lived but its really any-one's guess. I think the histories will show that we can get a good rebound up (around 70%) before it retests the low. I hope to be out on the upswing if we can get it soon.
TS