SPX Credit Spread Trader

[dagnyt]

Quote from yip1997:

I have some extra long puts with RUT (exp in June), what should I do?

1. Do nothing?
2. Sell some short-term put?
3. Always keep the book delta neural?

What else can I do? Any comments?

The argument for keeping them is that it's a good idea to have insurance. But, if too far OTM, they will not provide much help.

[EDIT] OK. I see these are expensive options. Question: Are you a market prognosicator? Do you want to own these options as a gamble? I thought you were a premium seller, not buyer!

The argument for selling is that the cash you can collect probably represents a significant portion of the profit for the position.

The agrument for spreading is that you already own the option (and don't have to deal with the wide b/a spread). But ONLY do this if the spread you manufacture is a good one - i.e., it meets your needs. Don't spread off these Junes just to do it. [Remember the warning: owning vega to sell gamma is a very bad idea].

Mark

 

[yip1997]

Quote from dagnyt:

[Remember the warning: owning vega to sell gamma is a very bad idea].

Mark

Don't understand what you meant here?

I got these expensive options at the first panic when i was unable to close my rut 770/780 put spread to protect the vertical.

I am planning to sell 780 April to help reduce my insurance cost. Is that "owning vega to sell gamma"?

 

[TrendSailor]

Whew - glad this options month is now finally over.

SET finished at 1396.12 UP 10.29 and near the peak of morning trading.

VIX currently at 16.34.

In my opinion VIX has to stay elevated for some time given the global contagion that everyone is now painfully aware is a reality.

TS

 

[dagnyt]

Quote from yip1997:

Don't understand what you meant here?


I am planning to sell 780 April to help reduce my insurance cost. Is that "owning vega to sell gamma"?

No. What I meant was don't buy FOTM to hedge ATM.

Remember your Jun 900 call vs. Feb 800 call spread? That's owning vega to be short gamma.

I thought that if you owned June 700 (or lower strike) puts it would not be good to use them to sell Apr ATM puts.

The 790/780 doesn't fit that description and is a good example of an ATM diagonal - assuming an ATM diagonal suits you.

Mark

 

[scoobie27]

Need some advice pple.....

If you go to BIG CHARTS and look at the SPX chart for the last 10 years. you'll notice that SPX fell from 1500 to 800 in the space of roughly two years. From mid 2000 to mid 2002 !!! That is a mighty fall :eek:

My question is, won't all we credit spreaders on the PUT side get killed in that scenario if it happened again ?

All responses is greatly appreciated as im sure we wouldn't like those market conditions to happen again and im curious how you would deal with it. I would say thats pretty close to being black swannish.


scoobie

 

[yip1997]

Quote from dagnyt:

No. What I meant was don't buy FOTM to hedge ATM.

Remember your Jun 900 call vs. Feb 800 call spread? That's owning vega to be short gamma.

I thought that if you owned June 700 (or lower strike) puts it would not be good to use them to sell Apr ATM puts.

The 790/780 doesn't fit that description and is a good example of an ATM diagonal - assuming an ATM diagonal suits you.

Mark

Thanks Mark.

My Feb 800/June 900 call was really a bad one. It was a costly tuition for me.

Even though IV increases a lot, my June 900 call is basically worthless.

My lesson learned from that experiment:
1. don't own vega to sell gamma (from Mark)
2. don't own FOTM wings for protection.

 

[yip1997]

Quote from scoobie27:

Need some advice pple.....

If you go to BIG CHARTS and look at the SPX chart for the last 10 years. you'll notice that SPX fell from 1500 to 800 in the space of roughly two years. From mid 2000 to mid 2002 !!! That is a mighty fall :eek:

My question is, won't all we credit spreaders on the PUT side get killed in that scenario if it happened again ?

All responses is greatly appreciated as im sure we wouldn't like those market conditions to happen again and im curious how you would deal with it. I would say thats pretty close to being black swannish.


scoobie

If it drops 50% in two years period gradually, it creates the best trading environment for premium sellers (esp FOTM sellers) for the following reasons:

1. Premium is high ( usually IV is high for a dropping market)
2. If it is a slowly declining market (assuming 2% a month), it won't threaten your FOTM put spread.

In general, your scenario is a perfect market for premium sellers IMO. Of course, your timing and the selection of strikes are very important to your actual P&L.

 

[yip1997]

It is hard to close a profitable spread without paying a fairly high premium in order to release the margin under the current high IV environment.

I had Rut Apr 760/Mar 780 put diagonal. TOS is holding my margin till the settlement price comes out.

Now I have a strong directional bias that I don't want. What are the best alterantives for getting your margin released at Friday morning?

Rut always has the settlement price at late afternoon!

 

[dagnyt]

Quote from yip1997:



My lesson learned:
2. don't own FOTM wings for protection.

This is not necessarily true.

Don't own them as your long leg against another option that is much CTM. But it might be ok to own them as a naked long.

Mark

 

[dagnyt]

Quote from yip1997:

It is hard to close a profitable spread without paying a fairly high premium...What are the best alterantives for getting your margin released at Friday morning?

Close Thursday. That's the best alternative.

In the long run, it's a LOT cheaper than being forced to hold onto long positions you don't want. Isn't avoiding the risk of a substantial move against you during the day Friday worth the cost of closing Thursday?

Another alternative, which I like far less is to try to own both puts and calls in April. Then you would at least be near delta neutral while waiting for margin release. This time your risk/reward would be very dependent on IV movement on Friday.

Mark