SPX Credit Spread Trader

And just when all of you thought this dead horse was beaten . . . LOL

Somewhere in these 2,000+ pages this topic might have been discussed, but I'll ask anyway in hopes of a decent response.

When doing the infamous SPX credit (or quasi-debit spread),

1) What is the optimal short month to use? (and why)

(i.e. we are in June, so for example, July, Aug, Sept, Dec, etc.)

2) What is the optimal distance between months? (and why)

(i.e. Long Aug, short June distance of 1 month or long Dec, short Sept distance of 3 months.)

Thanks in advance for any answers, and sorry to wake this sleeping dog again.

AZD

P.S. Whatever happened to dagnyt?
 
Correction, I wrote "(i.e. Long Aug, short June distance of 1 month or long Dec, short Sept distance of 3 months.)"

I meant to say Long Jul, short June distance of 1 month.

Obviously Long Aug, short June would be 2 months.

AZD
 
Quote from arizonadreamer:

And just when all of you thought this dead horse was beaten . . . LOL

Somewhere in these 2,000+ pages this topic might have been discussed, but I'll ask anyway in hopes of a decent response.

When doing the infamous SPX credit (or quasi-debit spread),

1) What is the optimal short month to use? (and why)

(i.e. we are in June, so for example, July, Aug, Sept, Dec, etc.)

2) What is the optimal distance between months? (and why)

(i.e. Long Aug, short June distance of 1 month or long Dec, short Sept distance of 3 months.)

Thanks in advance for any answers, and sorry to wake this sleeping dog again.

AZD
More...

Difficult to tell which kind of trade you are asking about...

A Vertical
A Calendar
or
A Diagonal ?
 
I agree, not sure what spreads you are talking about with different months. Sounds like you are asking about diagonals.

Quote from MechTrade:

Difficult to tell which kind of trade you are asking about...

A Vertical
A Calendar
or
A Diagonal ?
More...
 
Quote from optioncoach:

I agree, not sure what spreads you are talking about with different months. Sounds like you are asking about diagonals.
More...

Yes, I am talking diagonals.

For example, buy to open August 1350 puts, sell to open July 1400 puts.

AZD
 
Quote from arizonadreamer:



P.S. Whatever happened to dagnyt?
More...

Hello Arizona. I'm still here.

I do not believe there is a single 'best' answer to your question concerning diagonal spreads.

When doing diagonal spreads, I STRONGLY prefer that there be only one month between the long and short.

Why?

1) I don't want to pay extra dollars for those longer-term options. Cash management is important when working diagonal spreads.

2) I prefer to own options with as small a difference between strike prices as is feasible. That does NOT mean I trade diagonals with strikes 10-points apart (I use 20 or 30 in RUT). But It does mean that I'd rather own Sep 900 than Oct 920 against shorts calls that expire in August.

3) The above is not cast in stone. IV levels make a difference. When IV is perceived to be especially cheap, that's the time I might consider owning options that expire later. I also prefer to do ratio diagonals when options are cheap (14 x 10, rather than 10 x 10, for example).

3a) If IV were especialy elevated, I might even consider selling the diagonal. But, I'd never own the near-term for fear of being left in danger if the long were to expire near the money.

4) An important part of diagonal trading is the ability to trade within your comfort zone. For example, Murray has shown us that holding all the way to expiration provides the chance to make very large returns. But, failing to take a decent profit when the opportunity is present does mean that a good profit can turn into a loss as negative gamma takes it's toll near expiration. I don't believe one style is 'better.' A great deal depends on your risk tolerance.

Bottom line: IMHO this is a strategy with excellent profit potential, but there is no single 'best' way to play.

Mark
 
Mark,

Good to see you are still around.

Thanks for your detailed answer.

This type of diag has never been my thing, although the SPX has been somewhat kind to me over the years in regards to other spread strategies.

Since the SPX environment "appears" to be changing (more spikes in the VIX, less of a constant move upward in the underlying), I am re-investigating this particular strategy.

AZD


Quote from dagnyt:

Hello Arizona. I'm still here.

I do not believe there is a single 'best' answer to your question concerning diagonal spreads.

When doing diagonal spreads, I STRONGLY prefer that there be only one month between the long and short.

Why?

1) I don't want to pay extra dollars for those longer-term options. Cash management is important when working diagonal spreads.

2) I prefer to own options with as small a difference between strike prices as is feasible. That does NOT mean I trade diagonals with strikes 10-points apart (I use 20 or 30 in RUT). But It does mean that I'd rather own Sep 900 than Oct 920 against shorts calls that expire in August.

3) The above is not cast in stone. IV levels make a difference. When IV is perceived to be especially cheap, that's the time I might consider owning options that expire later. I also prefer to do ratio diagonals when options are cheap (14 x 10, rather than 10 x 10, for example).

3a) If IV were especialy elevated, I might even consider selling the diagonal. But, I'd never own the near-term for fear of being left in danger if the long were to expire near the money.

4) An important part of diagonal trading is the ability to trade within your comfort zone. For example, Murray has shown us that holding all the way to expiration provides the chance to make very large returns. But, failing to take a decent profit when the opportunity is present does mean that a good profit can turn into a loss as negative gamma takes it's toll near expiration. I don't believe one style is 'better.' A great deal depends on your risk tolerance.

Bottom line: IMHO this is a strategy with excellent profit potential, but there is no single 'best' way to play.

Mark
More...
 
Quote from arizonadreamer:

Since the SPX environment "appears" to be changing (more spikes in the VIX, less of a constant move upward in the underlying), I am re-investigating this particular strategy.

AZD [/B]
More...

The more arrows in your quivver, the better. Just choose them wisely.

Mark
 
Would now be a good day to buy straddles or strangles? It seems like 1500 is the "fence" and depending on that beige book tomorrow afternoon and the PPI/CPI coming up, we could get a violent move either to the 1520-1525 range or a drop to 1480-1490? Or is everybody doing this already so premiums are high and might be good time to sell the straddles and strangles?

Just wondering what people would do in this situation. I've mostly traded just vertical spreads and I'm testing doing Calander/Diagonal spreads so I'm looking at what strategies are good to use under certain circumstances.

Or for that matter would a backspread on the call side be effective here even though there's only 3 full trading days today (plus SET could be particularly nasty on Friday similar to the April SET.

Thanks for any opinions!:confused:
 
I got hit again this month and it erased 2/3 of my monthly profit.

I had 850/860 RUT credit spread, and decided not to close the spread on Thursday because it was around 13 points away from the short strike.

Here is the question if you like to share:

Under what conditions will you close your spread (vertical and diagonal) on the last trading day?

I feel very bad not to close it @ 20 cents and it cost me $3.45 for the decision. Was it a bad decision?
 
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