SPX Credit Spread Trader

Just a warning, my book does not cover adjustments to credit spreads in any detail as that was not a focus of our book.

For a better understanding look to Cottle's book Option Trading: The Hidden Reality.

Also look at doing unbalanced or skip strike flys for a nete credit as a lower risk way to trade a range.
 
Quote from optioncoach:

Just a warning, my book does not cover adjustments to credit spreads in any detail as that was not a focus of our book.

For a better understanding look to Cottle's book Option Trading: The Hidden Reality.

Also look at doing unbalanced or skip strike flys for a nete credit as a lower risk way to trade a range.
More...

I have the Cottle book. It is a tough read, but now that I am in a learning mode I will need to get tough. It seems to have lots of good stuff.

“Also look at doing unbalanced or skip strike flys for a nete credit as a lower risk way to trade a range.”

Could you give me an example of “unbalanced or skip strike” butterfly?

Right now I am sitting on a bull put spread in RUT
Aug 07 740/750 put
Rut is at 786.

Just trying to guess, but would this (see attached file) be what you are suggesting? That is an Aug 07 750/740/720 fly?
Thanks
 
Drofman,

lucky you.
I am sitting on several RUT 760/750 put credit spreads for August.
But it looks like next week will be up and then I am out.

gis
 
Thanks for that coach!!!

I bought your book to mostly learn something about repairing credit spreads gone wrong and was obviously a bit disappointed.
However, the whole mental gymnastics I had to do to understand some of the other things was worth buying it.

You wrote: Also look at doing unbalanced or skip strike flys for a net credit as a lower risk way to trade a range.

Is there something about that in your book? (Or the other one you recommended?)

Thanks, gis
 
The skip stirke and unbalanced FLYs are in Cottle but I will show you an example here if I can dig one up. As for the credit spreads, you can convert them to debit FLY as well.

If you are short the 2100/2125 NDX call spread for example you can buy the 2075/2100 call spread for a net debit minus the credit initialy received. I would only do this if the net debit to convert is less than the actual loss to close. If market moves into the FLY range you have a possible home run trade and your margin is taken off since this is a debit trade.

You can also convert it to Iron Fly by selling the 2125/2050 put spread.

However these do not wipe out the risks and losses are still significant but they can be less than taking the loss outright depending on what prices you leg into these FLYs. These are band-aids on bullet holes, so I do nto want to convey otherwise.

However, instead of the credit spreads you can do something like this

SEP RUT Call FLY

+ 25 840 Calls

- 60 850 Calls

+35 880 Calls

Margin = $71,500k

Profit if RUT < 840 = $8,250

Max Profit at 850 at expiration = $33k

Between 840 and 860 at expiration profit is between $8,250 and $33k basically.

BE point is ~860.

So you have $71,500 in margin for potential of >10% returns if market is below 850 at expiration and a potential home run if market runs to your short strike at expiration of almsot 40% return. Small margin.

If you want to see the beauty of this compare it to short 850/860 RUT SEP call spreads using about the same margin.

Downside is the best credits come with time so I could not find anything as good for AUG.

But imagine you do one now for SEP and then next month for OCT and keep them rolling. Basically choosing calls or puts based on expectations.

Graph the FLY in ToS if you use them using the example I did above.
 
Quote from gismeu:

Drofman,

lucky you.
I am sitting on several RUT 760/750 put credit spreads for August.
But it looks like next week will be up and then I am out.

gis
More...
Gis,
I hope your authority on how market will do next week is reliable. If so, we don't have to sweat learning this complex adjustment stuff:) :)

Have you found any information sources on hedging credit spreads? As I said above, I am in a learning mode and so might even read one of the many thick books on trading.
Jack
PS: I tried to upload a file in previous post but it did not appear as attachment. It was only 20k in size, which is below the Max size allowed. Is there a secret here?
 
Quote from Drofman:

Gis,

Have you found any information sources on hedging credit spreads?
More...

No, and I think that is what the Coach is saying. Although there are many ways to repair trades, credit spread are hard to do something about once they go bad. It is different with debit spreads. The exception is what the Coach just posted to me. Another possibility would be to use Futures when option spreads on indexes go bad, but that is not for me, at least not yet.

gis
 
Quote from optioncoach:

The skip stirke and unbalanced FLYs are in Cottle but I will show you an example here if I can dig one up. As for the credit spreads, you can convert them to debit FLY as well.

...........

Graph the FLY in ToS if you use them using the example I did above.
More...

Thanks Coach,
I have a ToS account so will analyze these options this weekend. Also will look up in Cottle book.
I appreciate your help,
Jack
 
Seems like I am on a run, writing here.

It is not quite the right topic, but maybe the Coach will answer in short nevertheless.

I was long a Goldman Sachs Jan08 210 put and short the August 200 put, when GS was around 208, now with this drop, I just sold the 210 Jan put and bought the 200 Jan put for a credit of 5 bucks. Was that a good idea? I think in that way I took in some money and reduced my overall risk, but am not sure. Since the market might be going up next week and GS had recovered from a low of 190 to 197 already, I decided not to wait and research, but rather act.

thanks, gis
P.S. I also have a 220/210 put diagonal calendar on, so if GS goes up too much, I get more premium rolling the short put forward here
 
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