SPX Credit Spread Trader

Hi All,

Was lurking in the background. Still a newbie to index options.
My first post here. Thanks Optioncoach and all others for all the info you presented here.

I have done a few credit spreads with SPX on TOS live account. Found it difficult to obtain reasonable credit. Like to move onto uneven fly spread with SPY instead. Would appreciate some input into this technique from those who are more practiced with live trades. I am more concern about the practical issues of the technique during live trading.

Like to confirm a few points/observations regarding this type of trade. This is a live trade on a small account. Please comment.

Re the attached file: Payoff chart of a “typical” skewed fly trade on the put side. Does it appear correct?

-the initial aim /expectation is for the trade to expire worthless (OR reach a key/set profit target before SET).

-If SPY index goes against my trade( say SPY index goes down and we are in an uneven Put trade ) we must attempt to exit/close trade when SPY index closes between Point 132.99 and Point 131.29 if possible; from Payoff chart profit is higher closer to the middle around 132.02 on chart. Are these assumptions valid during “live” trading when the index hits that area?

-how difficult is it to close out the trade during live trading when Point 132.99 is breached? In other words will I get out of this trade with a profit easily when it matters.

-One other way of hedging is to buy 2 SPY puts at 133 when the market turns against the trade? Comments please!

Thank you all in advance for your input.......

ZZ
 

Attachments

Covered Calls Risk Management:
After trying all options strategies and burning more than my fingers, i have decided to stick to Covered call strategy.

I bought 1000 shares of GM at $30 and wrote 10, 32.5 calls against it for a premium of $1000 ($1/$30 x 100 = 3.3%).
1). As long as the stock is below the strike price, i dont get called away and i keep doing this every month. I will get back all my money in GM stock in 30 months (assuming i get $1 premium every month)
2). If i get called away in the very first month, i make a profit (2.5 + 1).no problems there.
3). After writing 2 months for $2 and the stock is down to $20, i get called away on the third month at 22.5 stike, i will be at a lose. (on stock i lost $10, On options, i made $3 premium plus $2.5 (22.5 - 20)). Total lose$3.5

My questions is how do i handle the 3rd scenario. I hope i explained it correctly. can anyone provide risk management rules for covered call writing.thanks
 
Mark:

Is the bid/ask range just wide on the trader's computer screen for the SPX as opposed to the "real bid/ask" in the pit.

Example: Today, I wanted to close my Sept. 1550/1560 bear call spread (I'll be out of town and can't watch it). On the ToS screen the bid/ask was $0.15 to $0.80. I tried a few offers with no success. I called ToS and the guy I spoke with said that range ($0.15 to $0.80) was "ridiculous" and would call down to the SPX pit to get the "real" bid/ask. After he called he told me the "pit" bid/ask was $0.40 to $0.60. I place a trade to buy the spread back at $0.50 and was filled within 5 minutes.

Since you're an experienced MM, what's your take on my experience today.

Thanks.
 
Quote from rdemyan:

Mark:

Is the bid/ask range just wide on the trader's computer screen for the SPX as opposed to the "real bid/ask" in the pit.

The market is MUCH narrower in the pit than it is on the screens.

Example: Today... On the ToS screen the bid/ask was $0.15 to $0.80. I tried a few offers with no success. I called ToS and the guy I spoke with said that range ($0.15 to $0.80) was "ridiculous" and would call down to the SPX pit to get the "real" bid/ask. After he called he told me the "pit" bid/ask was $0.40 to $0.60. I place a trade to buy the spread back at $0.50 and was filled within 5 minutes.

Since you're an experienced MM, what's your take on my experience today.

Thanks.

1) They keep the markets wide on the screen because they can. I think it's awful, but the rules allow it and they take advantage.

2) Spread markets are always tighter than the posted b/a. But sometimes the MMs may not be aware of your bid and offer for a spread. I use IB and I'm often amazed and disappointed that some of my orders don't get filled. When you use a live broker who actually asks for and receives quotes, you get the true market. And if your live broker then represents your order in the pit, rather than submitting it electronically (as far as I know, there is no electronic SPX trading), you have an excellent chance to get filled.

3) My 'take' is that's the way it's supposed to work. You ask for a market (small trades usually cannot get anyone to request a quote for them. IB will NOT request one, no matter what size the order.) That way you see the real market and can enter an order at a realistic price.
More...

Mark
 
Quote from ThunderChicken:

Covered Calls Risk Management:
After trying all options strategies and burning more than my fingers, i have decided to stick to Covered call strategy.

I bought 1000 shares of GM at $30 and wrote 10, 32.5 calls against it for a premium of $1000 ($1/$30 x 100 = 3.3%).
1). As long as the stock is below the strike price, i don't get called away and i keep doing this every month. I will get back all my money in GM stock in 30 months (assuming i get $1 premium every month)
2). If i get called away in the very first month, i make a profit (2.5 + 1).no problems there.
3). After writing 2 months for $2 and the stock is down to $20, i get called away on the third month at 22.5 stike, i will be at a lose. (on stock i lost $10, On options, i made $3 premium plus $2.5 (22.5 - 20)). Total lose$3.5

My questions is how do i handle the 3rd scenario. I hope i explained it correctly. can anyone provide risk management rules for covered call writing.thanks


There is no good way to handle the 3rd scenario when writing covered calls. There are several things you can do to make the situation better.

1) Convert to a collar by buying a put for protection. It eats into your premium, but prevents a large loss. Most covered calls writers shun this choice.

2) Unless the stock gaps lower, accept your fate (a probable losing trade) and roll down sooner. Don't wait for your near-term option to expire. Buy back the near-term 30 call and write the next month call at the most appropriate strike available. Often that is going to be an ITM call, and not the '$1 call.'

As an alternative, roll out several months and choose the '$1 call.' - but I don't like that idea, as it affords very little protection to the downside - and protection is what you need as the stock sinks.

3) If you do write the 22 1/2 call (in scenario 3) and the stock rises, you don't have to be assigned an exercise notice because you can roll up. Buy back the 22 1/2 call and write the next month 25 call - hoping to collect a bit of cash for the trade. Or roll out an extra month to have a better chance to collect a cash credit for the roll. You can roll up just as easily as you can roll down.

4) Alternate strategy. Write ATM options instead, unless you are strongly bullish. They provide more downside protection and more time premium. When expiration nears, you can choose an appropriate roll.

4) Here is my personal bottom line. My goal is to make money on my portfolio. I do not need, not do I expect to make money on every trade. You can accept the fact that you have a loser, close the position, and reinvest the cash in a new covered call that you believe has better prospects for making money. Don't get married to each stock in your portfolio.

Best,

Mark
More...
 
Quote from rallymode:

They do it as of 2 weeks ago on 100+ lot orders.

http://www.elitetrader.com/vb/showthread.php?s=&postid=1563804#post1563804
More...

What does this really mean to index spread traders @ IB?

Does this access to SPX mm's via IB's tradedesk make trading the SPX any better or worse than trading NDX or RUT in terms of being able to judge accurate bid/ask spreads for putting on trades with the best R/R ratios?

Even with NDX & RUT, I've found that mid prices need to be 'probed' with several small orders at various levels around the mid to find the sweet spot for executions. And by fishing you can often get better than quoted mid-price executions.
 
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