SPX Credit Spread Trader

Quote from MechTrade:

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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You are correct that the markets need to be probed, b/c the mid-point of the displayed market is not always the true fair value. The best way to do that is to get a firm quote from the pit so you have information prior to exposing an order, rather than giving this info to the market makers.

For IB clients trading SPX in size of at least 100 contracts per leg, we can typically get .30-.50 wide markets for significant size, compared to the ~$2 wide displayed market.

Please contact me via private message w/ any questions. Thanks.
 
Kevin is correct.... the spread is usually .20 -.30 wide at best.

If you guys are trading the SPX....... you really should consider a floor broker to work your orders.

We currently use Lake Shore.... through VtraderPro. The commissions are higher, $1.20, but the fills are fantastic... which more than compensates for the costs.

Let me say this again.... if you're trading the SPX or other PIT traded indicies, for your sake, use a floor broker..... save money... get better fills.

Murray
 
Hi Coach and other regulars of this forum,

I'm slowly reading through all the posts and am up to Nov 2005. I find it very beneficial and particularly like when the well informed, experienced traders challenge ideas that the less experienced of us take for granted. In this respect I find the insights into -ve gamma/+ve theta aspect of credit spreads interesting.

I have come to the conclusion that credit spreads are simply a gamble (mitigated by sound adjustment decisions and some understanding of tech analysis), with the ability to select the payoff ratio. I think once one accepts this fact there is nothing wrong with using them. Initially there is a -ve profit expectancy, but (correct if wrong) with one correct decision to adjust/close a trade early, you theoretically now have an advantage. Mathematically, over the year, you should now come closer to +ve expectancy.

By jumping to the last pages of the forum it seems that there is less focus on credit spreads than in 2005. Have any significant new strategies been discussed between then and now? Do folks think that the current market is not suitable for these trades? Personally I think that when vols increase, it lets you go further OTM to receive the same credit, somewhat negating the wild swings.

Anyway, just wanted to say thanks to all for a good forum. From browsing the yahoo group topics it seems this one is head and shoulders above the rest. Let's keep the trade ideas and therefore constructive criticism going. It's surely the best way for us to learn.

Here's to retiring early!!

Aaron
 
Aaron.

Welcome.

Credit spreads are still king and iron condors allow you to play both sides of the market.

As for the sale of credit spreads being a 'gamble,' owning stocks is a gamble also. When well managed, these spreads provide a far greater return.

Keep reading.

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 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 strike, 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
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1° First of all, choice a stock with sideline range, if not see the next:
2° Write In The Money Calls (this protect You more deeper)[one or two strike deeper, depends increment]
3° If exercised sell NAKED PUTS to re-enter in position at lower price (if exercised) ONE STRIKE lower than the spot price. If not exercised and every time Buy-Back at lower price the SHORT PUT, when The STOCK move higher in price, sell again when stock price decrease a little (f.ex: sell the PUTS at 1.50, buy back at 0.90 f.ex, DO this every time much more as you can)
4° If exercised When in STOCK position again, Sell the calls If the stock decline buy-back the calls, stop the position OR when STOCK go higher sell the calls again. Do this much more as You can, f.ex into QQQQ shares, try to Buy Back 60ç lower in a side range.
5° Manage STOCK enter in low swings selling calls in high swings
6° Sell covered calls when the stock move a little higher
7* Buy-Back the calls at lower price, then to sell again when STOCK raise on prise. When exercised, Again sell the NAKED PUTS
8° Be aware about Day Trading Pattern (for accnt less than 26k)

[9° excuse my rough english]

I hope this Will Help

If not try again or Skype me , contact http://dot-circle.net/contact.html
 
Quote from dagnyt:

Aaron.

Welcome.

Credit spreads are still king and iron condors allow you to play both sides of the market.

As for the sale of credit spreads being a 'gamble,' owning stocks is a gamble also. When well managed, these spreads provide a far greater return.

Keep reading.

Mark
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Don't know that I'd call em the 'king'.

Calendars have less risk, and butterflys have worked well for me lately.

But back to the vertical spreads...

The last few months, I've experienced some unusual timing problems with verticals. On three consecutive monthly trades, I've had stops in place that happened to be triggered while I was away from my trading platform for a few hours until past mkt close (which is rare). These positions were small NDX positions that resulted in losses in the $3.5K - $6.5K range. The stop loss orders triggered based upon a Delta level of the Short position and took me out of both sides of the trade.

If instead, I had limited the stop loss to the short side (rather the both sides), the results would have been one (1) breakeven and two (2) big profits the following day by waiting to close out the long side. One of the trades that lost $3.5K would have yielded a profit of $21.5K had I only had the stop in place on the short side, and then exited the long side the next day.

Anyone care to comment on favored trade management techniques for those occasions when you might not be at your trading platform during volatile market conditions?

Mech
 
Quote from MechTrade:

Hi Mech

Calendars have less risk, and butterflys have worked well for me lately.

Calendars have less risk just as the strategy of buying options has less risk. You can still lose virtually 100% of your investment.

Butterflys are predictive in nature and not for everyone.

If I had limited the stop loss to the short side (rather the both sides), the results would have been...(better)

If you believe in following the trend, then by all means cover just the short. But I believe it's just as likely the market reverses direction as it continues, so I favor closing the entire position, as you did.

I don't think this is a right or wrong issue. It's doing what keeps you in your comfort zone.

Mark
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Quote from dagnyt:

Quote from MechTrade:

Hi Mech

Calendars have less risk, and butterflys have worked well for me lately.

Calendars have less risk just as the strategy of buying options has less risk. You can still lose virtually 100% of your investment.

Butterflys are predictive in nature and not for everyone.

If I had limited the stop loss to the short side (rather the both sides), the results would have been...(better)

If you believe in following the trend, then by all means cover just the short. But I believe it's just as likely the market reverses direction as it continues, so I favor closing the entire position, as you did.

I don't think this is a right or wrong issue. It's doing what keeps you in your comfort zone.

Mark
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Good advice.

The individual trader comfort zone is the key.

Prior to my last loss, I had placed the Stop only on the Short position. But then I had a telephone conversation with one of Dan Sheridan's students (who is an accomplished Condor trader), and he admonished me to take the whole position off rather than only stopping out the short position.

Well that advise did not work (as I felt it would not), so I now have the following discipline:

I'll place a stop loss order to take only the short position off.

The logic is as follows:

If I am at my trading platform when fast mkt conditions occur, then I'll manually manage the remaining long position real-time, after the stop has exited the short position.

If I happen to be away from my trading platform when fast trading conditions occur and go against me, then I'll take my chances that whatever market forces caused the adverse move against me, will continue into the next day, giving me the opportunity to turn a losing situation into a profitable situation.

After all, the remaining long position now has a limited loss associated with it. So I'll accept that limited loss risk, assuming that whatever mkt forces caused the adverse move will continue in the direction of my remaining long position.

It is a guessing game after all!
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Quote from MechTrade:

So I'll accept that limited loss risk, assuming that whatever mkt forces caused the adverse move will continue in the direction of my remaining long position.

It is a guessing game after all!
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Hi Mech!

First of all, initiate the two legs separately. The long ATM, sell the short ITM (when price move higher for calls)

Keep 3/10 of the longs free for covering /may be/ big market move [delta neutral]

Take a diagonal spread f.ex
Do not place any stops
Think to keep the "long" position, the long leg, as much time is possible.
Trade actively the short leg. As much is possible.

When money come into the account
Take a new long leg, for the next expiration date.

Sold the previous leg at the best price possible ITM

Continue to trade actively the short position, by multi buy-back and selling again and again...

Note: The MM see Your stops! They play with this!
Don't give them the 10 or 20 cents every time, this is too much costly.

Signé Artes - http://www.dot-circle.net/coveredcall.html (french)
 
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