SPX Credit Spread Trader

Thank you Art for the reply.
I do have that confirmed as a) buy back the sold side and b) let the buy side expire. I had sort of figured those two out and glad to have that confirmed. C) the closing of a credit spread on the OEX in thinkorswim platform I just got off an email to support people over there and as it is a dull day, they had time to tell me how to do it. I was doing it wrong. Anyway I've printed it out and will try it sometime. I will certainly go through some practice motions so I understand it.
I do appreciate the kind help from you all.

( 9 weeks lucky streak for a beginner so far ( grin ).

Ray
 
I've been trying to find something on the internet about Income tax paying for spread trading. I've come up with different numbers, of 28%, 30% and 40% Would not at the end of the year like to pay too little, or too much.

You professionals out there, can you tell me what the rule is for 2010 and 2011? Appreciate it!
Ray
 
As a newbie I ran across this thread a couple of weeks ago in the middle of June, 2010. So far I have only read up to message 58, of 2300 messages. The first 58 have answered a lot of my questions. Will certainly continue reading, but can only absorb about ten pages at a time. I've got a long list of DO's and DON'ts on a piece of paper now. Enjoying the thread immensely and this is the finest most informative thread on CREDIT SPREAD TRADING I have run across in the whole internet.
I'm not trading the SPX, but the OEX, as that is what I am familiar with. I have the sense of what the OEX might do and that is my comfort zone from technical analysis. My very small experience with the SPX is that it runs the same, except it swings wider and faster. From what I read from Phil in the beginning messages, the OEX is a tighter index for credit spreads than the SPX.
Unlike Phil I'm trading WEEKLY on the OEX. He was trading monthly. Weekly trading is something probably new since 2005. There are more trades in a year in the weeklies and I'm still getting a feel for it. I've got to the point I can find two spreads a week and maybe even three spreads a week on occasions. Which if winning, translates into around 9% a week. Another difference from his SPX descriptions are that the premiums do not go out more than 3 strikes, which makes the action much tighter. I'm developing rules as I go along now as a beginner using the recently acquired Sinkorswim web based platform. I'm actually feeling ready to switch into a real cash account. Still holding off a bit, nervous because SOME of the recommendations by Phil and the rest that were on here back five years ago are not ingrained in my subconscious automatic reflexes yet. Some things I have not actually done and still unfamiliar with the web based platform, are for CLOSING the SPREAD when threatened. Until I do that in practice, won't really know or feel more comfortable that it works. Some of his recommendations like hedging on the SPY I have still yet to try, or run through also. His premiums in the SPX were further out a couple of strikes than is possible on the OEX, so some of his rules are differently applied for my purposes.
In the idea that this thread could be renewed for a new generation of credit spread traders, I'm inputting this to see if I get any feed back this late along in the game?
One of the current testing goals is to find the comfort zone for the amount of capital required. I started with 5 contracts, jumped to 10 contracts and plan to jump to 20 contracts this week. If I remember in the heat of the action and excitement. It does look like 30 contracts or $30,000 for money for cash margin would be a workable amount to give a nice living, presuming you have the risk and adjustment skills down to keep a loss small. In the OEX this is not quite as easy as in the SPX. So I'm diddling with the parameters a bit to see how that will work out this month of July, 2010. The action is a lot faster in TIME DECAY in the weekly trading expirations.
___________________________

Friday, July 2, 2010
BELIZE - OEX CREDIT SPREAD TRADER WINS 10 th. SUCCESSFUL WINNING STREAK!
BELIZE OEX CREDIT SPREAD TRADER - Week ending July 2nd, 2010.

10 th. SUCCESSFUL WEEKLY WINNING STREAK!

These trades are done on the Thinkorswim Trading platform, in virtual or paper money as a training exercise. Done by a beginning trader in credit spreads, learning the intuitive lessons of experience, through trial and error, before moving into real cash.

10 July CALLS 490/495 @ .40 cents. OEX 474 $400 - $40 = + $360 net

10 July CALLS 475/480 @ .45 cents OEX 466 $400 - $40 = + $410 net
Total MARGIN CASH RESERVES REQUIRED $10,000
Return on investment capital in one week: 7%.

The following IRON CONDOR, despite my rules, was entered on a memo pad, as a trial at the behest of someone claiming success each week with an IRON CONDOR. We tried it and it worked. The three weeks previously it did not have enough premium to make it worthwhile.

10 July CALLS 475/480 @ .45 cents = + $450
10 July PUTS 450/460 @ .10 cents = + $100 Total profit was: $550 - $80 commissons and fees = NET of + $470

We will not consider the IRON CONDOR win, as the trade was not serious, intended only to see what would happen? An experience to be absorbed in the subconcious. The bull part of the IC is forbidden in my rules, when in a bear trend. Stick to only, above the market BEAR CALLS.

Total return NET PROFIT for the week was therefore: + $770 net

Ray
Posted by Western Belize Happenings! at 12:31 PM 0 comments
 
One of the questions I have is that I understood the SPX was a European style index in which my reading says you cannot close a spread until expiration. Yet I see people closing spreads. I must be missing something here? Which is why I chose the OEX for one reason and the SPY.
________________________

NOVICE - OEX SPREAD TRADER

11 th. STRAIGHT WINNING WEEK !

20 July PUTS 470/465 @ .15 cents with OEX at 481.82
$300 credit - $70 commissions = NET + $230 for the week.

Using $10,000 in cash margin, the return for the week was: .023 % on capital invested.
( Using web based paper money trading platform ) 2% or so comes out to 119% annualized.

**** I found the week difficult for this amateur. With the trend changing I could not get in the Spread at premium prices I wanted, with my RISK values. Finally Thursday, I took what I could get and increased the number of contracts. Still, a profit is a profit ! Just glad I did not lose anything and the nickels and dimes add up over time.
I learned how to use the THINKORSWIM platform and ‘close a SPREAD” this week. That makes this beginner feel a whole lot more confident, thanks to the assistance of Abigail Muehlech, Client Liason at TOS. I’d had trouble finding the way to do it, despite messages giving me instructions over the last two months.
Next week I work on using long SPY options as a hedge, as needed! I do not understand the SPY yet.
 
2 SIGMA SPREAD TRADING

Thats interesting because I have been diddling with it. To me it looks more like it would be covering all around the mean average. ( both sides ) The 1 sigma numbers would be scattered, spread across the average is the way I am seeing it in practice here on my work.

To give you an example, I have been allocating 3 strikes, or 15 points each side of the OEX and legging into the spreads when I get movement from Mondays, trading a weekly bar, when the index moves outward from the starting average at OPEN on Monday. Doing this I am assuming I have a 1 sigma deviation with a little more than my three strikes. When I do the simple calculation from the formula INDEX VALUE x VOLATILITY X the number of days divided by 365 left to expiration. I am getting 33 points, or 6.5 strikes, for last FRIDAY. ( 1 day to expiration )

Now if 1 SIGMA is on EACH side as you say, that becomes impossible to work, ( at 66 points wide ) because there are no premiums that far away from the average starting point. If the 1 SIGMA is the spread covering ALL of the average on both sides and I saw a pictoral diagram that looked exactly that way, but no written explanation ( sort of random dots around the average ) then I split my number and it becomes workable for me as a strategy. It is still far out but possible to get close to the outside partially to put on a safe spread. The probability of a 1 SIGMA system is 68 %. Which kind of fits in with my spreads getting almost done in last month twice. The index ran out over 15 points, or 3 strikes.
They say a 2 SIGMA deviation though is a 100% earner, but in that case it is not possible to find any trade premiums that far away, even legging in.. I don't know how to calculate a 2 SIGMA deviation without calculus and don't have the simple formula. For rounding up, I just added another 50% in points to my 1 SIGMA number and figured I might be in a probability of 68 % and 90 % roughly speaking. This gives me a weekly or even two weekly goal to shoot for in index movement, BEFORE putting on an opposing spread. So far in three months I have not seen more than a 17 point, or 3.5 STRIKE swing in the OEX index. Just enough to touch one of my threatened spreads, thats all. Enough to cost big bucks though.
If you are right and the number is away from both sides of the average, then that makes SIGMA value spread trading worthless on the OEX INDEX. You couldn't find any premiums worth trading. Split it is a useful tool for outside goals in a swinging moving index.

--- On Sat, 7/10/10, Lan Sluder <lansluder@gmail.com> wrote:


From: Lan Sluder <lansluder@gmail.com>
Subject: Re: Bz-Culture: 1 Sigma deviation
To:
Cc: bz-culture@psg.com
Date: Saturday, July 10, 2010, 7:56 AM

It is the deviation on either side. So if the mean is 50, and the deviation is 5, the range at a given probability would be 45 to 55.

--Lan Sluder

On Sat, Jul 10, 2010 at 4:19 AM, Ray Auxillou <hillviewhacienda@yahoo.com> wrote:

Any statistical math people on here?

If I have a 1 Sigma deviation of 6 points. Does that mean 3 on one side of the mean and 3 on the other side of the mean average? Or does it mean 6 points on one side of the mean and 6 points on the other side of the mean?

Probability theory has it that 1 Sigma deviation is a 68 % probability and 2 Sigma deviation has a probability of 95%.

I have a simple formula to calculate the SIGMA but when I get a number of 6.5, I don't know how to apply it on either side of the mean number. Makes a helluva difference in application.
 
Thanks for the response SUGAR. This thread seems to be dead?
I'm still reading the threads, up to about 90, of several thousand. Got me a lot of good ideas off it, to help me develop my own method for weekly trading of the OEX.

Put on 40 July PUTS 480/475 on yesterday Tuesday for .30 cents limit. Now to see if I get through Friday without having to CLOSE out. The BULL market right now is encouraging as the index is slowly moving away from my BULL PUT VERTICAL SPREAD. The trade is good for a $ 1070 NET if it expires nicely on Friday.

Raised the ANTE this week, to see what the returns would be for trying to find the optimum level for earning a living from this. Started with 5 contracts three months ago, then went to 10 contracts and last week did 20 contracts. It is looking like 35 to 40 contracts is a nice round number to have an income flow you could live off.

Got my instructions on how to CLOSE a spread from Thinkorswim and today got another set of instructions on how to cancel, or edit a spread order that had never been filled. Can't think of any more questions now? Except one about income tax. Anybody know what the income tax rate is on earnings from spread trading options? Appreciate knowing, if you paid last year?

Hoping for a 12 th winning week on Friday.
 
Well it is Thursday and I am nervous about reaching expiration tomorrow Friday on the weekly.
I had a 3 strike cushion which has been violated a few points.
What happened this week, was in reading the past threads ( I'm up to 103 now, Phil the Option Coach kept talking about RISK control. Many experienced traders misunderstood what he meant. I did myself. This week the PENNY DROPPED and I got it.
It got rather tiresome reading some kibitzers going on and on and on about the MARGIN required. Which is like 10 to 1 risk value to set a credit spread trade. Phil kept saying it, that it was RISK CONTROL. I finally got it. I ran the premiums if I closed out a spread before hitting the short side of the threatened spread. The loss was like maybe twice the premium collected. Something you could earn back in a month or less in weeklies.
Generally speaking in the OEX 15 points or three strikes is all you can get out in premiums. I like .30 cents or better to make the commissions worthwhile. Phil was constantly talking about getting good premiums out 6 strikes or more in the SPX. Now what little I have observed in the SPX is that it parallels the OEX. EXCEPT that it swings wider and wilder than the OEX. The fluctuations are bigger. One of these days I must look at it. I believe you could do well in SPX futures if you traded on OEX TRENDS, usually one a week as a signal and traded the SPX futures. Doesn't fit my temperament, but should some kinds of people.
Now mind you I'm a novice trying to figure out how to do the RISK CONTROL that Phil the Option Coach kept insisting on. So whereas PHIL kept talking about using 3 strikes approach threatening his spread as his WARNING signal, ( he is out 6 strikes or more with the SPX ) in the OEX I had this week to figure out what would I do similarly in the OEX. I've decided to allow my 3 strike out spread short, be approached 2 strikes, or 11 points in the OEX and then CLOSE the SPREAD, with only 4 points left to go. I didn't do that before and got scared witless twice. As PHIL explains, CLOSING THE SPREAD and taking the LOSS is a lot cheaper than what many traders complained about as the HUGE MARGIN mismatch to the bet reward. As PHIL practices it, the idea is NEVER, NEVER, NEVER let your SPREAD be touched. CLOSE IT OUT and take an early loss if necessary as the loss is very small compared to what it can cost you in margin. I jumped from 20 contracts last week to 40 contracts this week and it was then when looking at the numbers it really hit me in the gut, what PHIL had been talking about.
The MARGIN required means nothing at all to the trade. The margin is irrelevant, BECAUSE you will always CLOSE THE SPREAD before it gets hit. That is RISK CONTROL. A small loss instead of a big loss.
GOT IT! Thankyou OPTION COACH PHIL. Great thread and learning tool.
_____________________

SUGAR - re your comment on the opening gap. I use the gaps as an entry signal. They usually confirm a new trend and a spread can then be put on with good probabilities to get to FRIDAY ( in one week - 5 days ). I use 10 days and 1 hour charts for trends in the OEX.
 
There is no risk control. It's a strategy based upon a mistaken belief that options = income. Even the thread-starter no longer does these things.

How do you propose closing the spread before a strike-touch if the underlying gaps 60? You're risking 15x the premium received.

If you're smart you'll not continue down this path. Sell a few GOOG Jan 2012 530 straddles and pray the Mayans were wrong.
 
There are regular gaps in the OEX but normally they run only 3 to 5 points. I've never seen one in the past two years do 60 points.
In Bear market drops, the move is usually telegraphed before hand. Bear Market trends in the OEX according to my studies usually run 30 points in a week, or less. 20 points trend is normal. In a bear market drop you can get the biggest one ( trend ) in last two years 65 points. I rode that one down putting on Bear Call spreads. Lovely ride. A trend is not a GAP. Usually a number of days and even overlapping from one week to the next, for trends. I don't know what you are trading but it is not the OEX?
That said; I am very interested in STRANGLES and a little bit in STRADDLES. I haven't tried either with any sort of success and seem not to understand how to manipulate them. If you would like to tell me about STRANGLES more than the basics, but the meat, I would be very interested. I could send you my email address if you would. Not to take away from the credit spread thread.
GAPS are usually at the OPENING in the OEX and play havoc with trying to trade long options in the OEX. If I'm getting warnings of a trend change and start, but nervous about it, I take the GAP, usually 5 points or so, as a spread entry signal in the direction of the GAP. Even if it does not go up much more, the turn a round is likely not to be before my 5 trading days are up.
That's interesting what you say about PHIL. I haven't got that far in the long, long list of threads on there. Only up to 103 out of 2000 +. I wondered what happened at the end there?
Thanks for your comment by the way. I do like the STRADDLE and STRANGLE idea, just do not know how to profit from them, in the nitty gritty technical expertise details.
 
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