SPX Credit Spread Trader

I'd suggest you trade risk-defined, but atm. Look for an edge instead of selling wings. None of the passive vol-selling funds have beaten the SPX over the last few years as they cannot stay liquid when the SPX shits the bed.

6 or 60. It doesn't matter as you're essentially selling a binary for $0.07 on the dollar. There only hedge for that slope is to not trade.
 
Quote from konviction:

I just now started looking at this thread. Where is the OP and why does he no longer trade this strategy?
More...

The OP (me :) ) is always around! Since you are new to the thread you could not find the answer buried in all of these posts so I will restate it for the new friends.

In 2007 I stated that the vol environment had changed significantly and I felt that these spreads were no longer appropriate to focus as much attention given the higher vols. Most people do not realize that with vols in the 10-20% range, the premiums are lower but the market has slower movements and it makes it easier to manage these positions and collect premium month in and month out. Once the vols spiked into the 30-50 range, the market swings are huge and more unpredictable despite the higher premiums.

Now some may say the distance out of the money in the low VIX environment you use is equivalent to the distance in the high VIX environment on a percentage basis given the higher premiums further out in time. In other words in low VIX you go out like 60 points OTM and in higher VIX you can go out like 90 points and still get good premium do to higher VIX and skew with respect to put side.

However for me the low VIX environment is not just about the premiums it is about the nature of the market - quiet, drifting higher for the most part and easier to handle, then the wild bronco that was the market from 2007-2009. If it is just my perception then fine, but it is me trading the product. I was very glad to move on to other strategies more focused on vols since vols were back with a vengencance and were here to stay for some time (Flys, Calendars, straddles, etc..).

With respect to risk management, I have always said the best risk management with these positions is to simply not dedicate all your capital to these trades and you will never blow out. I used to average anywhere from 25%-50% of total capital in these trades and usually towards the lower end for safety.
 
Whats so great about trading the options on SPX, and OEX rather than individual stocks? Is it because an index in a way captures the essence of all stocks, (or at lease the ones in that index) so there is no need to trade individual stocks?..would you advise trading the indexes for a noob?

thanks, kon

edit: also what books would you recommend? I already have 3, that I need to wipe the dust off of and re-read. But here is what I got so far... "All about options", "get rich with options second edition", and "The bible of option strategies"
 
Konviction
It's all GREEK to me! ( pun intended )
When Phil moved on to discussing Flys, calendars, straddles, I just assume he got bored with the routine of making the money one way. Decided to complicate his life a little and make things a little more challenging. I am really pleased that he is still monitoring his thread. I was guessing he was dead from a heart attack or something? ( grin! )
As a newbie I have only the vaguest idea what he is talking about. I looked up the strangle this morning and see that if you get a big enough move, you do okay, allegedly. Presuming I suppose the move is not too small and too slow.
Since the OEX has at least one trend per ten days or so, I might paper trade a strangle and see what happens? I learn by doing myself.
There was a comment in one post, which I took to heart back around 174 or so on the thread this morning browsing, which said some people were better at technical trading with spreads than others using complicated strategies requiring a bit of expertise. I know I've been trying to learn using the GREEKS, but the darned numbers keep flipping with the movement of the index value. So I've gone back to technical interpretations. I suppose if I made money constantly I too would get bored in a hurry, like Phil.
I'm not at all sure I get his complaint about volume as a reason for moving to something else. Nor the VIX business. As a technical reader, I look for a trend and then ride it with a spread, but take that with a grain of salt, because my experience is only limited to 12 winning weeks. Still a trend and the VIX are the same more or less I think as a beginner? It could be that I'm just a fool, as in FOOLS RUSH IN WERE ******! Or in the case of a drunk never gets hurt when he falls down, sort of idea.
I have developed the idea that the BEAR moves are more dangerous than the BULL moves, so I'm reluctant to take on a BULL PUT SPREAD, but find myself in this recent short trend now holding one, maybe coming to an end into one for this week. However I have a cushion of 3 strikes and that SHOULD be good for FRIDAY tomorrow, which is all I have left? X your fingers!
At least now THANKS TO PHIL, I now have it in my mind, I must EXIT before the spread is hit and have set my EXIT point 11 points below 495 for tomorrow. Or 484 in the OEX. ( my version of Phil's RISK CONTROL ) I'm holding the 480 short spread. Unless it was moving very, very fast and not allow me. That is unlikely though. Next week I probably will return to BEAR CALL SPREADS which are more comfortable. I guess the trend will turn again, but one never knows? Take what comes!
 
With respect to risk management, I have always said the best risk management with these positions is to simply not dedicate all your capital to these trades and you will never blow out. I used to average anywhere from 25%-50% of total capital in these trades and usually towards the lower end for safety.

Phil's comment!

I get that reminder, but I started 12 weeks ago trying a method with 5 contracts, then graduated to 10 contracts and then last week to 20 contracts. The MARGIN mismatch to the bet threw me a lot. I didn't get the relationship between MARGIN and RISK management until this week. This week I moved up to 40 contracts which is still scary. But I owe a bit of tranquility now, to having an EXIT strategy that makes sense to me. Thanks to Phil's posts.
That said, I'm just trying things out, to find what amount of contracts will give me the living income I think I should get for the effort. It is looking between 35 and 50 contracts? We will see over the next option month.
 
Allow me to be the bearer of some bad news. You cannot do credit spreads for a living unless you already have a large enough account where not working is an easy choice. It is a bit of a dream to think that with $200,000 or $500,000 you can sell credit spreads month to month and live off the income without working and without drawdowns. One bad month and you can cut that in half and then where are you.

I never withdrew any money as I was not living off of it and that made it easier to trade knowing I was not stressing over a trade to pay the mortgage or food. First see if you can make money regularly before oyu worry about trying to make a living doing this.
 
If anybody should know, you should. That is interesting and I am wondering on the draw downs. Could you go into more detail of the experiences you had on a yearly basis. Give some examples?
Appreciate it. There is always a snake in the Garden of Eden, you can sense it, but as a novice, you don't know where it is hiding?
 
Well it was in interesting experience this morning, being expiration Friday and for this NOVICE a new one. Only trading spreads for 12 weeks.
Phil and his subject of drawdowns and such had me slightly alarmed and the one hour drop of the OEX of 8 points with apparently no end in sight, had me reviewing my recent decision on HOW TO EXIT a spread in the OEX. Which normally does not have more than 3 strikes and 15 points as a cushion. I had been pondering an EXIT strategy and how to apply it.
Never having successfully attempted to CLOSE a Spread on THINKORSWIM I decided to try it. There was at one point some credit earned in TIME DECAY but it seemed to melt away? Anyway with piece of paper giving me instructions on how to do it, I went ahead and was unable to close the spread and the index kept dropping. Got into their chatbox and apparently the helpers were overwhelmed by others, and prolonging the agony for 15 minutes or more, so finally asked them to close it, fully expecting a loss, at least of the commissions. Then later they told me what I was doing wrong. I think? Won't know until next time and I try it again, whenever that is. So far it looks like I actually retain $300 of my TIME DECAY as a net profit, which pleases me no end. If I held to the end of the day, I might have got $1000+, I fully expected to take a loss and learn first hand the experience of Phil's mention of drawdowns. That is a dreaded word indeed. The trade had $20,000 in margin outstanding as security. The goal was to get out, before the spread got touched. I was sort of expecting a drop today, by the technical aspects of the market bar chart. I'd rather hoped it would be slower and more controllable.
EXITING was based on VELOCITY of the drop, which originally only went 8 OEX points. Took about 45 minutes but was straight down. My other criteria in a slower moving index was to exit on a 11 point meandering type decline. So of the two, I decided to EXIT on the velocity and distance it had gone in TIME. It worked amazingly enough, though I still haven't built the confidence level to actually CLOSE A SPREAD yet on THINKORSWIM.
It was obvious yesterday that technically the market was breaking down and I wanted to get out. Unfortunately, there was no positive number on TIME DECAY, the MARKET MAKERS spread was still greater than the TIME DECAY COLLECTED. So I held over until today, prepared to see a drop, but not whether it would be fast or slow.
Anyway a lesson learned and a profit earned, however small.
 
Quote from falconview:

If anybody should know, you should. That is interesting and I am wondering on the draw downs. Could you go into more detail of the experiences you had on a yearly basis. Give some examples?
Appreciate it. There is always a snake in the Garden of Eden, you can sense it, but as a novice, you don't know where it is hiding?
More...

Limited on time at the moment so for right now just want to say my point is not that you cant make money doing it, just do not try and make it a sole source of income. You could certainly do well over time with the right approach, mentality and risk management (i.e. dont over expose yourself), but to do it 100% full tilt as a source of income? Only if you already have a huge sum of money such that working is already a non-issue.

A drawdown might be few and far between but they can be big. You can make $20k, $15k, $24K and then lose $45k on a bad month. This is hypothetical but not unrealistic. So you can see it can involve some 4 steps forward, 2.5 steps back. That is why my approach was always not what am I making each month but what is my return/risk at the end of the year, i.e. thinking long-term to be ahead.
 
You must log in or register to reply here.
Back
Top