SPX Credit Spread Trader

The 100% correct trade each time?

I'm kind of disappointed this week. While my trade is still going good, the idea that I could CLOSE THE SPREAD and EXIT didn't work out well at all.

As somebody had already pointed this scenario out, I think it was PHIL?

If you close the SPREAD before it is threatened, often the market turns right around, at least in my system, and goes back in the money. At least in the OEX.

The only conclusion I can reach is to trade credit spreads through to Expiration and expect that you will get more winners than losers and if you lose it will be once a year or something?

This makes Phil's early posts regarding the idea of maximizing premium very valid. As you want to have a large credit to handle a drawdown.

1) This week I learned to CLOSE A SPREAD on Thinkorswim. Thats a positive I suppose?

2) I also learned to figure on 50 or 60 contracts as a working basis for trading, for a living type of thing. The idea of a drawdown is perplexing. You are looking at a ratio of 22 wins needed to cover the $25,000 margin loss of a losing trade, using .30 cent limit order premiums for a credit spread. This week I got .40 cents, but that is not every week. Presuming one trade per week.

I'm still mulling over the prospects of letting credit spreads run once put on, expecting that the numbers would in the long run prove profitable, if a $25,000 loss if your spread was invaded should be worse case scenario. The idea of EXITING early if threatened didn't work out too good. At least in the OEX. Phil's comments on the SPX and far out options makes more sense now.

I know! I know! Both Phil and I believe somebody in California told me stuff, but one can only learn these things by trying them for one's own experience. It is very useful to have the strategies and commentary as reference points.

3) About the only thing unclear now, is what is the MARGIN cost for a wider spread, say of 2 or 3 strikes?

By the way some newbie kibitzer had mentioned without checking earlier posts, about Paper Money. My trading is still on the THINKORSWIM paper money web based platform. This is not REAL MONEY yet!

While I seem to have a winning system, I'm feeling discouraged because of not being able to EXIT as an adjustment on the closer in premiums of the OEX. I think I'm going to let this one pass for a few nights and let my subconscious work on it. I feel uncomfortable about the whole business.

Nor can I seem to reconcile alternative trading styles using a WEEKLY BAR chart. I've been looking at trading the OPEN, entering after the index moves back across the open price. Also trend lines to gain an edge. Far as I can tell, nearly always on the weekly bar, the index moves back over the OPEN price. I don't seem to be gettng anywhere conclusive yet.
 
HI, I am looking at this system which an acquaintance has been doing for a few years with good success. I am a total rookie at this, but have done a few simulated trades and interested to do more.
From what you are talking about it seems a slightly different strategy with more room for safety in this more volatile market (as Phil has pointed out).
Take for example the NDX (nasdaq 100 index, but I am sure you all know that), he will do a monthly spread that is around 200 points out of the money based on his analysis of an overall direction. The returns are smaller than the 7% falconview has mentioned recently, but seem safer to me as there is so much more room before there is a problem.
I still have a question on how to develop the best strategy if the market does start to head towards the first strike price. I have read that if the cost of reversing the spread gets to 150% of the original profit, then get out. That way if you have say 4 months a year when it goes seriously against you, your maximum loss would only be 50% of what you were going to make.

So you would need two winning months to make up for the 4 months of small losses, that leaves 6 months to make say 4%.

What do you think of that strateagy? Seems to make itmuch easier to sleep at night. Put in the reverse order when you make the trade to start, and then dont have to follow it as closely.

I could be totally out to lunch here, but thanks for your time in responding.

Michael
 
200 pts out on the NDX sounds very interesting. The monthly doesn't sound very interesting though. The reason I went to weeklies is the opportunity to make 4 trades a month. More trades, more money earned theoretically.
I will check it out though.

What I did was some studies on the weekly bar chart movement. When you do the studies based on the weekly bar chart, the results come out something different I've found out this last two weeks. So now I'm trying to evolve rules for trading this. Nothing definitive yet.

There is a guy called PEAK INVESTING selling subscriptions on a Thursday Noon trade IRON CONDOR and close the side that is threatened. I'm still into trying that and will do so tomorrow. What I can see is on Thursday, if you wait an hour and a half in the morning after the market open, and then put on the one side of the IRON CONDOR when the morning action is moving away from you and then put on the other side of the IRON CONDOR at NOON, you are essentially 2 strikes, or 10 points away on the high side and 3 strikes away on the down side ( BULL PUT SPREAD )
The catch with that is the market action on a FRIDAY can hit a spread and cost you buckoo margin, especially if you are going to trade $25,000 margin or 50 contracts, to make a meaningful weekly and monthly return. What this guy does is close out the SPREAD if threatened.
On a FRIDAY which is expiration day weekly, the premiums shrink dramatically and by noon on FRIDAY one side is zero, while the other floats around .15 cents to .10 cents. So if you were threatened say after 11 a.m. or so on a FRIDAY you could close the SPREAD and lose .15 cents plus commissions, about $160. The other leg would expire. He claims losses this way are controlled to about 25% of margin.
I'm not sure I am catching the nuances of this trick. So I am going to start doing it each week now in real time and see what it does.
I can see that if you have more winning trades than losing trades, then the system would work. The problem with a 2 strike out the money above and 3 strike below IRON CONDOR in the OEX is that the premiums by Thursday morning are small and you would most likely not get more than 3% when winning. Times four weeks that would be still over 10% a month.
The problem with 3 strike out and 2 strike out trades, is they get hit often enough, just a couple of points into the spread. The question is WHEN? Friday morning bad, FRIDAY noon and after OKAY!

You are in my case gambling $25,000 each time. Obviously if you expect a bear market you would not put on an IRON CONDOR. I tried this a couple of times just putting on one side, but the returns are not really high enough and even an extra .10 cents on the other leg could make a big difference in how you make out. Trouble is the .05 cents you get most of the time on one leg. I haven't got the practice yet to run numbers to see what the financial end results would be. I will have in three or four weeks. What happens on a FRIDAY morning will indicate if you win or lose. Time Decay will give you some return if you get into Friday afternoon,as the market maker premiums drop to the bottom. You don't get zero on both sides until they expire, which is after 4 p.m. I believe?

I had jumped to a 50 contract trade the other week, which is $25,000 margin. So the spread did eventually get hit. However, I made my first closing spread order and it worked, but one sees that the premiums at that point, just one point outside of the spread short side, were at their highest and my loss was $10,250, or 40% of the margin put up. Not good news. But better than losing the margin all of it. So planning on using closing a spread as an adjustment just went out the window. I lost all the profits over 12 weeks using smaller learning trades, plus an extra $6000. I believe the win loss ratio would give you the edge profitably though over time? Trading consistant 50 contracts. Won't know until I try it in real time.

Can't seem to make a weekly MONDAY OPENING work for a trade. You can on Monday get the highest premiums in a weekly. But you can only put on a spread 3 strikes each side. I notice that the odds of getting hit are not so good, because the average points is around 18 points for a weekly bar move against one side. 3 Strikes is only 15 pts in the OEX. So you get hit often enough. Not always, but more often than you would want. Since I have eliminated adjustments as a method of risk control, by trial and error, you have to let your trade run into the margin. Because there are 5 days and not just the last two Thursday and Friday, you may get savagely hit in your spread at a point that you cannot save anything by using CLOSING THE SPREAD as an adjustment. That only works on a FRIDAY afternoon, when the premiums have dropped to their lowest, which is zero and .15 cents.
I've written off trying to trade a spread from a Monday or Tuesday. The odds are against you long haul. What I did this week is try a LONG OPTION trade in the $5000 debit bracket usually by Wednesday depending on market action. The weekly bar chart study shows you get 11 point move minimum from the OPEN on a Monday. Identifying direction and point of entry is the challenge. I am trying this week this LONG OPTION and it is not working out yet, but two more days to go. Unless Friday sees a BIG UPMOVE of ten points, I am not going to break even. I'm using the AUGUST options for this long trade. Even so, it is going to be a weekly trade and out by Friday if it worked. Though theoretically you could hold over until next week. I'm not having any success with LONG OPTION trades, even though the weekly bar chart study says I should.

Phil is trading the NDX, is that an American style? I'm somewhat confused about European and American style. I understood from my reading that European had to be held to expiration, but PHIL is always talking about making adjustments. I don't see how he could close a spread if it was European style? I'd request Phil to clear up that point please?
 
Falconview, your loss experience is exactly why I would avoid the weeklys based on what I have see in my researching this. Yes you have more trades, more money, but I think you would agree that does not always pan out, does it? If you are playing with only a few points until you hit the strike point, that is far too much risk for me.

With the monthly, such as the NDX, you can choose whatever strike prices and spread you want. Less returns, but less chance of getting into the trouble you did.

What do you thinkk of the strategy of getting out when the cost of the new spread is 150% of what you stand to gain. I think I said it wrong in the last message. if you stand to gain say an average on your trades of 1.50, you would be out when the loss would be $2.25. That way three winning trades would make up for two losses, unlike your experience.

This is just me thinking out loud, love to hear your thoughts.

Also, are any of the credit spread neewsletters any good? Can you believe any of what they claim in their performance numbers? Most do show some years when they net lost money like Phil was talking about.

Many thanks, Michael
 
You can request Phil to read through the Bible-length posts of yours and do whatever you so command, but in my opinion, you are trading credit spreads and have no idea how options even work (i.e. American v. European). Don't you find it scary to trade something with no clue what it is?

Also 3 seconds on Google produced this:

http://www.investorplace.com/option...arted/option-styles-american-vs-european.html

American v. European has everything to do with exercise rights and nothing to do with adjustments.
 
Mike you are right, which is why Falconview is only simulating trading, and trying to learn as much as he can to see if he actually wants to do it for real. I am in the same boat, and also have no clue yet what the real world of credit spread options is all about.
I think the two of us are using this forum as an educational tool, and we appreciate anything that those with years of experience can share with us (even if it is dont ever do it!).
Thanks Michael
 
Newbies puzzling the intricacies of credit spreads.

I took a quick and dirty look at the NDX. Here is what I got Stanford. I think it was Stanford?

Mike chimed in with his experienced contribution. He is right, about not understanding the difference between adjustments and ( whoops can't remember the name? ) I looked at it three times and think I know what Mike means, but not sure how it applies to the credit spreads you are trading? That part I missed somehow. Credit spreads are new to me. Anyway the idea I got was you could do anything with the spread, BEFORE it got into the money. Something like that. A point I had not realized from my reading before. That changes the trading picture I had in my mind therefore.

That said for the other newbie query on here, by Stanford, who was talking about 200 points and premiums on the NDX monthly. My look was quick and I found 125 points out-the-money options had premiums of a $1 to be made. Which is VERY INTERESTING.
Strikes for trading on thinkorswim are 5 points apart. On the BIG CHARTS option chain they are 25 points apart, or 5 strikes. I was simply working from a 1 month daily chart on Big Charts The last trend on BIG CHARTS in the last month ran 125 points from bottom to top. It would seem from that if you started trading after a trend was confirmed by some other indicator and went out 125 points you might do an Iron Condor. A daily bar was averaging about 2 strikes, don't remember if that was BIG CHARTS? Probably was which would make a longer daily bar about 50 points. There were no weeklies on the NDX.

People like Mike and Phil are old hat at this and this must seem very naive and fundamental, but us newbies haven't a clue as to the intricacies and PHIL with this forum has been very helpful in explaining things. Thanks to Mike for bringing up that point on adjustments, which I obviously misunderstood totally.

Will get back to the NDX another day. Got my mason contractor bugging me right now about needing building materials for construction and the OEX weekly Thursday trade does not seem to want to give premiums worth trading. Have to go!
Some nice contributions, thankyou very much. So we learn!
 
European just refers to the ability to exercise. You can still trade them in and out all the way up to expiration.

NDX has much wider strikes than the SPX so the premiums might look better but NDX has more volatility in general and wider strikes give you less choices.

Since you are new to this and thankfully paper-trading, just realize that it is quite difficult to do this with 100% of your capital and expect consistent returns without taking some heat on wild swing days like we have seen in the past. A move like on May 6th would blow you out before you could wait out the market reversal.

First step is really learn how options work including volatility, exercise/assignment, delta/gamma and the bid/ask spreads of these options.
 
Thankyou Phil

"European just refers to the ability to exercise. You can still trade them in and out all the way up to expiration."


I had totally misunderstood the European versus American requirements apparently? Thanks for clearing that point up and to Mike as well. Haven't looked up his link yet, but maybe tomorrow?

Did get on the top side spread a 50 - 510/515 in Calls for .10 cents in the OEX this past hour. This is basically a 1 1/2 day trade. Will see how it goes. The theory is if the market behaves until noon Friday, tomorrow I could close the spread and at least break even I think should it become necessary. Otherwise let it expire. The market is not letting me get in the other side yet to make an Iron Condor. Will wait another 15 minutes and then I MUST go and do other things. Been trying all morning. Just goes to show the market cannot be predicted. I took a LOSS on the LONG CALLS 5 of them. OUCH! I keep promising myself I'm going to quit trading long options. Thing is, I did it with some mild success 20 years ago. Can't seem to repeat it now though. Every long option trade I've tried in the last 3 months, has lost buckoo money.

I'm going to have to re-read a lot of Phil's adjustment posts, if I trade the NDX as a monthly. Trying to technically TIME the market so you get entered 200 points away sounds an interesting idea contributed by STANFORD. Don't know what Phil is doing? The same SPX practice????

Most of my learning this past two weeks is in using the SINKORTHINK web based platform. Just successfully CANCELLED a working spread order for the first time. Tried it an hour ago and botched it, but tried it again after rereading the instructions and did it. So I'm pleased with that anyway for the day. ( grin! )
 
NDX vs OEX and monthly vs weekly

Stanford

It's evening and just got on the computer to see what happened the last 3 hours of the day. I'm still okay with a 10 point OEX cushion on the upside for tomorrow. I have on the 510/515 CALLS and the OEX is around 501. This is the THURSDAY to FRIDAY expiration trade on weeklies. Never got the bottom spread of an IRON CONDOR.
*****************
from STANFORD

"Take for example the NDX (nasdaq 100 index, but I am sure you all know that), he will do a monthly spread that is around 200 points out of the money based on his analysis of an overall direction. The returns are smaller than the 7% falconview has mentioned recently, but seem safer to me as there is so much more room before there is a problem."

I'm taking a look at this friend of Stanfords who has been making money on a 200 NDX monthly point spread out, from WHERE though?
Saying 200 points is fine, but what is the starting point from when you do your calculations? Is the OPEN on the Monday after the monthly expiration Friday? Giving you 4 weeks to sit it out and watch the market action?
What I did was try to calculate the similar movement would have to be in the OEX. What I get roughly is 9 points NDX is equal to 5 points OEX, or 1 OEX strike. I haven't run any charts yet on the NDX or OEX for monthly trading, but intend to do that this weekend. Probably print out 3 months of daily bar charts and see what the overall up and down swing is going to be? Off hand, without any statistical study, my feeling is that if you were to get 25 points OEX, which would be 225 points in the NDX each side from the OPENING MONDAY for the month's action swinging back and forth, I would expect you would make profits regularly. The major fly in the ointment is the BEAR MARKET plunges, but these usually telegraph themselves.
You get good premiums out the money for strikes in the OEX monthly also. I'm not sure how they compare to the NDX though at this point and will check it out this weekend when I print a 3 month daily chart and see what the swings are for a month, HIGH to LOW.
In a weekly I would think a 20 pt move in the OEX would certainly see you in good shape for placing a spread. This though is only possible if you get swings on a Monday and Tuesday, MAYBE into Wednesday. If you could put a spread on 20 pts out from the OPEN on a Monday, I would think it would be a solid earner? In the NDX this would be 9 x 20 or 180 pts NDX away from opening day of the month.
There is not much in the way of TIME DECAY collected during the first two weeks of a monthly that I can see? Since the NDX is a monthly and does not offer weekly trading expirations, then I guess I would restrict my trading to the last two weeks of the monthly, or preferably the last week, which would automatically default as a weekly trade on the NDX.
The big thing would be a long term statistical study of the swings from some starting point, say the OPEN of the month on a Monday in the NDX. I want to compare those swings to the OEX swings against the premiums available and see if they are better, the same, or comparable?
My theory is that if you identify SWINGS on a monthly high and low around a starting point, such as the OPEN on a Monday with four weeks to run, you could watch the monthly, either NDX or OEX if they are comparable and the premiums given match, then put on a SPREAD out the money, anytime you get a swing from the OPEN either side direction that went the equivalent of either 20 points in the OEX or 180 pts in the NDX? I'm just thinking with my fingertips here and won't have any firmer ideas until I run some charts this weekend and calculate it.
I'm sure thousands of credit spread traders have run these calculations and thoughts already? Be interesting if they would chime in and give their experiences on it?
 
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