SPX Credit Spread Trader

Well it is Friday morning and I'm watching my OEX weekly spread I put on yesterday for .10 cents. There are three possibilities I think? Either the market will go sideways and I will win late this afternoon. Or the market will go down and I will win this afternoon. Or the market will go up and I will possibly be threatened. If I have to close if threatened, I only would like it to happen after the noon hour, when all the TIME DECAY that will be taken out of the premiums has been rung out. I might still lose if I close it, but not by much I think? Won't know until it happens.
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I was thinking this early morning hours about the MONTHLY versus the WEEKLY trading. It is true you get 4 trades a month in the weeklies. Whereas you only get ONE trade in the monthlies. In the weeklies I try normally to trade not less than .30 cents premium. Though this THURSDAY - FRIDAY system I'm trying right now is somewhat different. Because occasionally you can turn a Vertical Spread into an IRON CONDOR. The second side of the IRON CONDOR is free of margin reserve requirements, so essentially you get two trades for the same $25,000 in my case. Only one side could lose.
That said; I had read somewhere that for the long haul in CREDIT SPREAD trading, you need to get more than .60 cents of premium credit. Far as I can tell in the last 12 weeks of trading, you do not get that doing weekly trades. I usually get .30 to .45 cents. Mostly .30 cents of the four trades per month. Which equates to $1.20 a month premium credit. The drawback as I can think of it, is more trades increases your probability of suffering a loss. So while you might average $1.20 a month, the RISK would be higher on weekly trading due to the larger number of trades needed. Unless you could develop a sure thing bet, more or less, or one that if failing would be very small and not expensive in lost margin, because of the size of the bet needed to make it worthwhile. Hence my now trying the Thursday - Friday trade in a weekly.
The higher risk due to more weekly type trades, makes the NDX look good. Or I suppose any MONTHLY index? For the most part I am discounting the so called VOLATILITY and wider range advantages of strikes, as while the NDX is appearing to be more volatile, in fact the chart is looking at a quick glance to mirror the OEX. What is happening is the volatility experienced is because the NDX is trading roughly 9 points to every 5 points in the OEX. I think if you thought of it in terms of PERCENTAGE CHANGE, you would find the premium price action exactly the same roughly. As also the movement. What seems to me briefly looking at it, is that the NDX is sort of magnified, as in a ZOOM picture of what is a more condensed picture of the action in the OEX. There are more points to trade and perhaps you can trade the smaller magnified swings in the NDX, than you would for instance in the OEX. Don't know if this is true, but it seems to be to me, at a brief glance so far. 3 points flutter, or noise in the OEX would be about 27 to 30 point move in the NDX.
What I'm going to come back to is the fact that somebody said, which I read sometime, that .60 cents is needed or better to make money over a couple of losses in the long haul. Obviously trading any monthly, either OEX or NDX would give you a better premium further out options. It is possible then I think, that the NDX would be better to trade one monthly trade with a better premium of $1.20 if you can get it, from a long haul profit view point, as less trades would mean less RISK. So comparing the WEEKLY trading versus the MONTHLY trading, if you can get a premium with over .60 cents and in looking at it, I can see $1 premium at 180 points out the money in the NDX, then the one trade a month would be a better trade than four weekly expiration trades at .30 cents, because fewer trades equates with LESS RISK.
I'm just thinking out loud with my fingertips here and if any experienced, successful long term credit spread traders on here have any criticisms of this line of thinking, please fire away. I am after all a novice and trying to learn the intuitional nuances.
In summation, what I am thinking is it is less risk to trade a monthly one time, than a weekly four times a month. Though if winning you may make more. It seems from my first rough check, that you can get a $1 premium and by technically TIMING your buying get far enough out in the NDX to make a winning trade. This winning trade would lessen your risk and be over the .60- cents somebody said someplace on the internet you need to make money after 2 losses a year.
Comments welcome and if the thinking is faulty, please point it out?
 
falconview, your thinking is starting to sound close to mine. I think the idea would be to open the spread on the Monday after settlement date of the previous week.
Look for around 1.20 spread, at least 10% from the current price of the NDX and based on some technical analysis (which I haven't figured out my method yet), put on a bull put or bear call spread.
If it goes the wrong way, put in a stop loss at 150% of the premium collected, so two winning months would almost make up for that.
What are your thoughts on that?
Just thinking out loud also.
Michael
 
I haven't figured out how to do a stop/loss spread order yet? Let alone calculate the 150% and see why and how you are picking that?
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Still an hour and a half to go this Friday, but does look like my spread will make + net $390 this Friday trade. Last week it made + net $590, if I remember rightly. So two Friday's in a row it has worked out, so far.
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IN THE MONEY CREDIT SPREAD TRADING ( directional ? )
Out of curiousity I was looking up comments on trading CREDIT SPREADS in-the-money and did some brief light reading. From what I read the OUT-THE-MONEY TYPES we are doing, are neutral strategies. We want the market to be range bound, or go sideways, to keep the credit. When trying to understand deep - in-the-money credit spreads I get the impression that these are directional trades implemented in trends?
Is there anybody on here trading these and give us an understanding of how you make money with these directional type of credit spread trading?

I was thinking a MONTHLY starting at the OPEN of the option month MONDAY. For example say, a "strangle" using opposing credit spreads. Not at all clear how you calculate losses on this though? Will delve into it deeper when time permits. The piece I read suggested DEEP in-the-money. I suppose this must be also premium driven? Don't know, but would like a brief explanation how they are used in practice, real life. If CREDIT SPREADS are traded out-the-money as far as you can go and get premium and safety, I presume the deep in-the-money must have some similar type reason for doing that? Comments from anyone using these?
 
What I mean is if you were going to make 1.20 on the spread, when it gets to the point where you would lose 1.80, get out. that will be a long way from the first strike point, with a big margin for safety.

I was reading about another trader who trades the RUT, which I beleive is the European style that can only be excercised on the expiry date. That way even if goes against you, you wont be assigned until the final date which gives your more time to work on other exit strategies. Will give you the details on this once I have looked more closely.

Thanks Michael
 
In my experience, chasing dimes (i.e. premiums of $0.10) is a losing battle in the long run. You are way out of the money and think you are safe. But $0.10 is not much of a premium to collect for the risk you are taking on. Even 50 spreads is only $500 and a 5 point spread is $25,000 - $500 = $24,500 maximum risk.

$500 premium for $24,500 risk means a return of 2% before commissions/taxes. Assume $1.00/contract commissions and you now have a net profit of $400 for a return of 1.6%.

You collect profit 10 times if you are lucky for $1.00 cumulative and one month the market spikes and you have to eat up your profit and take a loss. What I said can be true no matter what but I do not think $0.05 or $0.10 premium is enough for the risk being undertaken here along with the potential losses on a sudden large move.

Be careful about chasing dimes.
 
To you new guys to this thread who are trying to figure out the world of options. I'd like to make a comment that I hope you'll take seriously. If you do it will dramatically shorten the path to where you are going to end up in trading.

Once you've studied options to the point where analysis of greeks is effortless, you'll have an epiphany. Trading far OTM credit spreads is a losing strategy, as is any other random entry strategy in options. There are only two ways to make good money trading. One is to find an edge, and the other is to develop good directional skill.

If you learn how to recognize an edge in options, you'll soon realize how pointless it is to trade these credit spreads.

If you develop good directional skill you'll realize that there is more money to be made directionally in trading the e-minis.

Either way, you're going to abandon these credit spreads, so you might as well try to develop those future skills now rather than wasting a bunch of time with low delta credit spreads.
 
Advice understood, now can you please tell me the educational path you would undertake knowing what you know now. I am open to new paths. Thanks Michael
 
That is a good flurry of an exchange of opinions. At 2 a.m. in the morning with some great music playing, I laughed my head off!

Loved the bit from Cache Landing. Don't have a clue about E-minis, much less credit spreads.

Option Coach with his .10 cents stuff, more or less said what I had been thinking and coming to a more firm realization. What to do about it though is a different story?

The subscribe seller just sent me another blurb on how they made .30 cents on an IRON CONDOR on Friday. I made that trade also, but didn't get the other leg, they claim they did. I see they claim they took the 485 PUT and I had looked at that and decided it was too dangerous and was going for the 480 PUT, but never managed to get a decent price for it. The trouble with these outfits, they send you the stuff long after the game is over and you have no way of knowing did they really do the trade, or is this just advertising stuff based on something that could have happened. Then also they have no running account balance and trades as they record them to see losses and costs and profits. I notice the disclaimer is; this is hypothetical also. Real bummer!

Was looking at the monthly credit spreads in the OEX then ran out of black ink in my printer and could not print out the charts for the NDX. See if I can get some ink tomorrow? I did though light on a workable idea for trading the monthly credit spread. I think it was SUGAR in California who chimed in with some technical jargon on going out the WINGS, which I translated later to mean that if you pick your spot to put on a credit spread, if the market action gives you the opportunity to go even further OUT THE MONEY you could put on more, or at least another one. I've been watching that, but never happened in the weeklies. We shall see in the Monthlies.

Good bit of advice here, but I do not have a clue on the E MINI's if Cach Landing would kind of give us E MINI's explanation of what he does for DUMMIES, it would be appreciated.

Regarding Phil's stuff he keeps drumming into us about not putting all the eggs in one basket. I had more or less figured that, with either a final decision to divide the trades in credit spreads into 25% lots of different types of trades. Or at the most with 30%.
What exactly those different types of trades are, is where I'm at right now trying to identify them? THINKORSWIM web based paper money start you off with $100,000. I've been using less than 10% of that. ( well maybe not now I've moved to $25,000 margin ?) Even so, three months ago, I got hit with a number of long options losses that knocked me down to around $93,000. Then the credit spreads worked me back up to a few thousand over, around $103,000. Then the other week, I got hit with the first credit spread loss and a long option loss and that has knocked me down to $92,000 roughly again. Friday I netted + $390 and it was then I more or less confirmed suspicions of the .10 cent futility and RISK, more or less that Phil keeps on about.
So I have looked at the OEX monthly tonight. I think I see how to trade it, what the premiums are though will have to wait. The NDX is going to have to wait until I can get some ink for my printer tomorrow also.
E MINI's. I sure would like some experienced person like CACHE LANDING give me a run down on what type of trading he is doing and how he is doing it. Learning is a slow process. Where the devil is a place like CACHE LANDING, that is an intriguing name? Love it!

That was a great exchange, very informative.
 
Stanford

Your comment - What I mean is if you were going to make 1.20 on the spread, when it gets to the point where you would lose 1.80, get out. that will be a long way from the first strike point, with a big margin for safety.

I was reading about another trader who trades the RUT, which I beleive is the European style that can only be excercised on the expiry date. That way even if goes against you, you wont be assigned until the final date which gives your more time to work on other exit strategies. Will give you the details on this once I have looked more closely.

Thanks Michael
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I have a faint glimmer of what you are talking about. I confess this European exercise business has me confused. Phil and somebody else had said you can CLOSE those spreads, or roll them ( haven't tried that yet ) I thought I had grasped the explanation somebody else said, but your description here, just confuses me again?

I recall the business about the $1.20 and $1.80, but never trading monthly it really never came up in practice, so will eventually see in real time, what the numbers are, and how it works when I get into the monthlies, probably next week? At the moment I cannot picture it in my mind. Especially to the different costs between selling bids and having to buy back the loss of the market maker spread when you buy ASK. Not even counting the index movement. I'll clear it up this month for sure I guess?
You are bringing up some good beginner novice points though, which are very important to understand. THANKYOU!
 
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