SPX Credit Spread Trader

Stanford

That is the name of the game. Stay far out, play safe, don't take trades that violate your risk parameters by being too close in. PASS if you are not SAFE within your rules. Run probabilities of swings and regression to the mean lines.

If you do it right, you are NEVER going to get hit. If you do it sloppy and chancy as in gambling, or through greed, you are going to get hit. Obviously, ( to me ) you need to win many times to build a reserve of cash that can take a full margin wipe out.

The lower credit spread, the BULL PUT spread is where 98% of the danger is. To avoid this mistake, you need good chart reading skills and be able to forecast a bear trend plunge. You stay out of doing these credit spreads when you are approaching such an event. Mind you the Bear market plunges are great credit spread earners. You play the overhead credit spread, the BEAR CALL SPREAD using market reversals that establish descending ladder like overhead resistance horizontal lines. You can put a spread on top of these as the market plunges and follow it down. Moving averages will keep you in the 2 or 3 week bear plunge.

You have contributors on here on Phil's SPX credit spread trader forum, that have sent me messages that say stick with the overhead BEAR CALL SPREADS. They never bet anything else. Those number study I gave you is a case in point and glaringly points out the differences between the two types of spread trading.
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TRADING JOURNAL
Thankyou for the comeback Trading Journal. I am still not sure of your definition of leverage? Of and on, watching the performance of the STRADDLE to see what happens in a weekly.

I agree with your forecast for the market. All the computer signals are signaling a BULL continuation. The chart reading though is saying divergence and declining volume, shallower increases and slower. Classic signs of a chart reading reversal.

I'm looking forward to reading some of your clarifications to my questions. Starting, just a little bit, to get a feel for this SHORT STRADDLE CREDIT SPREAD. Still not clear on some aspects though and waiting your explanations. When you get time!
I just got back from the doctor and had a tumor dug out from behind my ear. He said it was benigne (? ) ( how do you spell that? ) I am feeling a lot relieved. Got a hole in the back of my ear the size of a quarter and dopey on pain killer. Pleasant feeling.
 
Falconview:

Quick comments before I go for dinner --- I am hungry and late.

1. Margin formulas depend on index vs. stocks/etc, and may also depend on brokers. Below some formulas from my broker. To calculate the margin for a short call:

INDEX:

Call Price + Maximum((15%* Underlying Price - Out of the Money Amount), (10% * Underlying Price))

Stocks/ETFs/ETC:

Call Price + Maximum((20%* Underlying Price - Out of the Money Amount), (10% * Underlying Price))

2. For Shut Puts: margin formulas are similar. For instance for INDEX short puts:

Put Price + Maximum((15% * Underlying Price - Out of the Money Amount), (10% * Strike Price))

3. For straddles, you would take the maximum of the two requirements above. You will notice that the 20% (and 15% for index) are important in determining the margins, and they are calculated with respect to price of underlying.

4. My use of word leverage means this: suppose you write a straddle, and at expiration you are assigned. It means you will either be short a stock, or long a stock. A no leverage means that when you get assigned in case of the put, you have the cash to take your position with no borrowing from your broker. Notice that assignment on the call may require less cash because you would be short the stock, so you have to be careful in computing the cash requirement. So no leverage corresponds to cash in the account equals to the value of the transaction (not the margin requirement of the transaction).
 
Quote from falconview:


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TRADING JOURNAL
Thankyou for the comeback Trading Journal. I am still not sure of your definition of leverage? Of and on, watching the performance of the STRADDLE to see what happens in a weekly.

I agree with your forecast for the market. All the computer signals are signaling a BULL continuation. The chart reading though is saying divergence and declining volume, shallower increases and slower. Classic signs of a chart reading reversal.

I'm looking forward to reading some of your clarifications to my questions. Starting, just a little bit, to get a feel for this SHORT STRADDLE CREDIT SPREAD. Still not clear on some aspects though and waiting your explanations. When you get time!
I just got back from the doctor and had a tumor dug out from behind my ear. He said it was benigne (? ) ( how do you spell that? ) I am feeling a lot relieved. Got a hole in the back of my ear the size of a quarter and dopey on pain killer. Pleasant feeling. [/B]
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Congrats on the success in your operation, and by wishes for a quick recovery!
 
Trading Journal

This short straddle credit spread I'm holding. Dull Monday and great for it I presume? I notice the legs have been up and down .20 cents, or so during the day. I should have an $830 credit?

Okay in a regular one strike apart credit spread, the goal is to let them expire without getting hit by market action.

What is the goal in this short straddle credit spread? Do I let it expire? One leg will be out-the-money, and one leg will be in-the-money presumably on expiration Friday? What should happen then from practical reasons? Should I close one of the these legs and if so, which one? Or should I let both legs expire and settle. The OEX index has a cash settlement.

Basically, what do I do with it? Whats the procedure?

I think after puzzling over the margin required, I'll just wait and see when I understand this enough to put on a straddle in my TOS account and see what margin they assign to me. The ordinary credit spread is $500 each contract x no. of contracts I think.
 
Trading Journal

Okay it's 3:15 a.m in the wee hours of the morning. Do my best work at this time.

Think I got the short straddle now, at least in the OEX INDEX and trading the weeklies.

You put the straddle on a Monday. Wait until Thursday and Friday and buy back the in-the-money side, if the index moves back across the MONDAY OPEN, when you put it on. That would be your neutral point. If on a Friday and you are ITM on one leg, you buy it back and take your loss on that leg. TIME DECAY will have kicked in by then and you should be able to make a profit on the leg anyway? We shall see in practice? Your loss would be what you sold it for on Monday on that ITM leg, and subtract what you had to pay to buy it back and your overall profit is your settlement gain at expiration of the OTM leg, plus whatever small amount you might have gained on the ITM leg you buy back on Friday morning?

The unlimited risk is that the 5 day price action might be in one direction and one leg would lose so much by Friday in premium as to wipe out any gain on the OTM side, plus any loss after subtracting the credit received on the ITM side. Do I have it right?

Found this explanation on a web page called PERSONAL OPTION TRADING MENTOR.
 
To: Trading Journal

Tuesday morning of my expiration week, the STRADDLE or rather the index gapped down. Bit over 6 points, or lost for me $3.20. The STRADDLE is still earning money though as it was for $8.30

Your model must be GOOD! Since you forecasted the drop before it happened. I felt it would happen and it did, but not the day it would occur. I thought it would give me one more day before occuring. C'es la vie!

I use the Fast Volatility indicator in BIG CHARTS for reversals on the 10 day - 1 hour chart.

I can see this STRADDLE is a tussle between the TIME DECAY I'm collecting this week and the accelerated index movement PROFIT experienced by the PUT option I sold yesterday for the buyer. As the week proceeds, I expect the TIME DECAY to win out over the buyer of the option.

Right now the straddle is worth $5.10. I seem to recollect, will have to look this up again, that you said you could get about 30% for what you sold the STRADDLE for? We shall see.

Still puzzling why you would not let both legs of the STRADDLE just expire on Friday evening? Why would you have to go to 3 commissions, to exit the in-the-money side? May be it will come clearer as the next few days progress?

I had looked at putting on a standard credit spread at OEX 515, just one strike out, but thought I would let it run another day for a bear drop. Your model was more accurate than mine. Lost the opportunity on that. Still it is early in the week and I want to wait to see what Wednesday and Thursday will bring? I am after all trading a weekly bar. My trading strategy dictated I only sell my credit spread at OEX 530 and obviously I am not going to get that and didn't in fact. I made a judgement call in that I thought the 515 was much too close to the price action of the index. ( one strike ) We shall see if I get a chance tomorrow, or Thursday morning. Got to follow my trading rules. Can trade closer in on strikes, as the week expires and deviation narrows.
 
Quote from falconview:

Trading Journals

Okay it is Monday morning and 40 mins into the action, have put on a paper trade of a SHORT STRADDLE credit spread.
Sell the 510 Calls for 4.70 in 1 contract
Sell the 510 PUT for 3.60 in 1 contract

Gross credit is $8.30 x 100, or $8300.
Trying to puzzle what the margin would be on this?
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Falconview:

1. In above the Gross credit may have an addition zero, unless you sold 10 contracts? It should be $830 if one contract. Maybe you are used to count thousands/millions, and you do not recall very well how to count hundreds. :-)

2. Margin: Add to the premium this: 510*0.15*100= 7650. This should be the cash from your account that will be tried at opening of position. Early on they would tie a bit more, but later the margin will become roughly the above number. So allow for a cushion. If you allow for the bigger number: 510*100=51K, it is what I mean by leverage equal to 1.

3. Think of a straddle as a bet that at expiration the stock price will be equal to the strike. If you are right, you keep the whole premium. If you miss a bit, you have to give back from your premium whatever deviation you have between price of stock and strike price. The direction does not matter (one dollar up is the same as one dollar down).

I thought to make smaller posts to allow for easier chewing. :-)
 
Quote from Stanford:

OK, so what are you going to do when eventually, and it will happen (as all of the credit spread traders say) the perfect storm hits and you watch a huge portion of your money just disappear? Could happen with your strategy couldn't it?
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That's just the thing with OTM vertical spreads. It doesn't take a perfect storm. Especially if the trader is selling them @ low IV (current environment).

Selling a credit spread here (IV ~ 18) is equivalent to waiting for the market to plunge 50% and then deciding that short selling is the best strategy. I realize that many would argue that direction makes a difference. It doesn't really. It is priced in.

What it comes down to is that regardless of the strike chosen, ATM or FOTM, selling a vertical spread is a bet on lower volatility as well as a bet on direction. To bet on <18 vol here is pretty bold. You'd better be really good at direction then. Then comes my previous statement.... if a trader is that good at direction, there is more money to be made in the e-minis.
 
Quote from falconview:

Trading Journal
Dull Monday and great for it I presume?
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Dullness is the friend of the premium seller, because the premium seller sells the fluctuations. He likes to sell the sizzle, and keep the steak.
 
Quote from Cache Landing:



What it comes down to is that regardless of the strike chosen, ATM or FOTM, selling a vertical spread is a bet on lower volatility as well as a bet on direction. To bet on <18 vol here is pretty bold. You'd better be really good at direction then. Then comes my previous statement.... if a trader is that good at direction, there is more money to be made in the e-minis.
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The seller of a bear call spread is sure to get either lower volty or the direction right, because when market goes up volty goes down, and vice versa. It is the reason why bear call spread are "easier" than bull put spreads in general. In commodities, I would expect the reverse to be true, because panic should take place for short sellers when a commodity rises (similar to longs in stocks).
 
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