SPX Credit Spread Trader

Quote from tradingjournals:

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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Fallacy of the bear call vertical. There is not 100% correlation between direction and vol. Amplitude is also not at all congruent.

Example: You sell a bear call spread 80-points OTM. In one day, SPX rises 40-points. Vol drops from 18 to 16. Over the next two days, SPX gives up 15 points. Vols are back close to 18 again but the underlying is 25 points closer to you spread.

In the real world I actually just gave you a tame example. The crux of the issue is that you're selling vol @ low vol. There is a natural floor on vol @ about 12. Under special circumstances, like the recent euphoric bull market, you'll get just below 11. But during normal market conditions, vol will bottom out at about 12-14.

You are right in that the bear call vertical benefits from vol drops on a positive print, but only when vols are >30 is that benefit going to outweigh the delta loss.
 
Wow!

Picked up a point or two, between the two professionals CACHE LANDING and TRADING JOURNAL debate

Particularly the part about volume is dropping when the VIX is dropping. The part about the delta and VIX at 30 left me stumped though? I liked the floor at VIX 12. I have noticed it casually but now you mention it, that is a very good technical point to remember.
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Getting back to the SHORT STRADDLE ( sold ).
2nd day of the week, and it has finished with .70 cents earned out of the credit. Before commissions. I still am puzzling whether you let both legs expire on a Friday, or you buy back the one in-the-money? I'm going to try another straddle on paper Wednesday, tomorrow afternoon. See what the effect of accelerated TIME DECAY is?

Cache Landing is adamant about E Mini futures buying, so that is still on my shelf of things to try and do. Just at the moment I'm trying to learn the SELLING of a SHORT STRADDLE. From there will go to a STRANGLE and I think from earlier comments by Trading Journal he means SELLING 2 on each leg? I'm not sure why? But I think those were his instructions. After that we take a look at the E Mini buying. Somebody on another forum said the sign for E Mini in TOS is /ES and not ES. Have yet to try it.

This is fun guys! Especially since you both are making money in your own niche. I'm learning a lot.

Thankyou very much!
 
Trading Journal

I did catch the mistake on the zeros and it should have read $830 credit on the SHORT STRADDLE. Trouble is you can't go back and edit these messages, I don't think? But following messages did say the right numbers. I wondered if anybody would have caught the error?
( grin! )
 
CACHE LANDING makes a good point!

The point was, that if you are a good enough chart reader to predict or anticipate underlying moves ( in my case, the OEX ,) to avoid a slide that will hit your VERTICAL CREDIT SPREAD, you are a good enough chart reader to make MORE money in the E MINI"s and more money than messing with low return reward, paying credit spreads, that are waay unbalanced in risk to reward ratio.
That is an interesting point and I'm going to have to think carefully about that, as to my own skill in that line. I'm going to sleep on it.
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I believe this was the point in debate?
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Registered: Jun 2010
Posts: 72


08-10-10 01:43 AM

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. "

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To be or not to be! That is the question? ( grin! )
or to para phrase it; Trade directional E Mini futures, or take a chance on purpoted safer VERTICAL CREDIT SPREADS?

Sounds like a philosphical question, or one based on your own evaluation of your own skill set? Is it better to get hit by one big loss occasionally putting you out of the game, or taking a lot of small losses that can mount up on the presumption you will profit more on the trend, if you can catch it?
 
"You are right in that the bear call vertical benefits from vol drops on a positive print, but only when vols are >30 is that benefit going to outweigh the delta loss."

Been re-reading the debate. Excellent when you get two experienced money making professionals on here. The above comment left me puzzled. Read it three or four times but the VIX at 30 or greater outweighing the delta loss left me stumped as to what was meant by it? I realize you are looking at performance from a different background measuring mind set.
I've kind of discarded the DELTA when doing Verticals and substitute chart reading instead, as the DELTA never stays still and fluctuates with the OEX index gyrations. Buying selling delta I found to be meaningless in the context of waiting a week for a Vertical Credit Spread to move up and down. I decided I'd more rely on ability to read the ticker tape number and sense the pattern of changing number rythm. Reading the flutter, or pressure in other words. I think this is a way of looking at what others use DELTA for and GAMMA for, but just more my old fashioned method. Before the GREEKS were so common on the new internet. It's kind of like cell phones, I hate the complicated suckers, my younger relatives love them.

Apologies to CACHE LANDING. I know I can trade futures, just do not know if I can trade them lucratively. So I will get to it eventually. Whereas I know absolute nothing about STRADDLES and STRANGLES and had a friend start a brokerage firm in Miami successfully and even started his own bank. Using profits from straddles and strangles he said. So Trading Journal has my immediate interest as you have to catch the opportunity to get expertise when it is right there and offered. Plus it uses options and I'm already in TOS, which makes it easier for me. You can waste years diddling around trying to teach yourself stuff otherwise. Just going with the flow mon!
Nice debate going on though and I'm picking up bits and pieces that are very nice nuggets of gold. ( I did gold prospecting in my mispent youth. ) So I know how elusive such things can be.
 
Quote from falconview:



Cache Landing is adamant about E Mini futures buying, so that is still on my shelf of things to try and do.
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Here is my problem with playing the underlying directly. My models are very good at the direction and timing, but my problems are myself, meaning I am not patient to wait for gains to developed fully, sometimes I do not honor my stop losses, and the worst is that I do not bet equal size, and sometime I overleverage and get hit hard. The last three are simply psychology/discipline, and I have been working on it, but it is difficult as long as it is not perfected because you have to be always right, but for the mistakes to hit, they have to be right ONLY once! In addition I think one needs capital, needs to play mainly/only when the situation is right. I also believe that for this to work, one should change the instruments, because opportunities in a given week or day are not the same, because an instrument shows opportunities only 20% of the time. The rule I have in my mind is: 80% of the move happens in 20% of the time. I came to the conclusion that the biggest gains are made at the end of the move when everyone notices it, and that the reason for entring early is not for the gains, but for the losses to be small. The distance between thesmall losses and the massive gains is patience, and I have that problem.

If any of you does not have the shortcomings I describe above, and want to test my timing models, let me know. I believe my models have an edge, but when I add myself in the loop I reduce the edge, and with the occasional but substantial hits, I get set back substantially.

When I sell options, I feel that they force me to wait. Strangely I seem to honor options. It is psychological. There is a number of additional advantages of options in playing the direction which is not possible to describe in one post.
 
Quote from falconview:

Trading Journal

I wondered if anybody would have caught the error?
( grin! )
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The good part of errors that are caught is that you have proof that people are carefully reading what you write! :)
 
atticus

What is buying a fly?

Trading Journals

At least you have your problem figured out, which is pyschological.
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"The rule I have in my mind is: 80% of the move happens in 20% of the time. "
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The rule I have on trend trading, is to follow the DMI computer indicator. When the D- and the D+ cross, - take the trend. Whether it is short or long depends mostly on the steepness of the first crossover. Shallow crossovers can be deceptive and short. Unfortunately in the OEX in current markets I am finding that the spreads for the market maker have altered the ability to get the meat at least in options, out of a trend. In E Mini's which I have not yet looked at in TOS., it will be the Spread for the market maker I will look at most. Finding the breakeven.
I am finding in today's OEX index market after coming back from a long absence ( more than a decade) , that you can NOT use the DMI indicator for a trend move in velocity and profit making in anything smaller than a daily bar signal, using Monthly chart. I even prefer the three month chart and even six month chart. Though I track using 10 day hourly charts. I use the daily bar to trade.
I like the DMI because the faster moving D trend indicator, will curve and cross over the slower moving ADX trend line. This is my automatic no questions asked EXIT SIGNAL and in between start and finish I don't even look at the flutter of the market. You get that 20 % of a trend fastest and most profitable move. In OEX options after that signal, the prices or index numbers continue up for a while, but the premium ballooning collapses like you pricked the balloon with a needle.
The drawback is that these obvious volatile profitable trends do not occur all that often. About once, maybe twice in six weeks or eight weeks. Sitting still for them to occur is maddening for traders who need the adrenaline rush. But avoiding any other trades is the only way to build your account balance.
Bottom line is the account balance. If you are not making 40% a year, then something is wrong. If I have a problem at all with futures, it will be the spread for the market makers and overtrading. Plus I am very unhappy with draw down systems.
I recently was attracted to the Vertical CREDIT SPREAD hoopla on the internet because of the promise of no draw downs. The fly in the ointment is you can get wiped out, when you lose it is a very big one. That quite rightly is what has Stanford worried. In my case I am hoping to acquire the RULES and SKILL that will avoid that scenario and the goal is NEVER to get hit. Can it be done? Phil on here indicates he can make money annually, so possibly it can? Time will tell, in paper money trading.
I am very interested in the STRADDLES and STRANGLES. I still want to know what happens on Friday expiration. Do you buy back the in-the-money side, or do you let it expire with the out-the-money side? Haven't got to the STRANGLES yet? Lets see what happens this week with the SHORT STRADDLE credit spread? If I can pick up the nuances to it. After that I can figure out how to deal with it and apply the strategy.
Avoiding losing questionable trades is the name of the game.
 
80% a year trading options!


If your annual account balance is not over 40% in trading options, then obviously you are doing something wrong? On many option trades you make 40% on one trade. The problem with that is you do not know you will beforehand, or you could bet all your savings and the farm on it.

I have a friend who has been doing 80% a year trading options. I'm tracking him this year, as he told me about it in the Spring. Would this interest you, if you are not doing 40% a year or better? It interests me.

What he does is buy Natural gas company option LEAPS. This is a year out option. My guess is you have 3 months to make it work? Don't know yet, just following along with him. I know he sunk his savings in his LEAP this year. It is only ONE TRADE per year. If he doesn't get the action in time, then he ROLLS OVER to the following year LEAP.

Of course for adrenaline junkies who love the intricacies of learning a lot of jargon and complicated trading strategies, most would rather lose each year and have fun doing it? After all, if you are old, retired and got nothing better to do, what would you do with a trade that doesn't have to be watched except every month or so! What would you do with your time?

So, are you really into trading for the money?
 
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