SPX Credit Spread Trader

[Cache Landing]

Quote from falconview:

"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?

Let me see if I can explain it simply. The basis of the problem is both Delta and Gamma as the two are related.

Delta = the amount that a certain option contract changes proportionate to the move in the underlying. i.e. if the underlying gains $1 and the option gains $0.5 then the delta is 50.

Gamma = the amount that Delta moves with a given move in the underlying.

IOW, delta is not static. The front strike on the vertical spreads you are selling might have a delta of 10 or less because they are far OTM. If the underlying moves against you hard, that strike might then have a delta of 40. But it is not the delta that kills you, it is the gamma. Because, as the underlying moves against you, the front strike is going to move faster then the back strike, because it has higher gamma. This higher gamma means that it is only going to get worse as the underlying moves closer to your front strike.

Now we get to the point I was trying to make before. The other main factor in option pricing is IV, which is currently @ about 18. Since the vol floor is right around 12-14, the most you can expect for is a 200bp IV drop on a +40 print. That will not be close to enough to offset the delta losses. Your vertical that you sold for 0.10 might be worth 1.00 now.

OTOH, if vols were >30 when you sold the spread, then a +40 print would maybe get you >500bp vol drop. That's a lot better in offsetting those delta losses.

The point is, buy low, sell high. It applies to volty as much as price.

 

[Cache Landing]

Quote from tradingjournals:

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.

Sure, if you don't have the discipline to trade it, any positive edge will lose.

 

[falconview]

Lovely slide and open, with prices going to the downside. My listserve was forecasting this based on European and Asian futures.

My SHORT STRADDLE interesting to see, if I had to buy it back is $12.65. I got a credit for $8.30 so my net loss before commissions is -$435 this morning. We will wait of course, as I'm curious to see what the accelerated TIME DECAY will do on late tomorrow, Thursday afternoon and Friday morning. This is my first learning SHORT STRADDLE courtesy of teacher guru Trading Journal. Except he hasn't told me yet how to deal with it on Friday expiration? ( grin! )

I'm looking seriously today at putting on a BULL PUT spread and my goal is to put one on the 485 STRIKE in the OEX, which is 5 strikes out of the money from the OPEN on Monday. Failing that I would accept the 490 STRIKE which is 4 strikes out-the-money. With only two days to go, a Wednesday afternoon spread should shrink pretty rapidly.

We shall see what happens! If I can get the 485, I will go to 100 contracts and if I have to take the 490 I will do the regular 50 contracts. That's the game plan anyway!

 

[Cache Landing]

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.

To be clear, I'm not adamant about buying e-minis. I'm just saying that with such low vols, you are actually making a directional bet in addition to the lower vol bet. Edge is highly negative here on the low vol side of it, so you might as well just make the directional bet.

 

[falconview]

Wow!

"To be clear, I'm not adamant about buying e-minis. I'm just saying that with such low vols, you are actually making a directional bet in addition to the lower vol bet. Edge is highly negative here on the low vol side of it, so you might as well just make the directional bet."

You gave me something to chew on here? Vols I take it is volatility?

I'm going to think about that a bit and chew some more, there is more here than is meeting my eye, in Delta and Vols?
********************************

BOTTOM FISHING FOR THE WEEKLY BAR

I put on my Vertical Bull Put Credit Spread, based on the 5 strikes out-the-money rule I had recently established. Got .35 cents for the 485/480. Counting on my swinging probabilities here!

50 contracts 485/480 @ .35 cents. I had a limit order of .25 cents but it went for .35 cents on TOS. Which pleases me. I was sort of waiting for the index to move down to the 495 area or lower, but it was going sideways so much, I thought I better get while the getting was good.
I noticed afterward that the 480 lower STRIKE was now starting to add some premium as the index slid a bit more. Might even do another one if it does so? At the 480/475 level of course. I chickened out on the 100 contracts.

Anyway, win or lose, I'm in the game for this week.
********************

I'm not at all clear in what you are saying about losing the edge when you have lower IV vs Delta? In what way? How can the EDGE be lost this way?

""To be clear, I'm not adamant about buying e-minis. I'm just saying that with such low vols, you are actually making a directional bet in addition to the lower vol bet. Edge is highly negative here on the low vol side of it, so you might as well just make the directional bet."

 

[falconview]

Now that is interesting.

The 5 min. chart is showing a bottom, based on the D- line crossing over the ADX. Which doesn't mean diddly squat in such short time frames.

The 15 min. chart D- is still paralleling the ADX and has not yet crossed over.

Haven't even got to the hourly chart.

The only one that really counts is the daily on the 3 month chart. Maybe I should have waited some more? Bottom fishing is always a hit and miss precarious affair. The thing is, you get more premium if you sell while the volatility has swollen the premium. Trade off, we shall see how it works out today?

Got a water line to fix this morning. The pipe popped by the water meter, on my side unfortunately.

 

[tradingjournals]

Falconview:

You are a hard worker, and smart. That is good. I think you have made strides on a number of points. You still have a distance to travel, but I think you are doing very well in your learning.

Some points:

1. Please report on the time premium left in your straddle. The time premium is just TWICE the premium of the option that is out of the money (for memory, I think it is the call in your case). So you will look only once. Also report the intrinsic value of the option that is in the money. That is easier because it is simply the difference between the current market and the strike of your straddle.

2. On your screen do you have something call implied volatility? You need to take a habit to look at that one. Take note of the implied volty on the strike of your straddle, and also of the implied volty at the current price. You will have to look at the option chain to find out.

3. You need to make this idea placed firmly in your mind: the short straddle is about predicting where the underlying will roughly finish at expiration. A ballpark area. I am iterating this, because I think you have not yet fully understood it. Here is my proof. I think you knew earlier this week that the market would fall, yet you may have sold your straddle at a strike which is higher than the market, or at least it was not lower than the price of the market at the time. I suggest you review it for learning reasons.

4. Get ready to hear about another friend in your spreads family. It is called the time spread. It will be your friend in the situation you already predicted few days ago, and it took place, which is: (1) time will pass (everyone get that one right (2) market would somewhat slide, and (3) because of your new acquired knowledge you now know that when market slides volty rises, so you want to capitalize on it. Time spreads are good for the three points we just mentioned.

5. The market had two gaps in two days, and other small gaps. Gaps are the most feared enemy of the option premium seller, and particularly your case because you work on shorter time horizons. So you are learning in a good environment.

See you later

 

[Cache Landing]

Quote from falconview:


I'm not at all clear in what you are saying about losing the edge when you have lower IV vs Delta? In what way? How can the EDGE be lost this way?

The IV and delta are not related. But if you are losing on the delta side, you are hoping to be gaining on the IV side to help offset those losses.

What I am saying is that when you sell any option spread for a credit, you are always short volatility. IOW, you think that VIX is going even lower. If you agree with that statement, then more power to you. Sell volatility all day long. OTOH, if your prediction is that vol will increase in the short term, then why in the world are you shorting it?

So my point was that the prediction is a lower print and subsequently higher IV. Just short the futures or buy the puts outright if that is the case.

Also.... Atticus is right. It is a rare case when a short straddle is preferred to the fly.

 

[tradingjournals]

1. I think his earlier conclusion that his concern should be focused on not getting hit is correct. You achieve that when volatility is lower (ocean is rough but not too rough), and by doing bear spreads because when volty rises it means the market went down which is exactly what he wants for his bear call spread. So for the latter case, volty rise is his friend, even if he sold it when VIX was lower.

I know what you mean when you say that he could have then played a pure delta by shorting the futures, but there is another case. In shorting the futures the market could have gone no where, or moved a bit up. In the latter cases, he would have made money on his spread, while incurred a loss from being whipsawed or from a slow rise if he shorted the futures.

2. Are sure about your statement that when one sells for a credit, one is short volty? I do not think it is always true. Think about spreading across time.

I think this FalconView is very smart, and has learned from life outside of the market. I think he has a good sense that a negative cash flow is something that a person should avoid the best he can. My sense is that he might not disagree with something like "return OF the money takes precedence on return ON the money".

I believe that these guys who are retired have a mind set that is very aligned with markets. Luckily they are spending their time in making trips/etc, and not operating in financial markets. I think they can clean a lot of the hot guys among us, because of their attitude, patience, mind set, etc.

 

[falconview]

Just like Janet Reno said after Hurricane Andrew hit Miami. After 5 days waiting for the FEDS and NEMO to do something. People were desperate, couple of million of them in destroyed houses and water was the biggest problem. Reno said in her on-the-air speech, that the Miami government was overwhelmed and they were waiting for the US Cavalry to come riding to the rescue.

So Trading Journal tells me stuff and then disappears? ( grin ) I thought the US cavalry was coming to the rescue? ( laugh )

Been gone for 2 or 3 hours and with an hour to go, I just got back on. There is two days left to expiration. Effectively only a day and a half.

The SHORT STRADDLE is losing (- $690).

Questions: a) Time premium left is 2 x .30 cents = .60 cents I'm using the ASK price as that is what I have to buy to get out.
b) Intrinsic value: the slide is now 13 points in the OEX.
c) Implied Volatility Strike started 510, IV of 30
IV current index value ( 495 ) = 22
********************************

In review I made a boo boo, a big one. The DMI indicator has completed all of the time frame cross overs by the D- of the ADX. So we are for today at the bottom thereabouts for the day. The bar is not encouraging though for tomorrow. Possibly another plunge? I've got a 10 point cushion, between the bottom today and the spread tomorrow.
a) In hindsight I made a mistake. Should have waited for the DMI to complete it's thingy. Before putting on the spread.
b) This is a bear move and my study I sent to Stanford had a worse case scenario of a 50 something point plunge in the study. The downside I told him was the most dangerous and it is. The 5 strikes I allowed in my excitement was the position recommended as a RULE for the topside spread, not the bottom side spread. There is no good rule for the bottom side spread. I just made a mistake. See how it comes out over the next two days? Be a 50 - 50 choice, or LUCK if it works out.
The thing is, I was conscious that premium was running out fast today Wednesday due to TIME DECAY and I would be losing Premium to SELL. Thats my excuse anyway! ( grin! )

C'est la vie!

Whats next GURU? - grin - Interesting data you asked for. Haven't a clue why? Something about expiration target for Friday?