SPX Credit Spread Trader

Cache Landing

Boy that is a tongue and mind twister!

I am trying to picture this, but having difficulty.
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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?
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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.
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Still don't know what this kind of fly is?

This I understand:

"or buy the puts outright if that is the case."

My thought is not that I have a directional bias of any kind in selling a credit spread. I'm just selling the credit spread and I don't think in the immediate future the market is going to move close to the spread. It might do so a few days away, during the future unknown. So selling the PUTS or whatever expecting volatility is not the question. What I am doing is simply SELLING for the joy and profit of selling, believing ANY MOVEMENT that the market does is not going to hit my spread.
 
The mysterious TIME SPREAD of Trading Journal

I got a feeling there is a twist, or trick coming here? What it is I don't know? Sort of like waiting for Xmas presents on Christmas morning.
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While it might seem you guys are wasting your time on a dumb, country boy yokel, the ACT OF TEACHING purifies your own thinking and strategies and the subconscious feedback you get from explaining things makes YOU A STRONGER TRADER!

- my sermon for the day-

You don't have to thank me right now! ( grin! )
 
Falconview, are you the owner of the hostel? Is it busy this time of year?

Just wanted to check on the numbers you gave me earlier. You talked about 4 spreads or 20 points and then said multiply by 10 for the NDX, but isn't that closer to 4 rather than 10?
I like limiting the whole credit spread idea to the bear call side of things, much safer (I had been wonderng about that myself before you mentioned it).

Why dont you sign up for the free 30 days with "monthly cash through options" as I am going to do. I would love to compare their ideas and market predictions to ours (well really yours). I would love to get someone who knows more to look at what they are recommending.

Thanks Michael
PS I dont work for them and have no interest in getting you to look at their site.
 
Stanford

The hostel was closed last year. I'm getting too old to run it. We use the place as a very big house now. Got it for sale though. Building a new duplex a block away on a ridge with a good view. My youngest daughter has one on Caye Caulker, ( a barrier reef island ) called TINA"S HOSTEL as well. My grown children and family have considerable small scale real estate things in three countries. Made more money in real estate then ever, in trading stocks, or options. Though I did profit in both of the latter two, mildly. Real Estate is a slow investment process of 7 to 15 years. Whereas options are gratifying for the immediate adrenaline rush and the mental challenges. I doubt 5% of people actually make a decent living off either stocks or options. It's a rigged gambling game. The financial house wins. You can win, but winning to the extent of getting rich is more hype than reality for 95% of investor/gamblers. Just my opinion. That is why you should use discretionary cash.

I'm not really interested in signing up for things. Thank you for the offer. I believe one has to learn in the school of hard knocks. That's why they have TOS free paper trading, which is a big improvement of the earlier days of learning options. I can remember when round turn commissions would run me $300 or more for simple things. Things have changed for the better. I don't want to lose even in the learning process, but you know we humans learn best by making mistakes. The idea of nowadays having FREE paper trading software programs, certainly makes it easier to learn the mechanical aspects. The tricks and nuances so to speak.
At the same time, the learning process is incomplete, because once you switch from paper money to REAL MONEY, the whole game changes again. The fear, euphoria and greed that goes with REAL MONEY throws a lot of the lessons learned paper trading right out the window. The most paper trading can do, is teach you the mechanics of doing it. The real lessons come when you put REAL MONEY on the line.
I would hate to lose the credit spread this week I put on, but in hindsight I should not have done it. One of the mistakes one makes when paper trading, which you would not do with REAL MONEY. You take more chances in paper trading, because you want to see and feel what happens. I doubt I would have made the spread this week, when I did, if it had been REAL MONEY.
The credit spread learning process for me, indicates YES, stick to the overhead BEAR CALL VERTICAL CREDIT SPREAD. If you were in a long term BULL TREND, you could do IRON CONDORS though. That's what I've learned over the last nearly four months. Especially in a mature bull trend, up to the point of a new bear trend starting.
Four months is a long time to take, just to learn one course on successful tricks to using one strategy to earn money with. That is why I am really happy to have the contributions of CACHE LANDING and TRADING JOURNAL walking me through some new niches in the financial derivative trading market. It shortens the learning time tremendously. All trading is a personal thing. What works for one person does not necessarily work for someone else. On forums like these, or advertising stuff on the internet, it is the FAILURES who are SELLING advice and lessons. If they were successful they would not be selling advice, they wouldn't have the time or inclination. Voluntary contributions from people like CACHE LANDING and TRADING JOURNAL, or even PHIL who started this forum are tremendously valuable assets to a newbie. That said; because of the personal and physcological nature in successful trading, advice has to be taken with a grain of salt, if you do not know the person and that person does not publish their running account balance, which shows their wins and losses and balances. There is no way of putting a value on it. Some people can be very forceful about pet theories, when in fact they do not make a good living at it. On SELLING advice sites, it is a case of BUYER BEWARE!
Stanford, like all newbies, you are looking for the perfect mechanical system. In trading lore, we call that the HOLY GRAIL. Nobody has ever found the HOLY GRAIL. Nearly always the problem has been physcological and personal quirks in how your personality treats data you accumulate in your subconscious. The more inputs and experience you get, the better usually you get at it. Takes a lot of time, couple of years, just to consistently show a profit in just one narrow niche, or field. Even so, there has been reams of literature printed out there, pointing out from the experiences of others, that we humans as traders, often repeat our mistakes, over and over again. It helps to keep a record of your mistakes, to see if you can overcome them. The mistakes may look mechanical, but are in fact physcological and personality quirks.
A useful tool to overcome trading learning, is BRAINWAVE ENTRAINMENT. Not sure if they have much on that these days, but it works. I've succeeded at a lot of life goals using this. You can use it to focus in trading too. The sole attraction for trading is the solitary aspects of being independent, otherwise people would not even bother.
It's 3:30 a.m. in the morning, and I'm fresh, so I'm spouting off here. Take it with a grain of salt!
 
Quote from falconview:

Cache Landing

Boy that is a tongue and mind twister!

I am trying to picture this, but having difficulty.
*******************************

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?


Still don't know what this kind of fly is?

This I understand:

"or buy the puts outright if that is the case."

My thought is not that I have a directional bias of any kind in selling a credit spread. I'm just selling the credit spread and I don't think in the immediate future the market is going to move close to the spread. It might do so a few days away, during the future unknown. So selling the PUTS or whatever expecting volatility is not the question. What I am doing is simply SELLING for the joy and profit of selling, believing ANY MOVEMENT that the market does is not going to hit my spread.
More...

First off, I am not suggesting that IV and Delta are correlated at all. They are both factors in the pricing of an option. No offense, but this is Options 101, if you don't know this, then you should not be trading real $ yet. Let me break it down for you a bit.

If you sell a bear call spread, and the underlying moves up 10 points. All else equal, you will see an unrealized loss on the position. That is a Delta loss. To be even more technical, you are losing due to Gamma, but we won't get into that yet. The reason it is a delta loss is that you sold the near strike, and bought the far strike. The near strike had a higher absolute delta (e.g. -20) than the far strike (e.g. +10). If those delta values were constant, then you would be down $100 on that vertical spread.... $200 loss on the fronts and $100 gain on the backs.

The benefit of a bear call (vs a bull put) is that when the underlying moves against you, the vol will generally drop. Your bear call spread also has correlating Vega values. Vega = the amount the option price will drop given a 100 basis point move in the volatility. Again, the fronts have a higher Vega than the backs, so the vol drop gain on those will be greater than the vol loss on the backs.

This is to your advantage on the bear call, but works against you on the bull put. That is why ppl keep telling you to stick with bear calls. But when Vol is already low, so you cannot expect much by way of Vega gains on a large positive print. So Vol essentially becomes a non-factor.

Now your trade is a combination of two things. It is a Delta bet and a Theta bet. We already said that Delta refers to it being a directional bet. Theta refers to time decay. If you sold it, then time is on your side.

You are saying that you don't care about the Delta (directional) aspect, and are not betting on direction. You claim is that it is purely a Theta bet. You don't care what the underlying does as time passes, just that all the time will pass (i.e. Theta gains will all be realized) without the underlying touching your front strike.

Indeed, that is the downfall of ALL otm credit vertical spread traders. They assume that a far OTM spread is 0% directional and 100% Theta. I need to be very clear about this next point....

THERE IS NO EDGE IN SELLING THETA.

If you think about this for a second you'll see why. Time passes at a constant rate. There is no way for you to judge passing time more accurately than the market.

So let's put it all together......

1) No edge in selling theta

2) No edge in selling vol when already at low vol. In fact, if vol is already at natural floor, there might indeed be edge loss there.

So the only thing left to have edge in is direction. Non-direction (or flat) is also a direction. So, in selling these OTM verticals, you need to have directional edge. If your directional edge is in more accurately predicting a sideways market, then more power to you. Sell those verticals all day long.

But if you don't have demonstrated edge in more accurately predicting price action of the underlying, then you are trading a losing strategy. The reason is that the market has already factored the time passing and because of the low vol is giving you slightly negative odds based on random price action. Add to that the edge loss caused by commissions and the bid/ask spread, and you account will drop in the long term.

In a nutshell, IF we were at higher vols and there was a reasonable expectation of dropping IV, then the verticals would be about 50% vol bets and 50% directional. But in current conditions, your verticals are actually 100% directional. Are they the best way to trade direction?
 
falconview, here was my paper trade for Aug, done on the Monday after settlment, on the NDX. At the time it was trading around 1840 and my forecast was for a rising market so I did the bull put spread. 1625/1600 for a premium of 1.30.
Looked good at first, then lately has been reversing. However, we are still far out of the money. At this point to close out the position would cost .45. I am not on the actual trading platform so these are approximation numbers from the delayed bid ask.

So I still have quite a bit of room before I would close out for my maximum 1.95 loss. Love to hear your thoughts on that. Of course, with our new strategy of bear call only, I wouldn't have done this.

Thanks Michael
 
I am busy with other things but here are some points:

1. A (long) time spread is to buy an option for an expiration, and to sell the same type of option for a short duration at the same strike. It benefits most if stock moves towards the strike, the volty rises, and time passes. For instance four days ago when QQQQ was at 47.19 (but the way when I wrote that my models told me that that sucker was about to reverse, it was made at the exact top), a good time spread might have been to buy a september put at strike 45, and sell an August put at strike 45. The time spread is like a an Indian tent in its profit vs. loss profile. The maximum profit is when the stock reaches the strike, assuming same volty as when you start. If volty rises, it helps the time spread.

2. Why a time spread can be useful? First it require less money, there is no margin, and return can be good. You earn from passage of time, with a limited capital risk. A time spread can be also used to hedge another position. For instance if a straddle is sold, and one thinks the market might go down, one can use some of the premium from the straddle to buy a time a time spread with a strike which is lower.

3. A general observation: a strategy is just a tool. It is ultimately the vision on the underlying that makes money. The option premium seller needs to learn a set of strategy (bear/bull spreads, straddles, strangles, time spreads, etc), and implement a strategy that is consistent with the view on the underlying. For instance, when it was estimate that the market might turn down, and at least not advance, then a credit OTM call spread could be a suitable candidate, but it is not the only good candidate.

4. A consequence of 3 is that if one were to do the same strategy every expiration, then the strategy should theoretical not make money, but probably lose a bit (commission, etc). So what to do? The option premium seller has to have the skill of knowing his strategies, AND the correct vision on the underlying. In trading the stock, you make money from correctly predicting where the stock will go. If you were good at predicting where the stock does NOT go, you do not earn from that prediction in trading the stock. Option allow one to take advantage of such predictions.

5. Falconview: You asked why I asked about the premium and volty. The purpose was to know whether you have fully understood the nature of an option price, and also a key variable in it which is volty. My guess is the call premium is now around a nickel, which means that the straddle has lost almost all its time value. What is left is mainly/only the intrinsic value. When all time value is gone, your straddle (with a strike higher than current price) becomes as if you bought OEX at current price and intend to sell it at strike price.

What to do depends on your future vision on the stock, and volty (but the latter one we know it is related to the direction of the stock).

There is also the rollover possibility. For instance one could sell the next straddle at the same strike, or at a strike that is different and possibly taking account the time premium from previous straddle.

I do not have time to proof read it, and edit it, because I have to get to something soon. Bye now.
 
Quote from falconview:


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.
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Worse case scenarios are good to limit risk, but how could you make money from predicting a worse case scenario?

In relation to predictions, the models that made the prediction of the QQQQs 4 days ago (read previous pages) told me time last night to cover any short position if QQQQ hits 44.80 or below. They opened the QQQQs at 44.50.

Now I want to consider selling some 45/46 strike straddles. Tomorrow straddle at strike 45 is running at volty of 29 ( it was running for volty of 33 just moments ago). Next week's straddle running for volty of 23.
 
Cache Landing

That was an excellent scholarly treatise in Credit Spread Verticals 101. Congratulations! I even understood it, "sort of" - grin!

Hmnnn! I'm going to print that out and cogitate overnight on it. In my REM sleep. I get fundamentally what you are saying though.

I have chosen to specialize in WEEKLY credit spread trading, where the THETA is highest. Essentially I want three things. a) the market stays level, b) the market moves away from me, after I use the volatility in the premijm ballooning, when it is moving in my direction or c) if it goes the wrong way, it does not go enough to touch my spread in the TIME SPAN of one week, or 5 days trading. In other words, I am counting both on direction and THETA and trying to catch IV ( premium ballooning for the entry ) Hence the number of option out-the-money strike choices.
I'm not at all able to articulate the same thing in GREEK lingo. I do however, in my own way, play both the volatility and the theta. VEGA I will have to look up again. Can't remember what it is?
Thank you VERY MUCH for taking the time to articulate it. I believe we are on the same page, just using different language. However the idea that VIX 12 and lower is the bottom in volatility, is a new thought to me. How I will incorporate that later I am not sure?
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For STANFORD

I think you are right STANFORD. ONLY TRADE THE VERTICAL BEAR CALL CREDIT SPREADS as a trading system. I ran the probabilities from that 3 month study again overnight.
The name of the game is PROFIT, cash flow on a regular weekly basis for me, monthly for you and you will have to do your own monthly studies. With RISK at a bare minimum. Forget the premium, profits look after themselves. Just worry about avoiding any losing style trades.
Using that 3 month study on the weekly bars, the 4 point OTM has a probability of 93% to win. The 5 strike OTM a probability of 100%. At least in THAT limited study data. ( we'll qualify it here for the nit pickers )
On the other hand the BULL PUT CREDIT SPREAD has a probability of 60% to win, either with the 4 strike, or the 5 strike OTM location of the credit spread. You can lose 40% of the time. That is very bad news. There are possibilities for BULL PUT spreads but they occur in low IV when the VIX is 12 or so and a long slow climbing BULL TREND is in progress. There are other good occasions but for safety will avoid them like the plague, if I get out of this week's mistake with a whole skin. ( grin! )
There seems to be a fudge factor here, dependent on your ability in the weekly to enter during a leg in trade, when you are using the volatility to get expanded premium before the market reverses definitely and the premium ballooning collapses. CACHE LANDING can explain that in GREEKS. Failing the ability to leg in, which we had this week, then my choice at least is to ENTER a VERTICAL BEAR CALL SPREAD in the last hour of trading on Wednesday. Without talking about GREEKS, the THETA , the TIME DECAY is huge overnight Wednesday to Thursday, in fact the premiums on Thursday morning are done consuming THETA between the MARKET OPEN and NOON hour. For all practical purposes. The OTM are usually zero by noon on Thursday. That could change with violent market velocity, but rarely does. In a BEAR TREND DROP which would be a case in point, it's fine, as the market is moving away from you, which is good stuff.
There is another factor. In the weekly, the week of expiration, after the FIRST day you can reduce your bet location from 5 strikes OTM in the OEX by one strike for Tuesday. You reduce the target strike by one strike each day as the 5 day week progresses. By Thursday noon, a credit spread put on 2 strikes OTM is acceptable in the risk parameters.
So there we presumably have a working trading system in CASH FLOW, VERTICAL BEAR CALL CREDIT SPREADS. Will see how it works out for the next ten weeks on TOS web based paper money. Then into real money if it works out okay.
The other clarification is bet size. I am currently using 50 contracts, which takes an account of $25,000 in margin. This is returning between $3000 and $4000 per month in the weekly trading. There will be variation, because the premiums vary depending on when you can enter a credit spread. Trading by RISK CONTROL as to where to enter is the name of the game, not premium collecting. You are trying to do this forever, week, after week after week.
I would if successful start with $5000. Then add or reinvest as the case may be in compounding, as confidence builds.
The next step is diversification of strategies and we will move on to the SHORT STRADDLE credit spread next. Get that one under my belt as well. I see at least one possibility already.
 
Quote from tradingjournals:



Now I want to consider selling some 45/46 strike straddles. Tomorrow straddle at strike 45 is running at volty of 29 ( it was running for volty of 33 just moments ago). Next week's straddle running for volty of 23.
More...

The volty of tomorrow straddle for QQQS has now fallen to 27.3. In only 15 minutes or so, it fell from 33 to 27. That is 20% fall.
 
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