SPX Credit Spread Trader

I WILL RESPOND BELOW!

Stanford


Registered: Jul 2010
Posts: 14


08-12-10 06:40 PM

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
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Look Stanford, I'm a novice at credit spreads, learning just like you. Any opinion I might offer on the NDX which I'm not trading would be as good as a FART in a hurricane. Forgive the vulgarity, I was a fisherman in another life.

The NDX mirrors the action of the OEX which I know. It is just that the NDX is swinging more and you see the FLUTTER, or back and forth more accentuated. It may be possible for you to use this enlarged picture of the flutter, or the noise action to ease out of a trade. I would not know myself, because in the OEX everything is much tighter and there is no time to distinguish between random flutter and actual index reversal. Nor would it make much difference because you would get wiped out by responding to it. They have a name for it, but escapes me right now. ( whipsaw)

"Of course, with our new strategy of bear call only, I wouldn't have done this."

You answered your own question and I'm sweating out my own trade the same way with the same feelings as you, maybe a little worse because I'm using a web based paper trading account.
 
Oh lordy me! Trading Journals

I don't know what you said? I will have to print it out and re-read it a few times.

I went to Community College and took a C+ software programmers course when I was about 68 yrs old. Annoyed the teacher no end, who tried to make me quit. I actually learned some good stuff but it was hard. Right now your last two missives are hard.
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In the meantime, the SHORT STRADDLE credit is lousy. The OTM is zero, the ITM has a big deficit. THETA is high, so why? Will see as it runs out tomorrow.
I put on another SHORT STRADDLE at the close yesterday Wednesday and started to think about how I could make money at this?
I got a .50 cent move in the STRADDLE this morning. A profit if I buy back the STRADDLE. No idea what commission costs are on TOS for this? This is on a memo pad paper. So I'm thinking, while I was sitting on the toilet ( great place to get peace and quiet ) The SHORT STRADDLE is a short time trade? A minimal move trade.
If I went from 1 option to 5 or 10 options and traded during slow times the SHORT STRADDLE I could scalp .50 cents or $250 to $500 before commissions? This would be best done as a late Wednesday trade, as the THETA or TIME DECAY zooms overnight. Using the weeklies.
Now I have to figure out the commission costs four times and the margin requirement. See how much money would be left for a profit? You could probably do this more than once a week, but in selling THETA it would work best Wednesday to Thursday.

Anybody has any thoughts on this crazy idea?
 
TRading Journal


"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."
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WHAT ARE YOU LOOKING FOR WHEN CHECKING THE VOLITILITY BEFORE PUTTING ON A STRADDLE? I don't understand this? I presume you are using the option chain?

I can sort of see a TIME SPREAD. One straddle done on a weekly and another done on a Monthly. Will have to think it out a lot more than I can realize right now though.

Market is closed and I am still in good with the credit spread. Hope for a dull day tomorrow. Think I am going to take a break and go read a novel.
 
Quote from falconview:



I can sort of see a TIME SPREAD. One straddle done on a weekly and another done on a Monthly. Will have to think it out a lot more than I can realize right now though.
More...

If you can see it in terms of a straddle, then you are done, because a time spread with a straddle is the same thing as a time spread with puts, or a time spread with calls. Usually people can see it with individual options, but have harder time to see it in terms of straddles.

Grasping these things come over time. Just remember how you may have perceived a credit spread when you strated, and how you perceive it now (I do not mean how to make it work, but just to understand it).

Later I bet you would realize that the core of all this is actually a deeper understanding of the basic building block.

You mentioned a high theta for your short straddle. If it is the 510 strike straddle, you may be mis-understanding theta, because the time value of that spread is a nickel/dime. Almost no time value.
 
Trading Journal and Cache Landing

It is after midnight and I am just reading the last couple of blurbs of my lessons. This doesn't seem like option 101 anymore. It more feels like software engineering classes.

I'm glad Trading Journal qualified it, with this "will come over TIME". Ha! Ha! Ha!

a) I've got the SHORT STRADDLE to fully understand?
b) The TIME SPREAD to understand
c) The two EDGES or so, of Cache Landing. Not so much the EDGES but the relationship between them and how you apply them.

Being a simple country yokel, I kinda have to get one thing down good, before going to the next.

Let me ask this? For Trading Journal

What is the best moment in TIME, or index movement to place a Short Straddle? From the conversation on here, I'm getting the feeling that a pause, or reversal of trend? Won't know until I try it a few more times, I can see.
I see you mentioning reversals and also reading the current level of Volatility from the option chain. That is giving me some ideas.
I was thinking a reversal will give you an altering situation in a SHORT STRADDLE, in that TIME DECAY or THETA will occur in whichever is OTM. The volatility will collapse premium of the side going to go ITM. I sort of am trying to catch a cloud of smoke here. In essence I'm going to get a profit by declining premium on whichever goes OTM and also going to get a premium advantage by collapsing volatility. Then I can buy back. It is however a fleeting seemingly moment to grasp that profit?

I'm not going to progress to the TIME SPREAD yet, until I understand the profit angle of this SHORT STRADDLE properly for ACTION and application.

My intitial thought was you watch the total credit you collected, when you sold the two CALLS and PUTS at the bid Then you watch the premiums of the ASK prices to see when they differ and are LESS in total than what you sold them for and buy them back. I vaguely understand that the TIME DECAY, or THETA will help and the collapse of Volatility of the premium collapsing will also help to achieve this profit goal. It is the question of TIMING.
Thinking about the cost of the difference in BID and ASK or market maker cost doesn't seem productive, when I'm really looking to see the TOTAL of the two sold options at the BID are greater than the two totals of the ASK. The difference is when I can buy them back and show a profit and clear my expenses. There has to be a moment in the movement of the index when this occurs? What is it?

From your chat I get the impression this is just at a reversal of index movement? I will figure it out of course by trial and error, but it would be faster if you just said so. Or described your moment in the TIMING of the INDEX for placing the SHORT STRADDLE. I will check that Volatility as well of the premiums and see what they tell me in identifying the moment in TIME when I should be BUYING BACK to make my profit.

Now I feel like STANFORD as a dog worrying a bone! ( grin! )

I understand the profit of the SHORT STRADDLE is about the effect of TIME DECAY, or THETA and of VOLATILITY of collapsing premiums. At least I think I do?

Interesting stuff, definitely not Options 101.
 
Falconview, hi from the worrying dog!
You might have missed my question on the OEX compared to the NDX, where you said the NDX was rougly equivalent to 10 times the OEX, but that is not correct is it? seemed more like 4 times or so to me. Doesn't that make my 200 point OTM spread more like a 50 point spread in the OEX. How much more safety is built into that compared your OEX 25 points OTM?
If I were to stick with the 200 OTM NDX bear call spreads that seems really safe, doesn't it?
Muchas gracias, Miguel
 
Stanford

You will have to run some comparisons on movement by the OEX and NDX. The two times I did it, a month ago? I got 9 to 1 ratio and sort of evened it out at 10 to 1 ratio. For quick useful discussion. But no, I don't see a ratio of 4 to 1 in the two charts, or didn't rather.

Print up both charts for a month on the daily and see what you get when you compare them? It may vary slightly as it has to do with slightly faster and more emphatic swings in the NDX.
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CACHE LANDING has me swallowing a mouthful this morning. I'm looking at the premium on the MONDAY PUT in the STRADDLE. Nice bit of money if one could forecast the STRENGTH of the coming down movement like that? I knew it was going down, but not how much, or how strong, or for how long? That is SOMETHING I WOULD LIKE TO KNOW how to do? Hard to predict for me, because these occur in the OPEN in the mornings rapidly. Not conducive to forecasting.
Trading Journals talks about his models, wonder if he forecasted that? I'm going to check on the weekly bar chart and see if anything pops out at me from that?
Still CACHE LANDING was right, probably make more on a straight BUY LONG PUTS if you could predict the length and strength of a move?
One thing I'm learning is that the in-the-money options do not shrink with TIME DECAY. That PUT went up like a BOMB! The out-the-money shrink though.
 
NITTY GRITTY DETAILS OF THE SHORT STRADDLE CREDIT SPREAD.

Trading Journal

I paper traded a SHORT STRADDLE yesterday about NOON Thursday and got by SELLING to the BID, a total of $3.20 + +$3.60 = + $680 gross credit before commissions.
The next day as the market is going sideways and looking to reverse? The index is crossing the 10 day moving averages, the values on this yesterday SHORT STRADDLE are now $2.45 and $1.10 = $3.55 gross total.
I would guess I CLOSE this fictitious paper money SHORT STRADDLE NOW? By buying both options the CALL and PUT at the ASK and if I subtract my cost of buying back from the credit I received, I would have in pocket $680 - $355 = gross profit before commissions at =$325.
Don't know what 4 commissions are yet, or whether there is a SHORT STRADDLE commission rate on ThinkorSwim. Will check that out shortly. Of course this was only 1 contract, but if you had done it with 5 contracts, it would be 5 X $325 = +$1625 gross profit before commissions are deducted?
How does that sound GURU? ( smile )
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The Monday STRADDLE was a loser by holding it too long.
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VOLATILITY
IV of SHORT STRADDLE PREMIUMS. I clicked up the premiums in the Thinkorswim OPTION CHAIN this morning and am watching them, with IV alongside. You can more or less tell by them as they change, which way the index is moving? Of course I am not clear why you would want to do it that way? As I just watch the fluctuating INDEX number itself?
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