SPX Credit Spread Trader

Quote from Stanford:

Trading journals,
My name is Michael, but for falconview living in Belize, I usd the spanish version.

You are very insightfull about me being a man of few words, and I am glad you might think the ones I use are solid!

I do not trade at all, just looking at the possibility after hearing a friend who traded conservative credit spreads for a very nice return. I am tired of the financial planners and investment people not doing very much for me over the years and want to learn myself. If I was able to get a return of 25% per year, I would be a happy man.

To me, the biggest part of doing this conservatively is the admustments when it starts to go the wrong way. I would love to hear your comments on the monthly cash through options site, as they seem to have the closest model (though not as conservative as I would like) to what I would like to accomplish. They do quite a few adjustments, and I am thinking of opening a small auto trading account with them to see what happens.

I am not American, but Canadian (your friendly neighbours to the north)

Thanks for taking the time here to explain to falconview (and therefore tomyself as well). I am not close to his level of understanding yet, but each time I read something, I am picking up more.

Take care, Michael
More...

michael,
let me suggest another approach other than credit spreads.
naked puts, secured with cash (csp). before you go balistic, hear me out.

a credit spread is a short put, hedged with a long put to limit risk.
(so in effect you are trading naked puts, but with an option hedge instead of cash or margin)

the risk you are hedging is actually quite high relative to the reward, in many cases it is 10 times.

sure you can adjust and maybe get out of the trade or morph it, and come out with a smaller loss, a break even or a win.
but your adjustments are just as certain to be hit with unexpected events as was your original position.

i traded spy bull put spreads for about a year with all wins. (all the while waiting for that big hit that would wipe me out, i avoided it but was in scared mode several times, the one time i got to a point of making an adjustment, i could not get my trade filled! the next day, it moved back my way and i just rode it out.

then when the market went crazy early this year, i could not get into trades that looked good to my rules and it kept me out.

from earlier in the year i started to look at the csp and found trades i could be doing that looked safer to me than the credit spreads. you have to do it with stocks or etfs that you would be willing to own and you have to watch out for earnings and dividends. so there are things you have to watch for that you dont with the credit spreads. you also need to be prepared to make adjustments or take assignment and go into a covered call mode if needed.
the returns are not as high, but i feel the risk/reward is better.

a canadian gal, teddi, has a free web site, "fullyinformed", where she gives great examples of this type of trading.
she also has a yahoo group:
"CoveredCalls-NakedPuts_OptionStrategies"

this might not be what you want to do, but for me, after dealing with credit spreads, it is one area where my trading is moving to.
 
Quote from Stanford:

Trading journals,
My name is Michael, but for falconview living in Belize, I usd the spanish version.

You are very insightfull about me being a man of few words, and I am glad you might think the ones I use are solid!

I do not trade at all, just looking at the possibility after hearing a friend who traded conservative credit spreads for a very nice return. I am tired of the financial planners and investment people not doing very much for me over the years and want to learn myself. If I was able to get a return of 25% per year, I would be a happy man.

To me, the biggest part of doing this conservatively is the admustments when it starts to go the wrong way. I would love to hear your comments on the monthly cash through options site, as they seem to have the closest model (though not as conservative as I would like) to what I would like to accomplish. They do quite a few adjustments, and I am thinking of opening a small auto trading account with them to see what happens.

I am not American, but Canadian (your friendly neighbours to the north)

Thanks for taking the time here to explain to falconview (and therefore tomyself as well). I am not close to his level of understanding yet, but each time I read something, I am picking up more.

Take care, Michael
More...

Glad to meet you Michael, and to hear that you decided to take things in your own hand. Canadians are wonderful people, and in my view, Canada is of one of the best countries (if not the best country) in the world. The liberal Canadian government under Jean Chretien seems to have done a great job, but ultimately it is the Canadians who have done it. A great/clean/beautiful country, and great wonderful people!

I have a set of questions that allow me to quickly test if someone really knows his options. Here are examples:

1. Is the delta of an ATM call option 0.5?

2. Is a straddle a delta neutral strategy? (with current price is at the strike).

3. If I were to open an iron condor where the short strikes are at 10-deltas and I make adjustments, is it reasonable to expect an 80% win rate, and to manage the risk of the remaining 20%?

If a person answers yes (or close to it) to any of the above questions, he is not an expert in my view. The expert should answer why the Yes answer may not be correct. (The point I alluded to in my previous note relates to question 3.)

I do not want the answers to be known in the open here. If you like the answers, let me know and I will be glad to PM then.

Options allow one to structure a number of strategies, but this does not exonerate one from forecasting the right market and applying the right strategy. An aspect that is good in options is that some strategies can be forgiving, but more importantly they allow one to play a scenario one cannot play using stocks. Another aspect is that the yield on option strategies can be high.

It is the yield that makes the returns appear high, and it is the inherent high probabilities on a given trade that makes some strategies appear consistent with high returns. Therefore in some option strategies, it can be hard for the casual observer to know what is due to the horse, and what is due to the jockey's skill.

I would always insist on reading the overall forecast for the market. If the person appears to be in good command of the view on the market, and knows his options at expert level, then he/she "can" be good. Notice the "can", and not "will", because in trading you have the part of human feelings to deal with as well.

Now with regard to human feelings in trading, you seem to be realistic, patient, and on the look out for what would go wrong. In trading, and particularly in high prob strategies, such attitude is crucial in success, and it is a rare skill in humans.

In my view one needs a portfolio of strategies, with each strategies assigned a given budget, and applied when the forecast matches it. The trader then make adjustments to match forecasts, and not necessarily to only correct errors. There are also money management strategies.

I will have a look at the site, and if I see something to add I will share it.

You mentioned that they have auto-trade. Who is your broker? What is your trading experience in actual trading?

In explaining options, academic background of the listener, can be useful to the person doing the explaining because options can be explained in a number of ways, and the effectiveness of the explanation may be enhanced by matching it the academic background. My background is in science/math/engineering/etc.
 
MoreYummy:

I was not planning on sharing the answers in public, but since you asked I am going to make an exception and share information related to the first question, which I believe I discussed where else in this forum, and therefore nothing major is lost.

Those who say that the delta of an ATM call is 0.5 (or roughly 0.5), may not understand that what gives an option a non-zero value is the deviation of its delta from 0.5, or put the other way, the non-zero price of an option is a reflection of its delta's deviation from 0.5.

The relationship between the price of ATM call (no cost of carry) and its delta is: 2*Stockprice*(Delta-0.5). Therefore, one notices that the delta of ATM call is always greater than 0.5, and that stating the delta is 0.5, is equivalent to stating that the call option is worthless. Try my formula using the price and delta from an option calculator (put carry equal zero such as no interest and no interest; if there is carry I have a slight change to further quiz the expert).
 
Tradingjournals, thanks
My Answers would not have all been yes. To show you my expert knowledge, the answers would have been 1. Huh? 2. Huh? And 3. Huh?
I am a total rookie at all this, so I appreciate your time in helping. I have no broker, and have never traded an option. Was going to open a practice account with TOS like falcon view.
Thanks michael
 
Teaderlux thanks, as you can tell by my last post, I will have to file this away for later.
Did you only trade the bull puts? What do think about falcon views plan to only c
Trade the bear calls as the upside movements are less than the downward side, giving you more safety. Thanks michael
 
Quote from Stanford:

Tradingjournals, thanks
My Answers would not have all been yes. To show you my expert knowledge, the answers would have been 1. Huh? 2. Huh? And 3. Huh?
I am a total rookie at all this, so I appreciate your time in helping. I have no broker, and have never traded an option. Was going to open a practice account with TOS like falcon view.
Thanks michael
More...

Michael,

Good answers! :-) . I give you a pass, and for the humor and honesty at pass with distinction. No problemo! (as Seneor Falconview may say). Now you can try those questions on people who say they know their options, and they may get very very intimidated by you!

If you want to learn faster, I believe opening an account will make things easier because it will be more concrete. Everyone was a beginner in the past. I think folks in here would give you a hand in your first trade at least. Do not be too scared, because it is not as complicated as it sounds. The issue is usually the long term, and not the first few trades. There is a saying that the worst thing that happens to new traders is that they make a lot of money in the first few trades, and then get hit later on. The hit is called paying the tuition.

You need the privilege to sell options. I do not know how your broker will react to your lack of experience. Do you plan to discuss it with them before submitting the papers? There is also a need for a net worth higher than 100K to write options if my recollection is correct. Maybe in Canada the rules are different.

Cheers!
 
Tradingjournals, I will open a practice account this week. I don't think I will share the full extent of my knowledge with the brokers. I read somewhere earlier of the type of trading experience and numbers the brokers want to see before allowing the level needed dfor the spreads, and lo and behold, that is just where I am!
Fortunately the over 100K net worth is ok until I pay my tuition!
Do you think it is possible to get away without paying a huge amount!
Thanks michael
 
Hmmmmn! To Stanford.

The TOS web based free trading site is formidable and I am still shaky and learning how to use it. After a couple of months.

Elite Trader - for example asks why not use the TOS think back feature for back testing? Why not? Simple - first I have never heard of it? I'm having so much trouble learning the intricacies of just putting in spreads and exiting spreads in TOS that doing anything else on the TOS site has to take a low priority number.

For example:

I found day before yesterday ( yesterday our ISP server was out for 24 hours nationwide). Anyway with scaredy cat fingers, I tried to put on a SHORT STRADDLE. Indeed I did ( not actually- I canceled before it messed up my trade account balance. ) I'm goiing to look at the STRADDLE on the TOS format again shortly. It has a LIMIT order. My question is; if I am selling both sides entering a STRADDLE then the limit order can be exceeded by the software program, as a wider spread would be advantageous. When CLOSING, or buying back the spread to take a profit, does the LIMIT order box, or Market order box self adjust, not to give you a bigger price but a smaller price.? To make a profit, I believe you want a smaller price in the spread? I'm not at all sure how you control the entering and exiting of the SHORT SPREAD on Thinkorswim? Any advice would be welcome. Want to try it this week.
My trade Thursday was a memo pad paper trade, but I ignored commissions, which I think I can safely do ( $60 ) but was going by the BID prices for the two legs when entering and the ASK prices for the two legs when CLOSING, or exiting. I have no problem now with the comprehension of the SHORT STRADDLE, just how to do it in the TOS platform for best price advantage when you enter the TOS order online.

SHORT STRADDLE CREDIT SPREAD
Admittedly one trade is limited experience, but I can see how you could put on such credit spread trade three times, either in a monthly system, or a weekly system. Whereas using the VERTICAL BEAR CALL SPREAD I can only see one trade, per month, or per week system. I may wrongly believe the risks are less in the SHORT STRADDLE.
Since you can close a bad SHORT STRADDLE it does seem better to do SHORT STRADDLE CREDIT SPREADS than the VERTICAL CREDIT SPREADS? I've got more research to do with this, but have my three trades marked out. So far the research shows you are in and out the SHORT STRADDLE credit spread fairly quickly and most likely either in one day, or a couple of days? Whereas a disadvantage to the Vertical Credit Spread has to be held throughout the TIME PERIOD, Month or WEEK to Expiration?

Off hand; reading the market and MARKET TIMING IS ALL IMPORTANT.

The number one criteria for success is MARKET TIMing and secondly avoiding taking questionable LOSING TRADES.

I can see so far a good enough trading system, which would include the VERTICAL CREDIT SPREAD, the SHORT STRADDLE CREDIT SPREAD and the OPTIONS ON E MINI FUTURES CHART.

1) One trade of the VERTICAL per trading period ( monthly or weekly)
2) Three possible SHORT STRADDLE trades per trading period.
3) Options on futures ( trend following ) One, or possibly two trades per 6 week time period.

TRADING JOURNAL is quite right in that one needs a BASKET of TRADING tricks to make a good account grow. I certainly agree with that.
 
Using Thinkorswim web based trading platform SUNDAY

Well I tried the OEX 490 ATM STRADDLE. It gives me $12.65 credit. You hit the blue arrow on the bid side as you are selling the straddle to bidders.
Then I canceled the entry and went to the OEX 490 ASK side and got a buy straddle at $12.65. SO I AM PRESUMING THAT WOULD SELL MY SPREAD? THE LIMIT ORDER WAS ON AND I TRIED CHANGING IT TO MARKET ORDER, BUT THE VALUATIONS DIDN'T CHANGE.

With 20 minute delayed pricing, bit worried about that? How can you control the buy back leg of the STRADDLE?

On the other hand had a look at the Implied Volatiility and it was fairly close the same, as it is ATM. Same with the DELTA. No knowledge tidbits gained there?
 
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