SPX Credit Spread Trader

There are a few reasons why that might be. First, they may have a target of 5% but whether they can make it depends on the opportunities available. Some months they may do more, some months they may do less and a month or two they may have a loss. Also, there are times when your cash is idle in between positions. Perhaps they are using a portion of their total cash each month and rolling month to month so 5% on the margin invested may not equate to 5% on the total portfolio.

Since I do not know the services, I can only guess but those are just some reasons why monthly targets rarely result in their estimated annual returns.

Also, a loss reduces your capital so if you make money in the next month, you may be back to where you were before the loss two month prior so you lose time. For example, assume in January you make 5% on $100k to $105K. February you lose 5% to bring you back to $99,750. March you make 5% to get to $104,737 (rounded). After 3 months you are only up 4.7% for the year with a target of 5% a month because a loss made you lose 2 months of time. Now imagine the %s change and you can see where a loss ruins your chance for that 60% year, but 25% is awesome even with taking loses.

Phil
Quote from andysmith:

Phil,

There are other (I know at least 3) entities who trade by selling deep OTM spreads for around 5% return/month -- very similar to what is working so well for you. Yet they publish their annual returns as being in the 20% to 25% range. I would have expected 40% to 50%. I'm struggling to see where the reduction is coming from. Are the loss months larger than I thought? Are they trading only a few months out of the year (like when the market is not trending)...??
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Phil,

Thanks, that's very clear -- thinking of losses in terms of "profitable month units" is a good way to look at it. If one had 3 losing months per year, and a losing month wiped out 2 months of profit, then the net result would be 12-(2*3)=5 to 6 profitable months for that year. (Strictly speaking, in terms of drawdown, it'd matter if those losing months happened early on or later, as well as the bet size per month.)

In your IC history, how many months of profit, on average, does one losing month take out?
 
Unfortunately the answer depends on how big a loss you took and how much money you make in subsequent months. That is why risk management is so important. The smaller you keep your losses the less of an impact they have on your overall trading and performance. If I have a small loss one month, it may be easily recovered in the next month, while larger losses can take longer.

I can tell you that in 2004, although I was hardly using ICs, I was down the first three months or so and was flat for most of the summer. But the last 4 months were awesome and I ended up in double digits for the year with a bad market (DJIA QQQQ etc.). It would have been quite easy to get discouraged last May and just assume I was never gonna make money that year but the goal is the returns on December 31 so I just stuck with my plans (was doing a lot of put ratio spreads) and worked harder.

I was distracted the first part of the year due to my book and I also made some bad trades (it happens to all of us lol). But there was plenty of time in the year to salvage my returns without swinging for the fences and i was rewarded by my patience and decision to stick with my plan.

So the effect of a losing month or quarter on your portfolio depends on how far you let the losses run and how you react to it afterwards.

I think your best bet is not to focus on how many "profitable" months you lose from a loss, but just focus on the current month in making money. If JULY was a losing month, then forget it and focus on making August a profitable one (keeping in mind any lessons learned from July ;). If you focus on the current month and keep making money then when DECEMBER comes you will see a double digit end of year performane and you will be proud that you did not let July derail your plans or approach.

Phil

Quote from andysmith:

Phil,

Thanks, that's very clear -- thinking of losses in terms of "profitable month units" is a good way to look at it. If one had 3 losing months per year, and a losing month wiped out 2 months of profit, then the net result would be 12-(2*3)=5 to 6 profitable months for that year. (Strictly speaking, in terms of drawdown, it'd matter if those losing months happened early on or later, as well as the bet size per month.)

In your IC history, how many months of profit, on average, does one losing month take out?
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Quote from andysmith:

If one had 3 losing months per year, and a losing month wiped out 2 months of profit,
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Have you considered the possibility that the first three months one tried this might be losing months?

It could happen. It happens all of the time.
 
Anything is possible but if you are choosing the right strikes deep out of the money then 3 months of losses is rare unless we got some extraordinary months of price swings which can certainly cause some consecutive losses. Adjusting to the market is the best way to avoid that. If the market is showing a strong trend then it is better to avoid the iron condor and just trade the opposite end of the strong trend.

Phil
 
Hi Phil:

I understand the trade and about purchasing and selling, and you did indeed PURCHASE Sep 1165 PUTS, and you SOLD Sep 1175 PUTS, but that is not really the issue at hand.

You answered the question from a clear and logical perspective relative to the September timeframe. What I was really trying to get at is a more specific issue to me, in that I am short 75 1205 AUG PUTS right now. I see support at 1225, (horizontal) about where we are, and again at 1218, (from a channel support as well as a horizontal support), 1210 and fairly strong at 1205 support, (horizontal) so I am not overly concerned yet, but watching it very closely. Many times when looking at support and resistance, I have found the stocks/indexes have not necessarily read the same book I did... LOL. So what I was really asking is if you saw the 1225 support level holding, therefore the timing was right to buy/sell the Bull Put Spread for September to maximize your return.

I value your opinion and am still interested in your thought process relative to what maybe happening short term. An earlier post indicated your friend moved his 1220 short position to 1230 last month for a small gain or loss, not quite sure which one. I "shook myself" out of my longer term 1230 short position near the expiration date just because it got "too close" for me. Hind sight would say I jumped too early, but that is hindsight and I have no regrets, and want to learn how to avoid making those unnecessary moves in the future. Still was profitable overall thanks to time decay, but I guess I am still a little like a moth, trying to determine how close to the fire I can go, and still come back... to trade another day... LOL

Again, THANKS for participating in this forum, I appreciate YOU!!!






Quote from optioncoach:

Gypsies

Remember I did not PURCHASE Sept puts, I SOLD September puts.

You will never accurately guess the low for any pullback. I waited for a decent pullback to get into the Sept puts but I gave up on the ol' pick the bottom/pick the top a long time ago. It just makes you miss too many opportunities.

Remember my strike selection was based on the analysis that the SPX would not reach 1175 by Sept expiration (or before for that matter). I wanted a downward correction to get better premium when I went in with this much time to expiration. However I do not necessarily predict that the correction is finished. I of course would love to get it at the bottom to get the most premium but my approach is to be happy with the premium I get, because that is my income, not the premium I could have gotten.

If the premium is enought to make me place the trade, then increases from continued downward movement are fine because my credit is received and now my goal is to stay OTM, not determine how I could have made even more money.

So find a good entry point but do not wait for the absolute low or high to make the entry because you will miss it more often than not.

Phil
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Well you certainly have brass ones bigger than me to be short puts on the SPX as opposed to put spreads LOL.

I also see the first level of supoprt at 1225 and with a potential up or sideways day today I see it holding. 1245 was definitely overhead resistance and still is for now. One item on CNBC this morning was that the large caps (which are the big players in the S&P 500) right now are in limbo and there is some initial weakness. If they can hold on to recent short-term highs then the index will also have some support. However, if they begin to crumble slowly then we may move back to 1200. So on good indicator to follow is to see how GE, GM C, etc... are doing and if there is any news moving them.

I think your first step is to watch the 1225/1220 support level and see if it holds. If it breaks through, and does so with strength, then you need to watch your next levels of support quite closely.

However, what is on your side right now is that you have AUGUST puts and my belief right now is that we will not see 1200 before AUGUST expiration, absent some catastrophic event. I think 1225 is good enough to hold for the next 9 trading days and tomorrow's fed meeting might provide more guidance.

Phil

Quote from gypsies:

Hi Phil:

I understand the trade and about purchasing and selling, and you did indeed PURCHASE Sep 1165 PUTS, and you SOLD Sep 1175 PUTS, but that is not really the issue at hand.

You answered the question from a clear and logical perspective relative to the September timeframe. What I was really trying to get at is a more specific issue to me, in that I am short 75 1205 AUG PUTS right now. I see support at 1225, (horizontal) about where we are, and again at 1218, (from a channel support as well as a horizontal support), 1210 and fairly strong at 1205 support, (horizontal) so I am not overly concerned yet, but watching it very closely. Many times when looking at support and resistance, I have found the stocks/indexes have not necessarily read the same book I did... LOL. So what I was really asking is if you saw the 1225 support level holding, therefore the timing was right to buy/sell the Bull Put Spread for September to maximize your return.

I value your opinion and am still interested in your thought process relative to what maybe happening short term. An earlier post indicated your friend moved his 1220 short position to 1230 last month for a small gain or loss, not quite sure which one. I "shook myself" out of my longer term 1230 short position near the expiration date just because it got "too close" for me. Hind sight would say I jumped too early, but that is hindsight and I have no regrets, and want to learn how to avoid making those unnecessary moves in the future. Still was profitable overall thanks to time decay, but I guess I am still a little like a moth, trying to determine how close to the fire I can go, and still come back... to trade another day... LOL

Again, THANKS for participating in this forum, I appreciate YOU!!!
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Well today is not an up or down day with any conviction but I decided to try and scalp more premium with about 8 days to expiration. So I added an OTM put spread to go with my current Call spread on the SPX for AUG. I am still hesitant right now to add any call spreads for SEPT since I would rather see what happens in the next week or so.

However I do feel that 1200 and 1190 are safe levels and opened a position for AUG just outside those ranges:

SPX @ 1227.72

Sold 115 SPX AUG 1165/1180 Put Spreads @ $0.35

Credit = $4,025
Margin = $172,500
Return = 2.33%

One comment on the return. This legs me into an IRON CONDOR for AUG with my 115 1260/1275 call spread which has a credit of $0.60. Since the margin is $172,500 for the entire IC, it becomes a net credit of $0.95 for the position and return on margin ($172,500) of 6.33%.

I believe with 8 trading days to expiration, I will hold the AUG Iron Condor to expiration to allow it to expire worthless. With the SPX at 1227, I feel comfortable right now with my short strikes of 1180 (47 points OTM) and 1260 (~32 points OTM). After expiration then perhaps I can look ahead to September to add to my put posiitons but for now I am quite comfortable.

Phil


CURRENT POSITIONS (including new position)

115 SPX AUG 1165/1180 Put Spreads @ $0.35
115 SPX AUG 1260/1275 Call Spreads @ $0.60

110 SPX SEPT 1165/1175 Put Spreads @ $0.95
 
For Sept bear call spreads I would try to go as high as possible in my strikes since there is still 37 days to expiration and I am not sure what the end of AUgust/early September can bring. There is certainly overhead resistance near 1245 but we could hit that and break through in a few weeks so I am hesitating this week on any calls for SEPT.

Also, I have a lot of trouble splitting those 5-point spreads so not sure how well you can grab that $1.10 with a b/a of $0.70/$1.80.
I like 5-point spreads but much further OTM because they hit their maximum value so much faster if the market makes a strong move near my short strike. With the 15 or 10 point I can roll the short alone or the whole spread and this gives me adjustment options.

I alreayd have a 10-point spread on the put side so if I do calls for SEPT I would look into 10-point spreads to leg into an IC.

Right now I am following the 1280/1290 and the 1285/1295 as candidates.


So I think the short strike is more than likely going to stay OTM but with Sept still 37 days away and the market in an upward price channel bouncing off the support today, I would expect to see the SPX move back toards 1245 and a 1265 5-point spread would make me a little nervous today.

Phil


Quote from andysmith:

Phil,

How about looking at a SPX Sep bear call spread -- 1265/1270 for $1.10?
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