SPX Credit Spread Trader

[smilingsynic]

Quote from optioncoach:

Ckor:

First the two positions are different so it is not a net debit, one is profit taking, one is a new position. Basically it is a risk management reaction. First, my goal is to take profits on the put side and bank them. Then I want to sell more puts to keep credit coming in.

The positions are certainly different. The one that was bought back for 25 cents is less likely to be itm than the one sold for 15 cents (not even counting commissions, which even with a deep, deep discount broker would not be insignificant). This does not sound like prudent risk management to me.

Yes, there is "credit coming in": 15 cents. Unfortunately, there is ten cents more going out. What you're paying 25 cents for is worth less than what you selling for 15. The market maker is the one "banking," I am afraid.:-(

As for risk management, perhaps a more reasonable approach would be to simply wind down some or most of the position.

 

[El OchoCinco]

You cannot compare the two postions. The one I bought back for $0.25 locked in a profit of $0.30. That position is closed and the profit is put in the bank. The new position opened for $0.15 is a compleetely new position to be evaluated on its own merits. Moreover, I did not get filled on my other put position trying to split the bid/ask which would have brought in another $0.25.

There are different risk management ways to play this event and this event is something that happens 1 or twice always start off with wide strikes. Should resistance hold, then i still end up with a net profit for the month which is the goal. Even a small loss to close out would not effect the overall performance due to the way I have been taking credits as often as I can.

I am sure there are many different ways to play this. As long as consistent risk management principles are followed in either case, you cannot go wrong.

The market maker is making money on every single trade I do from the bid/ask no matter what I do.

Phil

Quote from smilingsynic:

The positions are certainly different. The one that was bought back for 25 cents is less likely to be itm than the one sold for 15 cents (not even counting commissions, which even with a deep, deep discount broker would not be insignificant). This does not sound like prudent risk management to me.

Yes, there is "credit coming in": 15 cents. Unfortunately, there is ten cents more going out. What you're paying 25 cents for is worth less than what you selling for 15. The market maker is the one "banking," I am afraid.:-(

As for risk management, perhaps a more reasonable approach would be to simply wind down some or most of the position.

 

[smilingsynic]

Quote from optioncoach:

You cannot compare the two postions. The one I bought back for $0.25 locked in a profit of $0.30. That position is closed and the profit is put in the bank.
Phil

That you locked in a profit is nice, but it is really not germane. What counts above all here is risk and the reward for taking on that risk. You traded in a very low risk position for one with higher (but still low) risk, and you are being compensated less to do so. That does not make sense to me.

 

[dottom]

If you consider everything marked-to-market, why would trade:

(close) 150 SEP SPX 1140/1155 Put Spread @ $0.25

for:

(open) 150 SEP SPX 1185/1200 Put Spread @ $0.15

I only see possible scenarios:

- Free up margin, but that's not the case here. Though even if the first position was wider and required more margin, I'd still ride it out at this point.

- Trades were executed at different times. Obivously price changes with the market, but if this were done within same hour and market was within a few points option spread wouldn't have changed much.

 

[clslaw]

Quote from smilingsynic:

What counts above all here is risk and the reward for taking on that risk. You traded in a very low risk position for one with higher (but still low) risk, and you are being compensated less to do so. That does not make sense to me.

Risk is always what counts. Personally, I don't have a problem with closing the one spread and rolling to the other. My personal preference would be to pay a debit to close that is smaller than the credit received for opening. In other words, I'd want to increase my overall credit. If I am not able to do that, I would tend to simply stick with the original spread and let it expire to capture the remaining credit.

Having said that, I will admit that I have had the experience of closing a position with the expectation that I'd be able to get into the new position for a fatter credit. The market then moves, the quotes change, and I have to grab what is left. Sometimes we don't always get what we want, but like the Rolling Stones said..."but if you try sometimes you get what you need."

I think the critique of Phil's adjustment here is very good. That is one of the most instructive ways for traders to learn. Nonetheless, it appears he will still be bringing home a profit at month's end. I can't often argue with that! Good job, Phil!

 

[andysmith]

Phil,

Great job managing risk on Friday.

You wrote "The market maker is making money on every single trade I do from the bid/ask no matter what I do."
I've been comparing naked puts/calls (i.e. selling a strangle) to selling an iron condor and your comment is one of several reasons why selling a stangle might make sense.

If one has solid, disciplined risk management then why not sell a strangle?

 

[MTE]

Quote from andysmith:

...If one has solid, disciplined risk management then why not sell a strangle?

Andysmith,

It's called gap risk! No amount of discipline will save you from a gap.

 

[smilingsynic]

Quote from MTE:

Andysmith,

It's called gap risk! No amount of discipline will save you from a gap.

If the SPX somehow gaps to 1180, the earlier, now closed, spread is still a (small) winner, but the new spread is a huge loser. It is unlikely, but no one knows the future--it certainly can happen in a short period of time.

Gap risk is certainly the biggest danger to (bear call/bull put credit) spreads. One gap can easily wipe out many months of profits.

At least if one sells straddles or options closed to the current price of SPX, the higher premium received will at least help cushion the losses. Getting only $15 bucks a spread while leaving yourself open to a loss many, many times that seems dangerous to me.

Not with my money.

 

[MTE]

Quote from smilingsynic:

If the SPX somehow gaps to 1180, the earlier, now closed, spread is still a (small) winner, but the new spread is a huge loser. It is unlikely, but no one knows the future--it certainly can happen in a short period of time.

Gap risk is certainly the biggest danger to (bear call/bull put credit) spreads. One gap can easily wipe out many months of profits.

At least if one sells straddles or options closed to the current price of SPX, the higher premium received will at least help cushion the losses. Getting only $15 bucks a spread while leaving yourself open to a loss many, many times that seems dangerous to me.

Not with my money.

Actually I was referring to selling straddles/strangles not credit spreads.

You have a much bigger risk with short straddles/strangles than with spreads. In a spread your risk is limited no matter what and while a huge gap can wipe out months of profits, that same gap in a short straddle/strangle can blow out your account.

 

[El OchoCinco]

All of these points are quite valid. My intent was to close the spreads and sell higher strike spreads for additional premium. I did not get a good price for half of the new put spreads I opened and my other put spread order never got filled. I will try and grab more credit on Monday.

One thing that has not been discussed is that I made these trades with 4 trading days to expiration with the market at 1241 and two tiers of resistance at 1220 and 1200. Even a bad down day will not hurt me given the short time left and the large cushion I have until my short strike. My concerns right now are not my puts, but the 1255/1265 call spread I rolled up to. So even 3 bad days will not hurt my put spreads. Right now I want the index to stay below 1245 resistance.

I am sure there are different ways to trade this and I do not claim my way is right, just to be clear, nor do I think your great comments are wrong. They all make sense because they are part of a detailed risk management plan. Even taking a loss on either spread would not wipe me out nor make all those profits disappear. I have my capital spread out and can take a partial loss at anytime.

I feel quite comfortable with the moves based on my analysis of SPX and the levels of support and resistance. My goal is a net profit after the adjustments and so far so good. Even if I have to take a small loss, I already expect in my trading plan to take a small loss 1 to 2 times a year. Even so, I can still reach my goal of 20% for the year.

The point here is not to dictate the only right way to trade these spreads, but to highlight my way and use the discussions as a means of exploring different approaches to learn more.

Thanks for all the discussions and remember there is a difference between "this is the way I would trade it" and "your way is wrong".

Like July, should be an interesting expiration week! If I am close to the short strike, I will not take a chance on witching day settlement.

Phil