SPX Credit Spread Trader
- Thread starter El OchoCinco
- Start date
flyers&divers
Guest
I am daytrading ES futures with BB's and oscillators all day. It definitely works on the 2min bar chart. In my experience it has worked on all time scales up to the weekly.
When one constructs a trading system employing market logic one does not have to backtest.
The commission is a slight disadvantage, admittedly.
But say you do 1000 all around on an Iron. You get .40 on both sides, that's 80K you bring in. Assume on average you get to keep 85% of the prem you bring in, that's 68K for the month. Further assume that you pay 1$ per option (I pay less) and you make no adjustments, that's 4K in commission for the month.
To me to pay 4K and to keep 64K for the month is a trade I'll gladly take any day of the week. Back in the day I easily paid 4K a day in commission trading shares outright. Commission is the least your worries when trading negative gamma and vega.
But say you do 1000 all around on an Iron. You get .40 on both sides, that's 80K you bring in. Assume on average you get to keep 85% of the prem you bring in, that's 68K for the month. Further assume that you pay 1$ per option (I pay less) and you make no adjustments, that's 4K in commission for the month.
To me to pay 4K and to keep 64K for the month is a trade I'll gladly take any day of the week. Back in the day I easily paid 4K a day in commission trading shares outright. Commission is the least your worries when trading negative gamma and vega.
Dr.
Let's say the example you gave is for SPX. Now let's try that same setup with SPY (1/10 of SPX).
$0.40 on each side, total credit of $80k, but now it's 10,000 all around for the IC. So, commissions would be 10x that of SPX, which is 40k (at $1 each).
Think the brokerages might not promote SPX cause they kinda like commissions?
Let's say the example you gave is for SPX. Now let's try that same setup with SPY (1/10 of SPX).
$0.40 on each side, total credit of $80k, but now it's 10,000 all around for the IC. So, commissions would be 10x that of SPX, which is 40k (at $1 each).
Think the brokerages might not promote SPX cause they kinda like commissions?
That is well and good in theory but we need to address practical issues. I seriously doubt you can get $0.40 at the strikes we are talking about so we have to be honest.
I am looking at 1170/1160 put spreads on SPX right now for OCT. I can probably get a fill at $0.85.
The SPY 117/116 put spread has a credit of about $0.10 at best.
Assuming I want to only use $100,000 of margin I can sell 100 put spreads of SPX for a credit of $8,500
I could sell 1000 SPY at $0.10 for a credit of $10,000.
Assuming even $1.00 a contract at IB, although OX charges $1.25, which is charged on both sides:
SPX is $200 in commissions for total credit of $8,300
SPY is $2,000 in commission for total credit of $8,000.
SPX is $400 roundtrip while SPY is $4,000 round trip. Since most here are trading with IB, OX and ToS these are real considerations.
The commissions are too rich for the same margin invested. As to selling premium on SPY v. SPX, SPY is 1/10th the SPX so why not just sell the SPX for less contracts and less commissions.
So for SPY v. SPX I like to sell on SPX. Just my approach.
Hope I did not screw up the math, I apologize in advance if I do...
Phil
I am looking at 1170/1160 put spreads on SPX right now for OCT. I can probably get a fill at $0.85.
The SPY 117/116 put spread has a credit of about $0.10 at best.
Assuming I want to only use $100,000 of margin I can sell 100 put spreads of SPX for a credit of $8,500
I could sell 1000 SPY at $0.10 for a credit of $10,000.
Assuming even $1.00 a contract at IB, although OX charges $1.25, which is charged on both sides:
SPX is $200 in commissions for total credit of $8,300
SPY is $2,000 in commission for total credit of $8,000.
SPX is $400 roundtrip while SPY is $4,000 round trip. Since most here are trading with IB, OX and ToS these are real considerations.
The commissions are too rich for the same margin invested. As to selling premium on SPY v. SPX, SPY is 1/10th the SPX so why not just sell the SPX for less contracts and less commissions.
So for SPY v. SPX I like to sell on SPX. Just my approach.
Hope I did not screw up the math, I apologize in advance if I do...
Phil
No...the example I gave is on the SPY.
If it's the SPX you pay one tenth the comms because you're doing a 100lot and bring in roughly the same amount of prem for the month. The diff is -3.6K advantage SPX
But don't get caught up in that. It's not commission that matters. It's when you're wrong that the SPY has a HUGE advantage over the SPX.
Example: call bear spread on: the market is running against you hard to the upside. Your short strike is being threatened. Now there are many things you can do to hedge off that negative delta but at some point if the market keeps going you're gonna have to buy in that short strike.
As Coach almost found out in July his short strike was get very close to going ATM. He put on a SPX call credit spread that brought in about .75, I think. Three days later that fat gamma kicked in as the market ran higher. His spread went from .75 to over $3.00. Big time mark-to-market loss. But even more his short strike at one point went to $2.50 by $4.00. Had he decided that he had to take his loss he was gonna have to pay up big time....something around that $4.00 level. On a 100 lot of SPX that would have cost him 40K to cover.
Now here's the advantage. The corresponding SPY short strike was .25 by .30 On a 1000 of SPY it would have cost him 30K to cover.
(Aside: he held, market pulled back, short strike was safe. Good trade. Alls well that ends well.)
So to summarize: you pay a bit more in commission but when fit hits the shan.... there's nothing you want to be in less than SPX options going against you.
Cool?
If it's the SPX you pay one tenth the comms because you're doing a 100lot and bring in roughly the same amount of prem for the month. The diff is -3.6K advantage SPX
But don't get caught up in that. It's not commission that matters. It's when you're wrong that the SPY has a HUGE advantage over the SPX.
Example: call bear spread on: the market is running against you hard to the upside. Your short strike is being threatened. Now there are many things you can do to hedge off that negative delta but at some point if the market keeps going you're gonna have to buy in that short strike.
As Coach almost found out in July his short strike was get very close to going ATM. He put on a SPX call credit spread that brought in about .75, I think. Three days later that fat gamma kicked in as the market ran higher. His spread went from .75 to over $3.00. Big time mark-to-market loss. But even more his short strike at one point went to $2.50 by $4.00. Had he decided that he had to take his loss he was gonna have to pay up big time....something around that $4.00 level. On a 100 lot of SPX that would have cost him 40K to cover.
Now here's the advantage. The corresponding SPY short strike was .25 by .30 On a 1000 of SPY it would have cost him 30K to cover.
(Aside: he held, market pulled back, short strike was safe. Good trade. Alls well that ends well.)
So to summarize: you pay a bit more in commission but when fit hits the shan.... there's nothing you want to be in less than SPX options going against you.
Cool?
I just got .55 cents on the Oct 127/129 SPY call vert.
Remember I'm legging these trades.
Now I'll wait patiently until the market shows me I can safely put on some put side wing spreads.
My example of .40 was conservative.
Basically I've got little against the SPX. I trade it myself. But I just wanted to point out that there are distinct differences between the SPY and the SPX based upon the exclusive listing of the SPX.
Remember I'm legging these trades.
Now I'll wait patiently until the market shows me I can safely put on some put side wing spreads.
My example of .40 was conservative.
Basically I've got little against the SPX. I trade it myself. But I just wanted to point out that there are distinct differences between the SPY and the SPX based upon the exclusive listing of the SPX.
Dr.
OK, this is eye opening. (BTW, I know Phil's approach is never to be in a situation where the index and the short strike become close neighbors, but it happens as you've pointed out...)
So you're saying that because SPX is a monopoly the market maker will widen the bid/ask spread as a strike gets close to being ATM? Have I got it right? And why is the SPY exempt from this behavior?
OK, this is eye opening. (BTW, I know Phil's approach is never to be in a situation where the index and the short strike become close neighbors, but it happens as you've pointed out...)
So you're saying that because SPX is a monopoly the market maker will widen the bid/ask spread as a strike gets close to being ATM? Have I got it right? And why is the SPY exempt from this behavior?
It did happen. Just as I illustrated. If the market had kept going higher, just a little bit he was gonna be in deep doodoo.
The SPY is exempt from this because of compitition.....mainly the advent and popularity of the ISE.
The SPY is exempt from this because of compitition.....mainly the advent and popularity of the ISE.
This is eye opening because in July I had to cover a short strike that cost me a fortune. I didn't know to even check the SPY just to see what it might have cost me had I had a SPY trade on instead.
At the very least this discussion may make me reconsider how close I will allow my short strikes to be threatened on the SPX.
Dr. notes that the advantage is with the SPY if your position is threatened any you may be forced to cover. I believe Coach says that his experience is that he may have to adjust about twice a year (an adjustment not a pay at all costs to cover scenario). Given the commissions advantage for the SPX, under Coach's historical trades he probably came out substantially ahead with the SPX versus the SPY.
Still this is a good discussion, it's certainly something I hadn't thought about and is good to know.
At the very least this discussion may make me reconsider how close I will allow my short strikes to be threatened on the SPX.
Dr. notes that the advantage is with the SPY if your position is threatened any you may be forced to cover. I believe Coach says that his experience is that he may have to adjust about twice a year (an adjustment not a pay at all costs to cover scenario). Given the commissions advantage for the SPX, under Coach's historical trades he probably came out substantially ahead with the SPX versus the SPY.
Still this is a good discussion, it's certainly something I hadn't thought about and is good to know.