SPX Credit Spread Trader

Slight typo in that formula for middle of the spread b/a:

(Bid - Ask)/2 + BID

Round up to nearest $0.05 when dividing by 2.

Sorry about that.

Once you have the middle you should shave anywhere from $0.05 to $0.20 depending on how wide the spread is. I have found lately that the wider the spread, the more I need to shave to get filled. There is no right answer here, really. Some people say that it is perhaps better to take the mid-point between the BID and the B/a Midpoint as a limit price. Not a bad approach either.

Phil


Quote from rdemyan:

Coach:

Are we talking about a credit spread?

If the listed bid/ask on a credit spread is 0.4/0.8, then your formula would calculate 1.0. Or was the formula your providing based on the bid of the sell option and the ask of the buy option.

Maybe we need to be clear on what the bid/ask of a credit spread is. When I see this on my OX panel as I'm placing a trade or contemplating a trade, it appears that the bid/ask for the credit spread is.

So, an example from today.

SPX OCT 1125/1140 Bull put credit spread

b/a on the 1125 is $1.60/1.90
b/a on the 1140 is $2.05/$2.55

OX lists the b/a on the spread as $0.15/0.95

$0.15 is the difference between the 1140 bid and 1125 ask
$0.95 is the difference between the 1140 ask and 1125 bid

I thought the midpoint on the spread would be (.15 + .95)/2 or $0.55.

Also, what is the NATURAL for the example above?
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Quote from optioncoach:

The point is that if I said only 5 adjustments, you would ask me how I know it will not be 10 adjustments? If you want me to state that I can predict exactly what is going to happen, then you are in the wrong place. All I can do is put the odds in my favor and manage my risk and make money.

You seem to just want to disagree for the sake of disagreeing. If you do not like the strategy you are free not to post here. It is for those who are interested in the discussion. Disagreeing just to make chatter does not help anyone.

So please feel free to ignore the thread as it does not meet your investment criteria.

Phil
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Here is my take on this one.

Suppose I open Iron butterfly at

1195/1225/1255.
b/a on 1225 is 19.5/20.2
b/a on 1255 is 5.6/6.3
b/a on 1195 is 7/8
ba on 1225 is 14.5/16.1

For ATM Iron butterfly 120/123/126, the b/a spread is the following
120/123 0.85/1
123/126 1.2/1.3
Assume natural fill, the credit is 1.2+0.85=2.05
Total 10 contracts $20.50

I'll analyze risk/reward on SPX spread.

Assume I get filled at natural point on everything (worst possible scenario). The credit I'd get for this is 19.5-6.3+14.5-8 = 19.7. So, I'm risking 11.3 to make 19.7. The reward/risk ratio is 19.7/11.3=1.74

From TOS software, the probability of SPX expire between 1225/1255 is 50.7%.

I don't see anything wrong with SPX in this case.

So, can you please elaborate whether you don't like the instrument or you don't like the risk/reward ratio Coach Phil use.

I'm not saying that SPX is perfect but I'd like to know if there are alternatives for it.

Thanks,
Nick

Quote from smilingsynic:

It is absurd to choose to receive less compensation for taking on the same risk. But that's exactly what you're doing by trading a less liquid, less competitive product. And it is not the first time.
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Quote from smilingsynic:

You cannot rely on past experience when trying to estimate risk in the future. How do you KNOW that 5 adjustments or more might be needed in the near future?
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How do you know you won't lose your job tomorrow? Most likely you won't, but you could. Your past experience says that you are doing your job well and that things are fine. Based on this you make large purchases such as a house, a car or other item where you take out a loan you can repay based on your future cash flow (i.e. you are taking a risk).

Phil's past experience is that he will do 1-2 adjustments per year. He bases this on his past experience. He is taking a risk that he feels he can manage properly. Could the market crash tomorrow? Sure it could, but Phil has a plan, just as you would have a plan if you lost your job tomorrow.

I know I am comparing a bit of apples to oranges with my silly example but my point is that it comes down to risk management. If you are doing "A" and something bad happens more often then expected then you do "B" (manage your risk) based on your past experiences. Life is full of woulda, coulda, shouldas. In the markets you take what it is giving you. As Phil said, if he is seeing that he is having to make more adjustments than usual he will stick to put spreads if the market keeps making strong moves up and vice versa.

Phil always stresses to run your trading account like a business. Speaking as a business owner I would say his analysis is dead on, you put your capital to work for you where you can make the most profit with the least amount of risk.

ryan
 
The SPX closed today at 1227.73, but the opening price tomorrow is the settlement price.

I've heard that the SPX can open on settlement day at a price quite different than the sum of the 500 components that constitute the SPX... i.e. the market maker is doing his thing.

Question: is it possible to determine which way the market maker may "shift" the settlement day's opening by looking at all the strikes' open interest and volume?

I've heard a 10 to 20 point gap is not uncommon.
 
I do not know if I would go so far to say that the market makers can cause the SET to be different than the opening prices of all 500 stocks. The set is automatically calculated after all 500 stocks open and a market maker does not change the SET.

The market could have a gap up or down at the opening which would cause the SET to be quite different than the closing index price on Thursday. This is why on a day like today you have to be careful if you are 10 points or under within the index at your short strikes. It is a witching day SET so it could be wild. last June the SET was 10 points higher than the last index closing price!

Phil


Quote from andysmith:

The SPX closed today at 1227.73, but the opening price tomorrow is the settlement price.

I've heard that the SPX can open on settlement day at a price quite different than the sum of the 500 components that constitute the SPX... i.e. the market maker is doing his thing.

Question: is it possible to determine which way the market maker may "shift" the settlement day's opening by looking at all the strikes' open interest and volume?

I've heard a 10 to 20 point gap is not uncommon.
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Don't forget that there is a rebalancing too. This should mostly be done already, but it can make a difference also.


Cheers!

Quote from optioncoach:

I do not know if I would go so far to say that the market makers can cause the SET to be different than the opening prices of all 500 stocks. The set is automatically calculated after all 500 stocks open and a market maker does not change the SET.

The market could have a gap up or down at the opening which would cause the SET to be quite different than the closing index price on Thursday. This is why on a day like today you have to be careful if you are 10 points or under within the index at your short strikes. It is a witching day SET so it could be wild. last June the SET was 10 points higher than the last index closing price!

Phil
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Okay. So basically the midpoint is as I thought. If the credit spread b/a is 0.4/0.8 then the midpoint is 0.6.

How about the natural. Using my previous example, what is the Natural.



Quote from optioncoach:

Slight typo in that formula for middle of the spread b/a:

(Bid - Ask)/2 + BID

Round up to nearest $0.05 when dividing by 2.

Sorry about that.

Once you have the middle you should shave anywhere from $0.05 to $0.20 depending on how wide the spread is. I have found lately that the wider the spread, the more I need to shave to get filled. There is no right answer here, really. Some people say that it is perhaps better to take the mid-point between the BID and the B/a Midpoint as a limit price. Not a bad approach either.

Phil
More...
 
Quote from rdemyan:

Okay. So basically the midpoint is as I thought. If the credit spread b/a is 0.4/0.8 then the midpoint is 0.6.

How about the natural. Using my previous example, what is the Natural.
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My understanding is "the natural" in your example would be 0.4 if you are selling and 0.8 if you are buying
 
Phil:

I've heard that the CBOE is planning to introduce a "quickie" or short-term SPX option at the end of October.

I'm not sure what it is and I was wondering if you know anything about it.
 
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