Volatility has been so low that a 10% move up is very small.
A sharp 50% move in vol, from 12 to 18? Moves like that are not uncommon.
SPX Credit Spread Trader
- Thread starter El OchoCinco
- Start date
Volatility has been so low that a 10% move up is very small.
A sharp 50% move in vol, from 12 to 18? Moves like that are not uncommon.
I know it is not relevant to the thread but just to follow up I decided to close my long futures position this morning. I think I would rather wait until Rita blows through. I expect today might be mostly flat initially and after the opening hour I may go back in.
I now bring you back to your regularly scheduled journal.
Phil
I now bring you back to your regularly scheduled journal.
Phil
I agree, a stress test should include large estimated changes in volatility. With the VIX around 13/14, a 10% change can occur rather unnoticeably over a couple of days and would be more normal at time than unique. If the market breaks through 1200, the IV could certainly move 3 or 4 points.
Phil
Phil
Phil, I tripped over this forum by accident. Back in '97, I took a seminar taught by Don. Fishback. on options..by way of a guy who was in Don's testimonial section, and lived by me. Don got us into doing credit spreads on the OEX, at the time. For about 7 years, my now friend, then just a testimonial,, took whopping profits out of the market every Exp. Naturally, when I jumped on board, profits only ran for a couple months, before getting hit in Oct 97.. I kinda gave up on the credit spread thing, cause Don was complaining that the volatility at the time was too low to implement credit spreads, at least in his opinion. He is definitely a volatility player, where he sells high volatality and buys low volatility.. which makes sense as option pricing should follow that. For the last several years, I've been daytrading the 4 major index futures, as well as currencies.. I'm not complaining, but it is a lot of work.. At the end of the week, it seems George Foreman had been my roommate. I've read every post that you have in this forum,,, and I like what I see. I hope these attendees give thanks, and appreciate your help, cause most I have run into want a price for their advice. I certainly always kept my interest in doing credit spreads, but right now, i am using tradestation, and they won't let you put orders for anything else but ISE, as a credit.. I must "leg" in which I refuse to do. I'm not aware of any other Index that is ISE compatible yet, and has the overall breath that the SPX, Oex has... IS there?? I'm currently using TS for daytrading,, and I'm use to their format.. All i need now is an ISE index worth playing with or to change my broker.. Commisions are $1.00 with no minimum,, so if ya want to try something in small lots, its cheap.
I have a question or two for you,,
Do you give any consideration to overall volatilities, like the VIX, VXO, in either the I.V. format or statistical?? These "pros" keep telling me not to invoke any selling until the I.V.'s are high. Of course, the current rage is the %tile scheme,,I know Don F. is doing credit spreads on stocks now, but when I took his course, it was a big No, NO. If you do look at vol, then what do you consider in volatility
Second, I see that you don't really go by the expected return calcs,, you dive into just making money,, which is the objective.. I always heard the classical,, "if you do 10 trades,, with 500.00 to risk,, then your credit should be above $50.00,, like in the $60.00 range. That way if you lose on one,( which at a 90% probability or better, should be true), then you will still come out ahead.. I rarely see this to be true these days, as volatility has shrunken to zip... The old 300 point Nasdaq 100 range days are lucky to hit 10 points intraday.
Also,, what do you use to find what spread number set to implement??
Overall, I should think these attendees should buy you an expensive bottle of Scotch for your birthday,, and the winers should go trade something exciting like corn, or cocoa!!! Nice to see someone is out there trying his best to help,, without a commision.. Doc
I have a question or two for you,,
Do you give any consideration to overall volatilities, like the VIX, VXO, in either the I.V. format or statistical?? These "pros" keep telling me not to invoke any selling until the I.V.'s are high. Of course, the current rage is the %tile scheme,,I know Don F. is doing credit spreads on stocks now, but when I took his course, it was a big No, NO. If you do look at vol, then what do you consider in volatility
Second, I see that you don't really go by the expected return calcs,, you dive into just making money,, which is the objective.. I always heard the classical,, "if you do 10 trades,, with 500.00 to risk,, then your credit should be above $50.00,, like in the $60.00 range. That way if you lose on one,( which at a 90% probability or better, should be true), then you will still come out ahead.. I rarely see this to be true these days, as volatility has shrunken to zip... The old 300 point Nasdaq 100 range days are lucky to hit 10 points intraday.
Also,, what do you use to find what spread number set to implement??
Overall, I should think these attendees should buy you an expensive bottle of Scotch for your birthday,, and the winers should go trade something exciting like corn, or cocoa!!! Nice to see someone is out there trying his best to help,, without a commision.. Doc
Welcome and thanks for the questions. Potential for IV changes is a risk factor when selling spreads such as these however I do not treat it as selling volatility since I am selling spreads. let's compare the current Greeks for my 1165/1175 Put Spread. Using a current quote the net Greeks (combining long and short side) are:
Delta: -.04 (assuming move lower in index)
Gamma: -.001
Theta: .02
Vega: -.02
Now these numbers are small of course because the spread is about 40 points OTM. But the point is that having a spread partally offsets the effects of delta, gamma and vega to my advantage and theta to my disadvantage. In other words, the short strike delta, gamma and vega are partially offset by the long strike delta, gamma and vega and the time decay in the short strike is partially offset by the time decay in the long strike.
So I do not approach this trade as selling volatility like one would do selling straddles/strangles and looking for IV to move lower or buying vol, looking for vol to move higher. Basically these are non-directional and directional trades depending on the strike selection. SO the current low IV environment has not hurt me. When IV increases, I will be hurt more by that IV increase if it comes along with a move by the index towards my short strike. However, the spread effect will offset those results to a large extent.
For comparison lets look at a 1205/1215 put spread which would place the short strike ATM with the SPX at 1215.63. The net Greeks of such a spread are:
Delta: -.10
Gamma: -.0012
Theta: .01
Vega: -.08
It is not that the Greeks are not important or should be ignored, but that the spread does provide a partial offset as opposed to selling calls or puts naked. So the spread does help to offset most of the Greek risks and my focus is more on avoiding having my short strike end being in the money. That is why risk managment in rolling out or closing is the first most important aspect of this strategy with strike selection a very close second. Increases in vol concern me more with the greater movements in the index that may come with it, but that would allow me to go further OTM with the put side and work to reduce my risk as best as I can. I do this only on indexes because the index has a lower volatility on average than individual stocks and is not susceptible to those single shocks the same way stocks are.
Phil
Delta: -.04 (assuming move lower in index)
Gamma: -.001
Theta: .02
Vega: -.02
Now these numbers are small of course because the spread is about 40 points OTM. But the point is that having a spread partally offsets the effects of delta, gamma and vega to my advantage and theta to my disadvantage. In other words, the short strike delta, gamma and vega are partially offset by the long strike delta, gamma and vega and the time decay in the short strike is partially offset by the time decay in the long strike.
So I do not approach this trade as selling volatility like one would do selling straddles/strangles and looking for IV to move lower or buying vol, looking for vol to move higher. Basically these are non-directional and directional trades depending on the strike selection. SO the current low IV environment has not hurt me. When IV increases, I will be hurt more by that IV increase if it comes along with a move by the index towards my short strike. However, the spread effect will offset those results to a large extent.
For comparison lets look at a 1205/1215 put spread which would place the short strike ATM with the SPX at 1215.63. The net Greeks of such a spread are:
Delta: -.10
Gamma: -.0012
Theta: .01
Vega: -.08
It is not that the Greeks are not important or should be ignored, but that the spread does provide a partial offset as opposed to selling calls or puts naked. So the spread does help to offset most of the Greek risks and my focus is more on avoiding having my short strike end being in the money. That is why risk managment in rolling out or closing is the first most important aspect of this strategy with strike selection a very close second. Increases in vol concern me more with the greater movements in the index that may come with it, but that would allow me to go further OTM with the put side and work to reduce my risk as best as I can. I do this only on indexes because the index has a lower volatility on average than individual stocks and is not susceptible to those single shocks the same way stocks are.
Phil
Phil,, I've seen you do a 15 point wide spread for a credit of $75.00..on the SPX.. In your past experience, what happens,, how bad is it, when the index gets to a place where you have to roll out, or close.. If you were looking at a $75.00 credit,, how much is the usual debit when things get bad.. You can include the credit from the next position you establish if you'd like, and any offsets you do by buying options on the SPY.. But bottom line,, what is the loss you incur,, .25?? 50?? 1.00?,,etc Just wanted to get a feel for the hit factor,,, and how many more wins it would take to make it up.. Thanks.. Doc
doc:
rdemyan advised me on this, I think it is excellent (thanks rd):
"Christopher Smith at the OptionClub.com has prepared an excellent video on an actual adjustment to an SPX credit spread. He presents it in a very cool, level-headed fashion without emotion, which is exactly how you have to be when you make these adjustments. You have an adjustment plan in mind before you enter the trade and you stick to it. I believe the adjustment was made in late June or early July. I highly recommend you check it out. Goto www.theoptionclub.com, click on "SPX Iron Condor Chat session" link and then click on the link "06/26 Iron Condor Adjustment". Coach presented I think two chat sessions to that group."
rdemyan advised me on this, I think it is excellent (thanks rd):
"Christopher Smith at the OptionClub.com has prepared an excellent video on an actual adjustment to an SPX credit spread. He presents it in a very cool, level-headed fashion without emotion, which is exactly how you have to be when you make these adjustments. You have an adjustment plan in mind before you enter the trade and you stick to it. I believe the adjustment was made in late June or early July. I highly recommend you check it out. Goto www.theoptionclub.com, click on "SPX Iron Condor Chat session" link and then click on the link "06/26 Iron Condor Adjustment". Coach presented I think two chat sessions to that group."
I watched the video in its entirety as well and I agree w/ both rdemyan and ckor30. It was a very informative and helpful video.
Doc:
All excellent questions and hard to get them all at once. If you browse the whole thread (it is long I know) you will see various discussions on the adjustments, risks and how to handle losses. I do not expect to win all the time but I trade with that approach. I adjusted in September before expiration and although it was not an optimum adjustment I still have a nice profit for the month. There may be a time where you take a small loss but thinking long-term for the year, you can still have significant returns. It all depends more on your own risk managment and trading style than the strategy itself.
Take a look through some of the great discussions here and I pop back in with questions whenever you want.
Phil
All excellent questions and hard to get them all at once. If you browse the whole thread (it is long I know) you will see various discussions on the adjustments, risks and how to handle losses. I do not expect to win all the time but I trade with that approach. I adjusted in September before expiration and although it was not an optimum adjustment I still have a nice profit for the month. There may be a time where you take a small loss but thinking long-term for the year, you can still have significant returns. It all depends more on your own risk managment and trading style than the strategy itself.
Take a look through some of the great discussions here and I pop back in with questions whenever you want.
Phil