SPX Credit Spread Trader

Here is a more recent post where I talked about the 10/15 point markers. Also if you look at a SPX chart you will see the 1180 support. I mentioned the 1190 point as a target based on intra-day charting of a wedge in between the move down from 1225 or so and happily the market rallied back to that point. But 1180 seems to still be strong support looking from MARCH until now.

If we move back lower, I will load up on puts for protection in the morning and look at adjustments.

Phil


Quote from optioncoach:



Contingent stop losses are not a good idea in my opinion. Now you can probably make a contingency such as if the index is within 15 points you close out your spread but I do not like that for two reasons. 1, if the contingency is hit, you may buy back your spread at a market order which, given the wide SPX b/a spreads, you will lose so much more money than if you did it manually. 2, I use the 10/15 points away from strike price as a warning signal and not an automatic adjustment. Sometimes if there is a short time to expiration and strong resistance or support I may decide to hold, or perhaps I have a partial hedge on and I am willing to wait longer. I think the personal touch is still required here when the index is closing in on your short strikes. Also, it may be better to simply roll down then to close out and take the large loss so the contingent stop loss is too simple an approach to limiting your risk and may result in greater losses than you really need to take.


Phil
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Thanks, Coach.

I'd like to explore this a little further. Having "been there" myself (and by that I mean ATM and ITM), I'm curious as to how your decision to hold on (as you said it took "balls") was affected by the fact that you already had a SPY hedge on. I know that you can only use the SPY as a partial hedge, but how does having the SPY hedge affect your decision making as to the point at which you will adjust. It's probably difficult to quantify an answer, but would you say that having the SPY hedge narrows the distance between the price and the short strike for adjustment.




Quote from optioncoach:

I hope I was clear about this in previous posts, but if not then I apologize. I will try and look through some of the old posts to see. I said that I use 10/15 points as the point when I make a decision whether to adjust or not based on what was happening in the market. I tend to lean more towards 10 points while others prefer 15.

Although the market got down to 1181 intraday for 3 minutes, I decided to hold because 1180 was the next major support level for several technical reasons support after 1190 and I started to see some strength in the market coming in (I watch the live TICK indicator). SO I decided to wait and see if we could move back higher, if not I had my screen up to start rolling lower. I felt the combined moves were overdone and wanted to wait for a bounce. Happily in about 6 minutes with the TICK surging higher, the market moved back to 1185. And my comfort level rise even more when we jumped back above 1190.

It took some balls to watch it move to 1180 and wait and see but the move lower was huge and I just felt we were overextended. I have been trading this strategy for a while so I am do my best to keep off the panic. Others may have decided to simply roll out as per the plan but my analysis did not convince me I needed to roll yet.

I think I have said this a few times that the 10/15 point is where I make a decision to stay, roll down or close. Last month when the market hit 1241 with my 1250 spread I decided to roll. This time I felt I still had another support level to "protect" me and use as a last indicator and thankfully it held. I do not expect everyone to trade this as I would since I have my own approach.

As you do point out I have a lot of experience so I traded it one way. Beginners, and I hate to use that word because I do not recommend this to beginners at all, but assuming you meant people newer to this strategy, may need to have stricter rules of when they will make adjustments.

So bottom line I did not adjust because of my belief that we overextended to the down side and I wanted to see if 1180 would hold. Since I watch live 1-minute charts along with the TICK, I can get a live sense of sentiment and make decisions off that.

I hope this clears things up. The distance from the short strike is when I get my warning signal to re-analyze the position and make a judgement call.

Phil
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The SPY hedge helps a little but it was not the main factor. Potential profits from the hedge would eat into the cost of rolling down partially but since the market moved so far so fast the short strikes inflated rather quickly and therefore the paper profit in the FLY was not major (maybe $1,000 at one point). I put it on more against a slow sustained move lower but this large gallop lower was quite nice huh lol.

The SPY hedge really was not the overriding factor in holding on, it was in place to help out but at the moment was not providing much help. It was more my beliefs that 1180 would hold given the large extended move and previous support. Trust me, if I was wrong and it broke through 1180 I already had the order screens up and was looking at the prices. Could not watch market and type here at same time so I could not tell you I was doing this in real time lol. So it was a real possibility. But as it bounced quickly off 1180 and sentiment was moving higher I just kept watching it and each point higher made me less nervous, so to speak.

But my comfort level also exists in that I feel that I can spend premium credits tomorrow to buy puts or put spreads for more hedging and I can permit a limited loss as long as I can protect my capital.

One learning experience I am getting from this is that I am not sure if the FLYs are the best for sudden large moves. If anyone has input on this issue, please jump on in. Perhaps long puts or bear put spreads may simply be better.

Phil

Quote from rdemyan:

Thanks, Coach.

I'd like to explore this a little further. Having "been there" myself (and by that I mean ATM and ITM), I'm curious as to how your decision to hold on (as you said it took "balls") was affected by the fact that you already had a SPY hedge on. I know that you can only use the SPY as a partial hedge, but how does having the SPY hedge affect your decision making as to the point at which you will adjust. It's probably difficult to quantify an answer, but would you say that having the SPY hedge narrows the distance between the price and the short strike for adjustment.
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You say you had the order screens up and were looking at prices. Am I correct in assuming you would have placed a limit order. Also, would you have bought SPY puts or spreads as well or just adjusted your existing SPX position (both the bull put and bear call).

When I had my debacle, prices were moving so fast, I couldn't buy my way out. I'd enter an order at about the midpoint. Market kept moving up, no luck. Modified the order and entered again, no luck. Ultimately, I entered an order at the "ask" just to get out and it still failed until I modified it twice higher to meet the then current ask.

This is what really makes me nervous when close to ATM with a moving market. Because once you get near the money, it's as though the price of the short strike has gone up exponentially. If the long strike is 15 points away, you have little hedge at that point.



Quote from optioncoach:

The SPY hedge helps a little but it was not the main factor. Potential profits from the hedge would eat into the cost of rolling down partially but since the market moved so far so fast the short strikes inflated rather quickly and therefore the paper profit in the FLY was not major (maybe $1,000 at one point). I put it on more against a slow sustained move lower but this large gallop lower was quite nice huh lol.

The SPY hedge really was not the overriding factor in holding on, it was in place to help out but at the moment was not providing much help. It was more my beliefs that 1180 would hold given the large extended move and previous support. Trust me, if I was wrong and it broke through 1180 I already had the order screens up and was looking at the prices. Could not watch market and type here at same time so I could not tell you I was doing this in real time lol. So it was a real possibility. But as it bounced quickly off 1180 and sentiment was moving higher I just kept watching it and each point higher made me less nervous, so to speak.

But my comfort level also exists in that I feel that I can spend premium credits tomorrow to buy puts or put spreads for more hedging and I can permit a limited loss as long as I can protect my capital.

One learning experience I am getting from this is that I am not sure if the FLYs are the best for sudden large moves. If anyone has input on this issue, please jump on in. Perhaps long puts or bear put spreads may simply be better.

Phil
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Coach,

Great stuff! I love the valuable info. you so freely share w/ us. Thank you very, very much.

I've been trading an approach very similar to yours for over a year now & have had very good success. I, like yourself held on rolling/covering/making adjustments on my puts this afternoon b/c I felt like the mkt slide was overdone & new there was solid support @ 1180. Once, I saw the mkt bounce off this level it gave me some nice breathing room as well. Another thing traders must keep in mind is that many times traders will shove the market just below/above key levels only to extract stop orders then you'll often see a nice rebound. This is exactly what happened late day.

I monitor mkt activity closely so this was not new to me. It's times like these that experience is huge but believe me I've gone through a lot of learning curves to get to this point & I'm sure I have more to come. My objective, like the Coach is to always keep my losses in check then the profits will take care of themselves. I also am prepared to make major adjustments tomorrow should the mkt break through 1180 convincingly however, I will have a game plan in place & not be panicky about it. I'm continually reviewing my gameplan & making necessary adjustments as I see fit. There's no exact science here, I believe it's rather an art. There's many different ways one may handle various mkt situations that's why one must analyze the mkt & have a gameplan in place for when these situations arise (surprise Fed cut, terrist attacks, earnings, etc.)

This strategy is definitely not for the faint of heart. Only if your a disciplined risk manager & know what your risks are should one even be considering this strategy.

Coach, thanks for all of your help & being a positive contributer to the investment community.

Take care,

traderanonymouw
 
Whew, what a day. Talking about support for a bit...I was a little disappointed that the 1190 level didn't hold intraday as I had thought it was a major support level in my analysis intraday and was happy to see that level again on the close. For any of you that follow Fibinacci analysis, if you pull up a 6mth daily chart on SPX and do a Fib retracement chart from the lows in Apr to the highs in Aug, you'll see that we closed today right smack at the 50% retracement levels from the highs set in early Aug. A lot of traders (myself included) think it's more important on where a stocks closing price is rather than the intraday. While the low of 1181 is important I think the close of 1191 was more signifigant and was somewhat relieved to see the market hold that level in todays session. BTW, is it just me or did the last three days feel like April or what?

Thank for the great thread and helpful, timely advice Coach!!

Happy Trading.
 
And if anybody has a in with the Fed, please tell that doofus to keep his trap shut. Next time he "reassert's inflation-related comments" I'm going to shove my foot up Dallas Fed President Fisher's you know what.

I also have the 1175 put spreads but I'm flying all day tommorow and won't even see the market open or close, UGGH. I think I might put in some contingent orders tonight to buy spy puts if the spx gets to 1177, but I'll have to buy at the market because I will have no clue what the bidXask will be on the puts....

Let's hope traders do a TGIF and stick above 1190.

sd
 
Trader:

I'm very interested in knowing what your plan is for a terrorist attack. Now that I too have "more experience" I feel like I can handle most adjustment requirements. The one that concerns me is a terrorist attack with a dirty bomb or, God forbid, the real thing. Seems like a 100 pt. or more drop in the SPX could easily occur.

Do you think there is a plan to handle such a scenario and if so would you mind sharing your thoughts.

Thanks.


Quote from traderanonymous:

Coach,

Great stuff! I love the valuable info. you so freely share w/ us. Thank you very, very much.

I've been trading an approach very similar to yours for over a year now & have had very good success. I, like yourself held on rolling/covering/making adjustments on my puts this afternoon b/c I felt like the mkt slide was overdone & new there was solid support @ 1180. Once, I saw the mkt bounce off this level it gave me some nice breathing room as well. Another thing traders must keep in mind is that many times traders will shove the market just below/above key levels only to extract stop orders then you'll often see a nice rebound. This is exactly what happened late day.

I monitor mkt activity closely so this was not new to me. It's times like these that experience is huge but believe me I've gone through a lot of learning curves to get to this point & I'm sure I have more to come. My objective, like the Coach is to always keep my losses in check then the profits will take care of themselves. I also am prepared to make major adjustments tomorrow should the mkt break through 1180 convincingly however, I will have a game plan in place & not be panicky about it. I'm continually reviewing my gameplan & making necessary adjustments as I see fit. There's no exact science here, I believe it's rather an art. There's many different ways one may handle various mkt situations that's why one must analyze the mkt & have a gameplan in place for when these situations arise (surprise Fed cut, terrist attacks, earnings, etc.)

This strategy is definitely not for the faint of heart. Only if your a disciplined risk manager & know what your risks are should one even be considering this strategy.

Coach, thanks for all of your help & being a positive contributer to the investment community.

Take care,

traderanonymouw
More...
 
Quote from optioncoach:

Perhaps long puts or bear put spreads may simply be better.

Phil
More...

If one is going to buy puts, I would buy some from a more distant month, like the Decembers. Lower time decay, plus greater vega.
 
Something worth considering especially since month to month I have the same support levels so long-term puts may be a way to provide some hedges. Would like to see how the mini-SPX work to see if it might be better to use those somehow.

Futures up 2.25 as of 8:56 AM EST so at least on the opening we have some upward movement on better than expected job numbers to an extent. I might decide to grab the puts on the upward move since they will be cheaper unless we really explode out of the gate and getting above 1200 looks more likely (maybe not today but next week)

Phil

Quote from smilingsynic:

If one is going to buy puts, I would buy some from a more distant month, like the Decembers. Lower time decay, plus greater vega.
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