SPX Credit Spread Trader

[parisd]

When I wrote full edge, it would be only in the case of a SPX crash below the short and not recovering at all, in that case if the S&P future is liquid enough to be sold at the short strike of your spread then no money is lost and in fact money is made as the money from the future will be greater than the money lost in the spread.

Now, if the stop-sell of the SP future is trigered and soon after the SPX start to climb again, then you are losing big money until you buy to close your future position.

No perfect edge, only one possible solution against fear of crash.

 

[rdemyan]

Thanks for that information! I was primarily referring to bear calls that were put on before a crash, so these would be in very good shape. However, no doubt I would be tempted to put on additional bear calls during the crash and your point is well taken.

Quote from zman7854:

Take a look at what happened after 9/11, if you loaded up on bear call spreads when the crash was at it's zenith you would have gotten crushed when the market began it's rally.

 

[El OchoCinco]

You have to realize that all these comments are suggestions worth considering for hedges. best bet is to find the means that you ar emost comfortable with, ie bear put spreads, short call spreads, long puts, futures... Just have something you can slap on to slow down the bleeding and preserve capital. Keep the ideas coming...

Phil

 

[ryank]

We closed just below the 1190 support on low volume. It will be interesting to see how the market reacts with the higher volume expected tomorrow and with some earnings starting to come in. I'm pretty nervous about my 1160/1170 spread as the market has shown its great ability to tank over the last 5 trading days or so. I like to evaluate things when the index closes 15 points away from my short. I would like to roll down tomorrow and will be looking at the 1125/1135 or possibly 1130/1140. It looks like I could some premium around $.40-.$.45 at those strikes but looks can be deceiving!

I am playing it like Coach at this point, forget the profit just manage the risk. With the rolling down I have done already on the call side (twice already, on my third call spread this expiry cycle) I should be able to cushion the blow barring a quick drop before I roll the puts.

ryan

 

[burrben]

I also have the 1165/1175 bull put, and now I'm a little concerned. Coach a couple of questions since you have the same bull put.
1) I have 15 contracts of the 1165/1175, if I wanted to hedge using SPY puts, how many would you purchase (1 for 1?) and at what strike (118?)
2) Would you consider closing the spread and rolling down? I only took in .60 for the credit, it would cost $2.55 at the mid to buy it back, a loss of $1.95. I could probably get another .40.
3) What would you say the next major technical level of resistance is, and are you looking to hold on and wait for earnings or manage the risk now?

Thanks as always for the help!
Sd

Quote from ryank:

We closed just below the 1190 support on low volume. It will be interesting to see how the market reacts with the higher volume expected tomorrow and with some earnings starting to come in. I'm pretty nervous about my 1160/1170 spread as the market has shown its great ability to tank over the last 5 trading days or so. I like to evaluate things when the index closes 15 points away from my short. I would like to roll down tomorrow and will be looking at the 1125/1135 or possibly 1130/1140. It looks like I could some premium around $.40-.$.45 at those strikes but looks can be deceiving!

I am playing it like Coach at this point, forget the profit just manage the risk. With the rolling down I have done already on the call side (twice already, on my third call spread this expiry cycle) I should be able to cushion the blow barring a quick drop before I roll the puts.

ryan

 

[El OchoCinco]

Sky:

1) You have $900 in credit I believe so if you were looking at SPYs to hedge, you could look at bull put spreads using the 119/118 strikes and could probably pay about $0.35. I would not do more than 10 since you do not want to eat into your entire credit. I would not jumpt to do it yet since we are in an upday moving back to 1190 level and we still have 1180 support. However sometimes it is best to buy put hedge on up day since it will be cheaper. I cannot recomment you buy it, can only tell you what strikes and price to consider.

2) I am not considering yet rolling down because I like the 1190 level which keeps pulling the index back each time it went under (could reverse again today but we shall see) and the 1180 is still strong support for right now. However, barring some bad news that could send it below 1180, I do have the SPY FLY and the SPX bear put spreads to help cushion the blow and allow me to roll down at a smaller cost. Time decay can really kick in if we have some upward strength. The first 20 minutes so far are nice, but still a long trading day to go..

3) I see major support at 1180 and smaller support/resistance at 1190. Both times the market dropped below it has moved back to or above 1190 and maybe the next time it will surge through and start to test 1200 again which is short-term overhead resistance as well.

Stay tuned because it could be pretty or ugly or pretty ugly in the next 9 days to expiration!

Phil

Quote from skdoyle1:

I also have the 1165/1175 bull put, and now I'm a little concerned. Coach a couple of questions since you have the same bull put.
1) I have 15 contracts of the 1165/1175, if I wanted to hedge using SPY puts, how many would you purchase (1 for 1?) and at what strike (118?)
2) Would you consider closing the spread and rolling down? I only took in .60 for the credit, it would cost $2.55 at the mid to buy it back, a loss of $1.95. I could probably get another .40.
3) What would you say the next major technical level of resistance is, and are you looking to hold on and wait for earnings or manage the risk now?

Thanks as always for the help!
Sd

 

[burrben]

Sorry for hogging the thread but:
1) You reccommend looking at a bull put spread on the SPY with the short option being 119. Wouldn't this also be in danger of being in the money quickly? Did you mean a bear put DEBIT spread for .35? In the past you have just heged with a simple long purchase of puts or calls, can I not do the same here? (I know I can do anything, but this will be my first hedge instead of closing and rolling down) I'm also trying to figure out how a Debit spread would help instead of just buying the 118 puts outright?

Quote from optioncoach:

Skd:

1) You have $900 in credit I believe so if you were looking at SPYs to hedge, you could look at bull put spreads using the 119/118 strikes and could probably pay about $0.35. I would not do more than 10 since you do not want to eat into your entire credit. I would not jumpt to do it yet since we are in an upday moving back to 1190 level and we still have 1180 support. However sometimes it is best to buy put hedge on up day since it will be cheaper. I cannot recomment you buy it, can only tell you what strikes and price to consider.


Phil

 

[El OchoCinco]

Ooops sorry about that, I meant bear put spread on the SPY. Basically you want the cheapest hedge you can find. If you are interested in long puts then the 118 SPY put would be the best choice. In this case I think you are right that the debit spread would be inferior to just buying the 118 puts outright if you so chose to hedge that way. The reason I looked at the 119/118 is an attempt to get something that could be ITM for a profit and yet you are still OTM on your short SPX calls. The 118 can still achieve this but of course it costs twice as much as the 119/118 spread. You can also look at the 119/117 spread as an alternative. Weigh the choices and see which bests fits your needs should you choose to partially hedge.

Phil

Quote from skdoyle1:

Sorry for hogging the thread but:
1) You reccommend looking at a bull put spread on the SPY with the short option being 119. Wouldn't this also be in danger of being in the money quickly? Did you mean a bear put DEBIT spread for .35? In the past you have just heged with a simple long purchase of puts or calls, can I not do the same here? (I know I can do anything, but this will be my first hedge instead of closing and rolling down) I'm also trying to figure out how a Debit spread would help instead of just buying the 118 puts outright?

 

[rdemyan]

Coach:

Why do you say you think the 119/118 bear put is inferior to the 118 put. As you point out the 119/118 has a higher probability of being in the money and the net debit is half that of the 118 put. The only reason I can think of, of why you came to this conclusion is that you expect the SPX to go down. The bear put has limited profit whereas the long put has much higher potential if the SPX continues down.

I'm considering hedging with the SPY as well, so making these decisions is important, but not easy. If you could provide further analysis that would be great.

Quote from optioncoach:

Ooops sorry about that, I meant bear put spread on the SPY. Basically you want the cheapest hedge you can find. If you are interested in long puts then the 118 SPY put would be the best choice. In this case I think you are right that the debit spread would be inferior to just buying the 118 puts outright if you so chose to hedge that way. The reason I looked at the 119/118 is an attempt to get something that could be ITM for a profit and yet you are still OTM on your short SPX calls. The 118 can still achieve this but of course it costs twice as much as the 119/118 spread. You can also look at the 119/117 spread as an alternative. Weigh the choices and see which bests fits your needs should you choose to partially hedge.

Phil

 

[El OchoCinco]

I think you are right actually. The 119/118 may not be inferior due to its cost and fact that it could be ITM well before hitting your short strike and thus have more profit to help cushion a potential roll down of the 1165/1175 SPX spread. I think the 118 put might be too costly at $0.70 since that means the breakeven point is technically 1173 or 117.3 more or less.

I am watching the SP closely right now for futures trade so sorry for the flip flop, my mind is cheesy today.

Phil

Quote from rdemyan:

Coach:

Why do you say you think the 119/118 bear put is inferior to the 118 put. As you point out the 119/118 has a higher probability of being in the money and the net debit is half that of the 118 put. The only reason I can think of, of why you came to this conclusion is that you expect the SPX to go down. The bear put has limited profit whereas the long put has much higher potential if the SPX continues down.

I'm considering hedging with the SPY as well, so making these decisions is important, but not easy. If you could provide further analysis that would be great.