SPX Credit Spread Trader

Although it has gotten lost in the shuffle I did open NOV 1150/1160 Put Spreads about 2 weeks ago and I am starting to see a negative turn in the market and looking at ways to start placing some partial hedges.

Considering some SPY 119/116 Put spreads and SPX bear put spreads but the SPYs seem to have the better cost. Still watching the market tickle close to 1180 support.
 
I was going to read this entire thread but I bought War and Peace instead......

Maverick and me don't always see eye to eye on directional trading but he's God on the implication of directional risk on options pricing. Riskarb and me don't always see eye to eye on position structure but he's a fabulous directional trader. Together they'd equal America's best trader.

EVERYTHING Maverick has expressed on this thread is gospel truth.

I'm a futures trader who dabbles in options. I can tell you this. What would you rather do? Sell/buy futures on strength/weakness into a long vertical or panic and HAVE to hedge into a short vertical. As Mav said, and he's totally correct, same "odds" on each trade.

You guy's are blinded by premium. Is receiving 41pts on a football spread an EDGE? Usually not as there's a 50/50 chance on who'll cover. Since most of us suck as traders/hedgers, then make it easy. Just buy the friggin spread and hedge the decay by buying breaks and selling rallies!
 
The key for me is comfort level. If I bought the spreads and held until expiration I would have had 7 months of no profit this year.(none of my original spreads were ITM at expiration). I prefer to bank credits and reinvest and keep managing my positions month to month. That is my style. For example I have brought in about $65,000 in premiums this year. If I was doing debit spreads I would be out $65,000 until now. As a credit spread trader I have been able to reinvest those proceeds over time as my account has grown instead of watching it shrink and have less money to invest with. I prefer the money in the hand month to month and have to make adjustments those 1 or 2 months. It is just a trading approach. Do not know why it raises so much objection much if it is equivalent as the one others are advocating (i.e. debit spreads).

I also do not have the ability to accurately trade the futures constantly into rallies or drops, I would probably incur more losses in some months and thus increase my risk. You are saying that you hedge the decay by buying breaks and selling rallies. That makes this strategy require more monitoring and active trading then I am comfortable with. I am not a prop trader so the constant trading would eat into my profits. I prefer to deal with the 1 or 2 cases of adjustments and collect premiums monthly and reinvest those proceeds because it fits my trading style.

If the odds are the same then wouldn't it be more prudent to trade the way that best fits my trading style? What puzzles me is that if several of you have made the case that they are the same, then why not trade the way most comfortable for me? I know it bothers some to deal with the adjustments or hedges but not me. I accept it as part of the strategy. For those that prefer the hands off of the buying spreads approach, then that is perfect for them. Buying the spreads and trading the futures on rallies and drops is more active than I care to be nor have the time to be. I also trade a portion of my portfolio with these strategies so I do not fear a blow up at all since I am not fully invested.

I accept the risks and do not panic when the market is moving against me. I simply make the adjustments or get out. I am not trying to bank 30% a year, just 15% - 20% and do not mind less if the market is collapsing as long as I make money year in and year out.

Trade the way that best fits your risk and trade management styles. If two positions are equivalent, then trade the way that is best for you. Same argument over buy-writes and naked puts in a sense.

Thanks for the input.




Quote from Pabst:

I was going to read this entire thread but I bought War and Peace instead......

Maverick and me don't always see eye to eye on directional trading but he's God on the implication of directional risk on options pricing. Riskarb and me don't always see eye to eye on position structure but he's a fabulous directional trader. Together they'd equal America's best trader.

EVERYTHING Maverick has expressed on this thread is gospel truth.

I'm a futures trader who dabbles in options. I can tell you this. What would you rather do? Sell/buy futures on strength/weakness into a long vertical or panic and HAVE to hedge into a short vertical. As Mav said, and he's totally correct, same "odds" on each trade.

You guy's are blinded by premium. Is receiving 41pts on a football spread an EDGE? Usually not as there's a 50/50 chance on who'll cover. Since most of us suck as traders/hedgers, then make it easy. Just buy the friggin spread and hedge the decay by buying breaks and selling rallies!
More...
 
Feels like a bunch of formula 1 drivers are telling me (the average retail driver) how to drive my Fiat. My car uses regular gas, has skinny tires, a 4-speed that grinds....
 
Phil, back to 1178. We might test the week's low at 1168 between now and exp, but hopefully this evening's earning should boost the market a bit tomorrow... rough month!
 
The overall trend looks down. I am not so much worried about OCT now as I am NOV. Might have to start hedging NOV early and roll out of those and take the call side but November can be a strong rally month. The inflation numbers were expected given the oil spikes but with Wilma subsiding, oil could move a little lower over the next few weeks. However one of the biggest travel days is coming up in the end of November so demand may keep it higher. Things look bearish so I caution those who are grabbing put spreads on these down days.

Phil
 
Quote from skdoyle1:

Could you please inform the group of a strategy you think we should investigate, and possibly start working with on paper, when the markets don't "behave" like they have been.

One thing I have noticed on this group, is that people want to hear experienced traders views on this and other strategies. As long as they don't follow along the lines of "You are a cheat" If you don't mind, please share your ideas, I'm looking forward to learning.

Thank you,
sd
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Sure, for something that's passive; combo-atm butterflies -- take the Nov 1175 SPX strike and structure a bull and bear call and put fly w/long outright and curvature[gamma]:

Long 1175/1200/1225 call fly
Long 1175/1150/1125 put fly

Flies carry the best attributes of gamma -- short concavity, long convexity of curvature. You're holding a superior risk-reward and there is no need to adjust unless you're attempting to bank gains.

No risk atm, only 2sigmas up/down at expiration for a small debit.
 
I guess these are OTM butterflies. Interesting way to play a move in either direction. I think I priced the combo at around $13.00 real quick (cost of both butterflies together). So the cost is $13.00 with a max reward of $12.00 if the index is right at 1200 or 1150.

Profit zones would be 1183 to 1212 on the upside and 1162 to 1138 on the downside. My only concern is the frequency with which you can find the profit zones but you can simply adjust the strikes to make wider or narrower profit zones.

Why do you say no risk ATM?

Quote from riskarb:

Sure, for something that's passive; combo-atm butterflies -- take the Nov 1175 SPX strike and structure a bull and bear call and put fly w/long outright and curvature[gamma]:

Long 1175/1200/1225 call fly
Long 1175/1150/1125 put fly

Flies carry the best attributes of gamma -- short concavity, long convexity of curvature. You're holding a superior risk-reward and there is no need to adjust unless you're attempting to bank gains.

No risk atm, only 2sigmas up/down at expiration for a small debit.
More...
 
Quote from optioncoach:

I guess these are OTM butterflies. Interesting way to play a move in either direction. I think I priced the combo at around $13.00 real quick (cost of both butterflies together). So the cost is $13.00 with a max reward of $12.00 if the index is right at 1200 or 1150.

Profit zones would be 1183 to 1212 on the upside and 1162 to 1138 on the downside. My only concern is the frequency with which you can find the profit zones but you can simply adjust the strikes to make wider or narrower profit zones.

Why do you say no risk ATM?
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Yes, these are OTMs, my mistake. I would attempt to offset whichever achieves neutrality[body strike] and leave the otm. It's not a panacea, but a decent, neutral gamma strategy that carried small +theta under the meat of the curve. I'll admit I don't typically play these; my exposure to flies in mostly in individual equities, simply long the otm body fly[not combo]

There is very little risk at the entry strike, unless you're very near expiration. Gamma is largest at the entry strike, increasing as we approach expiration. You can usually get out profitably if you're trading pinned to the entry strike with >5 days to expiration.
 
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