SPX Credit Spread Trader

smilingsynic · Oct 20, 2005

Quote from optioncoach:

Since IV is picking up why are you inclined to stop selling net premium. Would you simply go further out to keep the same returns but reduce the risk by being further OTM?

Phil

Because if volatility is increasing, then BUYING premium will be more profitable. Premium increases when vol increases. I want to make it easy on myself.

Going out further seems safe now, but what seems "far out" today will be "too close for comfort" later if vol continues to increase. By selling premium in an environment of rising vega, one is taking bets in which the odds continually are shifting against you the longer you hold the bet.

One can hedge, of course, and I know you do, somewhat. But the easiest way to taking advantage of rising vega is to buy premium.

andysmith · Oct 21, 2005

10-day Average True Range for SPX went from 9 (around one month) ago to 14 (as of today)! This means if one puts on a spread of say 1130/1140, it would take as little as 3 days to hit the 1140 strike from the current level of 1178. Think it's time to go fishing. :eek:

rdemyan · Oct 21, 2005

Coach:

So what's you're current thinking on bear call spreads. I tried to get a Nov 1255/1265 filled today, with no luck.

Quote from optioncoach:

Going forward during this wild period I am gonna go further OTM and accept less credit for more safety.

I currently have the NOV 1150/1160 I sold 2 weeks ago before the floor dropped. I have 90 spreads. Once my margin is freed tomorrow I will look into rolling down at least 10 or 15 points and increase my contracts to keep a net credit. I will be more reserved for NOV given the current uncertainty. Since I have so much margin room I have more flexibility in how I adjust or handle the NOV positions.

NOV should be a good month to continue this great year. With IV higher, the spreads have slightly better premiums so I can go further OTM and still get good premium. Right now the 1120/1130 NOV strikes can be had for about $0.70 or so.

Phil

andysmith · Oct 21, 2005

Smiling, very well put. I don't want to put on a credit spread today with ATR(10)=14 and then a week later have the ATR(10)=25. I'd be toast.

I guess the big unknown is if vol is actually increasing or are we seeing a momentary pop (i.e. VIX will soon be back at 12)?

Quote from smilingsynic:

Because if volatility is increasing, then BUYING premium will be more profitable. Premium increases when vol increases. I want to make it easy on myself.

Going out further seems safe now, but what seems "far out" today will be "too close for comfort" later if vol continues to increase. By selling premium in an environment of rising vega, one is taking bets in which the odds continually are shifting against you the longer you hold the bet.

One can hedge, of course, and I know you do, somewhat. But the easiest way to taking advantage of rising vega is to buy premium.

gatorplease · Oct 21, 2005

You are only toast depending on time frame. These trades are not daytrades. They are designed to be held to, or close to expiration. So the increase in volatility does not mean the position will be a loss. I think many of the arguements here are between daytraders with a different perspective. This is an intermediate buy and hold position.

Quote from andysmith:

Smiling, very well put. I don't want to put on a credit spread today with ATR(10)=14 and then a week later have the ATR(10)=25. I'd be toast.

I guess the big unknown is if vol is actually increasing or are we seeing a momentary pop (i.e. VIX will soon be back at 12)?

momoneythansens · Oct 21, 2005

Quote from gatorplease:

You are only toast depending on time frame. These trades are not daytrades. They are designed to be held to, or close to expiration. So the increase in volatility does not mean the position will be a loss. I think many of the arguements here are between daytraders with a different perspective. This is an intermediate buy and hold position.

I don't want to start a fight

but I think it's important to resist the notion that credit spreads are "designed" or "meant" to be used in any particular way. It's up to the person doing the trade and what their personal market sentiment and objectives are.

I think everyone is aware that to have a statistical advantage with credit spreads the best environment for them is when IV is higher than normal and thus has a chance of mean regression. It just puts the odds in your favour. The position is short vega after all.

Current conditions it could be argued are the exact WRONG time to use these trades since IV is historically low, even at 16 and as such there is a large probability of mean regression in the wrong direction! BUT that does not preclude the use of the strategy if people are more inclined to bet on technical analysis rather than trying to capture profit from selling volatility.

Food for thought. Let the games begin.

Momoney.

Synaptic · Oct 21, 2005

Wondering if I could get a comment on my current spread position I've sold .... OEX 535/525 Nov Puts. I'm wondering what I should do if the market continues to move against me. My sold 535 position is below this years low but I would be interested in anyone's comments on how I should hedge/protect this position should I get in trouble. My current thinking has me holding to the bitter end, and if hit, closing the position and re-opening the Nov OEX 525/515 or lower and taking that premium in to buffer the loss.

gatorplease · Oct 21, 2005

Quote from momoneythansens:

I don't want to start a fight but I think it's important to resist the notion that credit spreads are "designed" or "meant" to be used in any particular way. It's up to the person doing the trade and what their personal market sentiment and objectives are.

I think everyone is aware that to have a statistical advantage with credit spreads the best environment for them is when IV is higher than normal and thus has a chance of mean regression. It just puts the odds in your favour. The position is short vega after all.

Current conditions it could be argued are the exact WRONG time to use these trades since IV is historically low, even at 16 and as such there is a large probability of mean regression in the wrong direction! BUT that does not preclude the use of the strategy if people are more inclined to bet on technical analysis rather than trying to capture profit from selling volatility.

Food for thought. Let the games begin.

Momoney.

OK, I agree that different people can use credit spreads in different ways. However, the spreads as proposed by optionscoach are not meant to be used as a daytrade.

SO, what do you propose to trade in todays environment. Up 20 points one day, down 20 the next. What direction are we going??? I sure don't know. And apparently half the people out there don't know, because we're going up and down, taking trading positions out left and right.

I'm sincerely interested in what you propose as a trade here.

gatorplease · Oct 21, 2005

Quote from Synaptic:

Wondering if I could get a comment on my current spread position I've sold .... OEX 535/525 Nov Puts. I'm wondering what I should do if the market continues to move against me. My sold 535 position is below this years low but I would be interested in anyone's comments on how I should hedge/protect this position should I get in trouble. My current thinking has me holding to the bitter end, and if hit, closing the position and re-opening the Nov OEX 525/515 or lower and taking that premium in to buffer the loss.

Curious, when did you open that spread, and why?

codyhopkins · Oct 21, 2005

Hi All,

Today will be a good day to look at the SET risk. The futures and the cash were both up strong at the opening. But, remeber that SET is the actual opening price of each component stock. SET could well be above the gap opening prices of the SPX.

Cody