SPX Credit Spread Trader

[El OchoCinco]

First the hedge works better if it is above the your short strikes in my opinion. So if you have the 1160/1150, the perhaps the 118/117 or 117/116 so that you can make a profit ahead of an adjustment if need be.

Second, I was looking into the FLYs if I thought the cost was too much for the long puts or put spreads or if I had a large distance I wanted to FLY over. $0.30 for a hedge is not too expensive. If I collected $8,000 in premium I would not mind spending $1,500 on 50 spreads as a partial hedge. But I still think it works better if it is at higher strikes than your short strike.

An example of where I might look into the butterfly is if SPX moves back to 1200 and then bad news is coming and the market starts to turn negative. Perhaps I would test out the 120/116/112 FLY as an alternative to the put spread to get a cheaper form of partial hedge. The FLY would be used with a wide profit area rather than 1 strike apart on the SPY. It has its drawbacks as has been pointed out but if the market drops over some time towards 1170, the the spread will earn some money and and partially finance an adjustment if needed.

Nothing is fixed really and these are some of my suggestions.

I have also been looking into put ratio spreads which I have traded a lot in previous years. It does have some negative sides but basically you can have a really wide profit zone at little or not cost. For example, if you look at the 119/116 put ratio spread (1:2), you could enter the spread for almost no debit or even a credit and your profit zone (assuming even cost) goes all the way down to 113. I do not have time to go into great detail so do not jump into this yet. We can walk through it. It does have naked options, gamma risk but does have some good theta and wide profit zones. If the market is near the short strikes at expiration you greatly incease your profits. Just take the bottom wing off the FLY.

I do not want to get off track because this is more advanced and I do not recommend it for people unless they have traded put ratio spreads before. So please disregard if this is new to you. I added it in to give you more to think about.... ON PAPER!

Phil

Quote from daytrader85:

Coach,

Going back to the SPY hedges. Suppose I had a 1160/1150 Put Spread and received a credit of $1.20.

With SPX at 1,179.59, let's say I felt the market was going a little lower.

And let's say I buy a 116/115 Bear Put Spread, for $0.30.

But you said that if there is not that much time left, you would buy a butterfly. To convert that the above mentioned Bear Put Spread into a Butterfly, would I Buy another 116 Put and sell and another 117 Put?

Sorry for bombarding you with so many questions.

Thanks again.

 

[El OchoCinco]

OX finally cleared up the positions so I wanted to put the final net profit number which is mroe accurate than my math and is net commissions as well.

Final Net Profit: $1,946.20

Risk Margin: $250,000

Return on Margin: .78%

Nothing to sing about but, I made money after many adjustments and as I covered in detail I got greedy on an XEO roll down which probably cost me about $8,000 in profit. That would put my return at 3.9% for the month. I @#$%ed up and paid for it. Greed will do that so I am still happy for my returns for the month and for the year to date posted above.

On to November. remember I have 90 1150/1160 Put Spreads and will be watching it closely as well as adding to NOV positions. May even roll it down and add more contracts for a net credit for mroe safety.

Phil

 

[daytrader85]

Quote from optioncoach:

First the hedge works better if it is above the your short strikes in my opinion. So if you have the 1160/1150, the perhaps the 118/117 or 117/116 so that you can make a profit ahead of an adjustment if need be.

Second, I was looking into the FLYs if I thought the cost was too much for the long puts or put spreads or if I had a large distance I wanted to FLY over. $0.30 for a hedge is not too expensive. If I collected $8,000 in premium I would not mind spending $1,500 on 50 spreads as a partial hedge. But I still think it works better if it is at higher strikes than your short strike.

An example of where I might look into the butterfly is if SPX moves back to 1200 and then bad news is coming and the market starts to turn negative. Perhaps I would test out the 120/116/112 FLY as an alternative to the put spread to get a cheaper form of partial hedge. The FLY would be used with a wide profit area rather than 1 strike apart on the SPY. It has its drawbacks as has been pointed out but if the market drops over some time towards 1170, the the spread will earn some money and and partially finance an adjustment if needed.

Nothing is fixed really and these are some of my suggestions.

I have also been looking into put ratio spreads which I have traded a lot in previous years. It does have some negative sides but basically you can have a really wide profit zone at little or not cost. For example, if you look at the 119/116 put ratio spread (1:2), you could enter the spread for almost no debit or even a credit and your profit zone (assuming even cost) goes all the way down to 113. I do not have time to go into great detail so do not jump into this yet. We can walk through it. It does have naked options, gamma risk but does have some good theta and wide profit zones. If the market is near the short strikes at expiration you greatly incease your profits. Just take the bottom wing off the FLY.

I do not want to get off track because this is more advanced and I do not recommend it for people unless they have traded put ratio spreads before. So please disregard if this is new to you. I added it in to give you more to think about.... ON PAPER!

Phil

I guess buying a bear put spread above your short strike of your IC would make more sense.

When you say 120/116/112 FLY, are you saying
Sell 1 120 Put
Buy 2 116 Put
Sell 1 112 Put

or buying the wings and selling 2 of the body?

 

[skanan]

Here is result of my OCT spread trade.

I used about $7000 cash on TOS platform. I losted $265 not including commisions.

On OX platform, I used about $22000 and make $40. However, after commissions, I losted $147. I rolled down some of my short at 1180, 1175, 1170.

On IB platform, I made about $100 on $2000.

Total lost was about $300 on $31000 or about 1%.

Mistake:

1. I had some spy hedge at 1190/1180. I removed it when the SPX moved up. Had I kept them, I would brake even.

2. I did not sell enought credit spread on call side. I had only 7 contracts on call side.

Things I did right:

I kept a lot of cash margin at the beginning and was able to sell more put contracts when the market tanked to offset some lost.

Overall, my lost is small compare to what I gain on other months. I survive one more month to trade.

 

[riskarb]

Quote from optioncoach:

Since the real risk in OTM credit spreads is the delta/gamma, is a volatility spread really the best approach to hedging? Increases in vol are not as severe a risk factor as gamma is so in my opinion any hedge that can add some deltas is preferably.

As you pointed out, there is no perfect hedge and that is why strike selection and time to expiration are so important to allow theta to counter delta as best as possible in slow moving markets and stay out in front of the market move as best as possible in fast moving markets. The adjustments are basically to move out in front of the train and let time be an ally but naturally a collapsing market requires cutting it off at some point and taking the loss which can be mitigated through partial hedges and playing the other side. That is why I think long spreads or outright long options are the to of the list for hedging although expensive at times.

Yes, a direct gamma hedge is preferable, but there is no method in which to buy anything approaching =gammas that won't eat multiples of your credit from the vertical. That is why I neglected that option. You're simply short too much curvature for such a nominal per contract-credit to effect any net-long gamma hedge < credit received on primary position.

The time spread is slightly-additive to gamma risk, but the +$vega exceeds the -$gamma.

 

[riskarb]

Quote from optioncoach:

OX finally cleared up the positions so I wanted to put the final net profit number which is mroe accurate than my math and is net commissions as well.

Final Net Profit: $1,946.20

Risk Margin: $250,000

Return on Margin: .78%

Phil

OMG... I had no idea of the magnitude. :eek:

Good luck guys.

 

[skanan]

Quote from riskarb:

Yes, a direct gamma hedge is preferable, but there is no method in which to buy =gammas that won't eat multiples of your credit from the vertical. That is why I neglected that option. You're simply short too much curvature for such a nominal per contract-credit to effect any net-long gamma hedge < credit received on primary position.

The time spread is slightly-additive to gamma risk, but the +$vega exceeds the -$gamma.

Riskarb,

I appreciate your comment here very much. Could you please explain or point me where can I read the definition of "curvature" ? Is it the same as gamma ?

Thanks,
-Nick

 

[riskarb]

Quote from skanan:

Riskarb,

I appreciate your comment here very much. Could you please explain or point me where can I read the definition of "curvature" ? Is it the same as gamma ?

Thanks,
-Nick

Sent you a PM

 

[yellowjacket]

rdemyan:

What would the curves look like if the skew was taken into account instead of using constant vol?

Quote from rdemyan:

Attached are two charts with calculated credit spread values for an 1140/1150 SPX bull put and an 1130/1140 bull put. Both charts assume 10 days to expiration. One chart is for a 15% volatility and the other is for a 20% volatility.

The B-S pricer was used to calculate individual option prices assuming an interest rate of 0% and a dividend yield of 0%.

It's interesting that the curves have a region that is essentially linear. With a 10 to 15 point distance between SPX price and short strike as a trigger, the credit spread value would be in this linear range.

The vertical distance between the two curves at a given SPX price is the amount that would be lost by rolling the 1140/1150 spread down to an 1130/1140 spread. In the linear range, the loss doesn't vary as much as I would have thought. At a 15% volatility the loss is $0.83 at SPX = 1170, peaking at $1.39 at SPX = 1140, and then back to $0.78 at SPX = 1110. Nothing is included here on rolling any bear calls down or how much was initially brought in as credit.

Interestingly, at a higher volatility, the loss from adjusting is theoretically less. Also, it's interesting (at least to me) that the loss from adjusting is not nearly as great as I would have expected once the short strike of the original position is ATM or even ITM.

I think these curves support the idea that if one really feels that there is strong support at a level, then one can hold on longer before adjusting (i.e. maybe wait until 5 points or even ATM to adjust). It appears that you won't lose much more from the adjustment by holding on. HOWEVER, with an adjustment, the idea is that the adjusted position will expire OTM. If it doesn't, then that's a substantial loss on top of the adjustment loss. But it's late and I'm a little muddled in my analysis here, because the SPX will do whatever it wants to regardless of when one adjusts. So, for example, if strong support were at 1150 and the original position were 1140/1150 bull put, then whether one adjusts at 1160 or 1150, the loss from the adjustment is not all that different (let's ignore the accompanying bear call roll down for now). The SPX might still break this strong support and go down to 1140 regardless of whether I adjusted at 1160 or 1150. If I adjust at 1160, I guess I could adjust again at 1150, whereas if I wait until 1150, it's much more difficult. But in the end does one come out ahead if the SPX goes down to 1140? Since this example uses a strategy that assumes that 1150 is strong support, once that support is broken then maybe the only smart thing to do is bail out of the position.

This is all theoretical of course and one has to consider b/a and so on. But if the position can be adjusted using a butterfly, then one should be able to remove the risk associated with sequential rolling of the spread.

Also, I personally don't yet have a good feel for how days to expiration affects all of this.

I thought I would just get the ball rolling and welcome comments and analysis.

 

[rdemyan]

The only skew I know about is the skew in volatility for puts relative to calls. Are you talking about using the actual implied volatility for each different option? The curves did use a constant volatility for each option that was just assumed at 15% for the first graph and 20% for the second.

Quote from yellowjacket:

rdemyan:

What would the curves look like if the skew was taken into account instead of using constant vol?