SPX Credit Spread Trader

[rdemyan]

Momoney:

To get the 80% probability, you are multiplying .9 by .9. The part that I think makes this confusing is that only one side can expire ITM at expiration. So I'm not sure that the probability would be 81% (assuming each spread is 90% probability of expiring in the money).

I think Murray is a statistics teacher. I'd be curious to know what he thinks the probability of an IC expiring OTM is when each spread has a probability of 90% of expiring OTM.

It's the fact that only one side can expire ITM that confuses me.

Quote from momoneythansens:

Rdemyan,

I hear what you are saying but I'm not sure I fully agree with your assessment. With an IC, I agree there is no additional RISK

 

[El OchoCinco]

I think the approach is that each side has a 10% chance of being in the money so at anytime your entire position has a 20% chance of having a short option in the money. I think someone best explained it as rolling a die where you lose if it is a 1 or a 6. Although only one can come up in one roll, the odds are really 2 out of 6 that you will have a loss on the entire roll.

Phil

Quote from rdemyan:

Momoney:

To get the 80% probability, you are multiplying .9 by .9. The part that I think makes this confusing is that only one side can expire ITM at expiration. So I'm not sure that the probability would be 81% (assuming each spread is 90% probability of expiring in the money).

I think Murray is a statistics teacher. I'd be curious to know what he thinks the probability of an IC expiring OTM is when each spread has a probability of 90% of expiring OTM.

It's the fact that only one side can expire ITM that confuses me.

Quote from momoneythansens:

Rdemyan,

I hear what you are saying but I'm not sure I fully agree with your assessment. With an IC, I agree there is no additional RISK

 

[rdemyan]

The wierdest thing just happened.

I'm trying to clear up margin. So I placed the following on ToS:

Buy back 1085/1115 Nov SPX for $0.20

Order sat there for about an hour with the 'mark' (midpoint) at $0.15.

I called ToS and also used live electronic support. Both times I was told that I needed to be at $0.25 to get the trade through.

So I finally decided to up it to $0.25 just to close the existing position.

Well the trade went through quickly.

But here's the weird part. It only cost me $0.15 to get out and not $0.25

Of course I'm happy, but am I the only one who thinks this is weird.

It's beginning to seem to me that the key to getting trades filled is to get these guys in the pit to sit up and take notice. But still, why would they fill me at a $0.15 debit when I would have paid $0.25???

Not that I'm complaining but consistency sure makes it easier to trade.

 

[rdemyan]

I posed this same question to TMS live support online. Here's the response from the ToS person:

"I called the broker and he was working it after the first quote and got lucky. That's the answer"

Getting these guys to call down really does make a difference. That's 4 out of 4 trades now where I feel like I did better

Quote from rdemyan:

The wierdest thing just happened.

I'm trying to clear up margin. So I placed the following on ToS:

Buy back 1085/1115 Nov SPX for $0.20

Order sat there for about an hour with the 'mark' (midpoint) at $0.15.

I called ToS and also used live electronic support. Both times I was told that I needed to be at $0.25 to get the trade through.

So I finally decided to up it to $0.25 just to close the existing position.

Well the trade went through quickly.

But here's the weird part. It only cost me $0.15 to get out and not $0.25

Of course I'm happy, but am I the only one who thinks this is weird.

It's beginning to seem to me that the key to getting trades filled is to get these guys in the pit to sit up and take notice. But still, why would they fill me at a $0.15 debit when I would have paid $0.25???

Not that I'm complaining but consistency sure makes it easier to trade.

 

[El OchoCinco]

Something like that is seeing a $5.00 bill on the floor. Just pick it up quietly and move on like nothing happened, celebrate in private lol.

When someone is talking directly to the floor, they have a lot more power to get a better fill.

Quote from rdemyan:

I posed this same question to TMS live support online. Here's the response from the ToS person:

"I called the broker and he was working it after the first quote and got lucky. That's the answer"

Getting these guys to call down really does make a difference. That's 4 out of 4 trades now where I feel like I did better

 

[rdemyan]

Coach:

The market's got a bounce up that may prove to be more. Are you looking at any bear calls?

I've got the DEC 1285/1300 in my sights.

 

[rdemyan]

Coach:

Did you get a chance to review the ToS article on rolling the "safe" side of an IC using a regular condor as opposed to two separate trades (with the inherent risk that the market will move against you in between the trades).

 

[El OchoCinco]

I am looking at the 1280/1285 as the lowest spread I would consider. Looking at that spread to match my 1135/1140 for an IC. 1280 is certainly well past the recent high of 1245 and seems safe as of today. My only hesitancy is that the spread value is $0.25 and I might like to get more for it. It is in my sights but not pulling nay triggers yet until I see whether we can hold 1225 in the S&P.

What I may consider doing is close my NOV 1150/1160 spread and then use the freed up margin to open a new call spread deeper OTM. Hvae my eye open but nothing yet lol. The 1185/1300 certainly looks good but with today's move above 1225 I am still a little chicken. I think I am being very overly conservative since it is the end of the year but we shall see.

Phil


EDIT: Well I closed my 1150/1160 NOV spread for $0.20 which I sold for $0.65 and freed up that margin.

Re-evaluating the chart of SPX I am thinking that we still have some headwinds and I might want to grab some 1280/1285 or 1275/1280 for decent premium and then add some SPY hedges (XSP has no DEC options right now).

Stay tuned for an update!

Quote from rdemyan:

Coach:

The market's got a bounce up that may prove to be more. Are you looking at any bear calls?

I've got the DEC 1285/1300 in my sights.

 

[El OchoCinco]

NEW POSITIONS UPDATE

First, I cleaned out all my NOV positions. Remember I had 110 of 1100/1115 put spreads and 90 of 1150/1160 Put spreads for total margin of $255,000. The net profit on those spreads was $5,800 for a NOV return of 2.27%.

YTD including NOV:

$63,075.86 on $250,000 avg margin (includes commissions)

Return YTD: 25.2%

----------------------------------------------------

After analyzing the charts some more on this upday I decided that I could take a little more risk than I was previously cautious about taking.

So I added some call spreads for DEC and a partial SPY hedge and the end result is the following:

-300 SPX DEC 1135/1140 Put Spreads @ $0.30
-300 SPX DEC 1275/1280 Call Spreads @ $0.40

Total Margin = $150,000
Total Credit = $21,000

Since I am still a little cautious I decided to spend a nice part of that credit on SPY partial hedges:

Long 200 DEC 127 Calls @ $0.30 or $6,000.


NET RESULT:

Margin = $150,000
Net Credit = $15,000

NET POTENTIAL RETURN = 10%.

WARNING: I am being a little aggressive on the call side and therefore warn you fo the risks. I am doing so because I was also willing to spend a chunk of it on SPY partial hedges to offset any possible costs/losses of adjustments. I chose 5-point spreads for DEC because it resulted in best credits to margin I could find without requireing huge shave off mid point and probably not getting filled. REPEAT THIS IS A RISKY POSITION but I have enough cushion to take the risk and enough partial hedges to mostly offset any adjustments or limited losses in closing out the position.

I will even spend another $5,000 on any hedges if I need to for a net return of 5% for the month which is still extremely nice.

Also, notice I am only risking $150,000 this month and not the $250,000 I usually do. This is a result of me scaling back a bit for the final month. Risk is still there but less than previous month.

 

[momoneythansens]

Joethemoustache,

Nice spreadsheet. Had a quick look at this if you want my wacky opinion. More sane opinions to follow from others I'm sure.

You might want to add a "mid price" column for both the individual options and the 10 point spread so it doesn't look quite so depressing lol.

You seem to single out 30 points away as being a safe bet or being significant - but for what period do you believe this to be true?

November options seem to be out of the question but that's not surprising.

Based on my thirty second calculation, the front month ATM IV is about 15-16% (assumed European exercise, 4% interest rates) which implies a probability of roughly 90% for the 830 December put

The 830/820 Dec bull put spread with about 90% chance of success based on my IV calc would get you about .55 at the mid which may or may not be good enough for the risk you are taking. If you've read my last few posts you'll know I personally wouldn't take that bet but if you believe there is strong support there, you may take a different view.

Make of that what you will.

Momoney.

Quote from joethemoustache:

Hello! Thanks for taking the time to answer, it was interesting to see where you´re coming from trading wise. I suppose a blowout could either bring about a mental freeze or provide a lesson-never-to-forget about risk management as it did in your case. Also your focus on having a mindset of being humble and willingness to learn is key.

==================

An aside: If you or anyone would care to comment on the current state of our local non-dollar options market in Stockholm I would be most happy. (A one-time request, I promise)

I trade this market (stocks and index) directionally but have stayed away from selling premium due to risk considerations. The thought of hedging with futures also seemed difficult due to whipsaws but with the "coach" strategy of partial adjustments doing credit spreads might be an option.

Swedish stock market is currently also a low vol environment. OMX 30 is a dow-like index with 30 major stocks, Nokia, Ericsson et al. As you can see from enclosed spreadsheet many spreads on the index carry negative credit. Also choice of otm strikes is thin. Would any of theese spreads be worth selling? Prices are from this morning when index was at 900.

Thanks/ Joe

Edit: 1 USD = 8 SEK

Current bid/ask prices (click english flag)
http://www.omxgroup.com/stockholmsb...ue&group=Kursnoteringar&listname=OMX-optioner

6-month chart of index
http://finance.yahoo.com/q/bc?s=^OMX&t=6m&l=on&z=m&q=c&c=