SPX Credit Spread Trader

Coach,

I'm confused about a few things regarding your most recent position:

-you said that your total margin req is $150,000. Shouldn't it be atleast $15000 less than that (shouldn't the credit you received be subtracted frm the total margin)?

-I'm still confused about your hedging strategy. What do those 127 SPYS really do for you? Let's say you waited til the SP got close to 1260 (but I know you'd probably do it much sooner) before you started adjusting. If it did, maybe the SPY is worth a little more than when you bought it (say .35 considering likely theta before that point). So, that would you give you a $1000 (- commissions) profit that you could use to finance your adjustment. Is that really worth it? HOw would you expect the numbers to play out if you needed to use this hedge to help finance an adjustment (where would you likely adjust, what would you expect roughlt that the hedge would be worth at that point, and how much you would likely have to pay to roll up)?

Thanks!
 
:o



Quote from Sailing:



Hope this helps to really confuse you... that's what us Math people do... we just don't tell anyone.... job security.

Murray
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:eek: :eek: :eek: :eek: :eek:
 
RJG:

Thanks for the great questions.


1. Most brokers state the margin as the full difference between the strikes. Your actual loss potential is the margin minus the credit. In an effort to truly highlight the risk I prefer to list the risk as the full margin amount. I am risking $150,000 to make $15,000 although the $15,000 credit can be applied to the margin requirement. So technically you can say that you are risking $135,000 to make $15,000 but the $15,000 premium is still at risk and is not fully yours until the position expires worthless. So in my personal opinion I do not want to measure the risk as though that $15,000 is mine. It is profit I am trying to earn and it is at risk. So therefore I count the full $150,000 as my risk. My actual loss would be $135,000 out of my account but I would rather not downplay the risk and use the higher figure since a maximum loss would take $135,000 plus the $15,000 profit I was trading for. It may be semantics but I woudl rather paint the higher risk picture when discussing this strategy.

2. You underestimate the SPY partial hedge. If SPX is at 1225 right now and in 4 weeks is at 1260, then the SPY will be worth more than $0.30. Also I do not adjust as soon as the SPX is at 1260 with a 1275 short strike, I use 1260 as a warning flag. If the SPX moves to 1265 or higher I would consider adjusting the spread higher. It really depends on time to expiration and market conditions. At that point the SPY could be worth much more than $0.30. Assuming it is worth $0.85 I would have a profit of $0.55 * 100 * 200 = $11,000. Assume it costs me $14,000 to adjust higher, the partial hedge reduces the cost to $3,000. I can then roll up the put side and bring in more premium and still maintain a net positive credit and profit.

The goal of my partial hedges is to try and offset the costs of adjustments or minimize losses from closing out the position. In OCT my partial hedges brought in about $2,500 and my net profit was just under $2,000. Without the partial hedges perhaps I would have had a loss for the month. I had to make 2 different adjustments in OCT so the partial hedges helped with the costs.

You cannot perfectly hedge these credit spreads as I have said so the goal is to add some long deltas to help partially hedge the position to an extent to allow me to make an adjustment.

Phil

Quote from rjg96:

Coach,

I'm confused about a few things regarding your most recent position:
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Thanks Coach. Makes sense. Although I'm not sure I understand your margin at risk explanation. That 15k is yours in the sense that if the options expired in the money, your max loss is 150,000-- but that 15k is still yours-- you're not going to "lose" it-- so I don't understand how the worst case loss could ever be more than 135?

Totally unrelated question-- where can I get historical SET prices? Yahoo doesn't seem to have them, and neither does CBOE or optionsxpress. Thanks.
 
CBOE does have them actually. If you look up the SPX settlement values they have a link for the past year and even last year I think for the indexes.

Your point is valid on the margin and at risk issue. You are right that technically I could only lose $135,000 of my money on the position. I overstate the risk to reinforce the point but also due to a difference in the brokers. But you are correct to bring it up in case I am misleading anyone or confusing them but I also look at it as money tied up in the trade and here is why.

OX treats the $150,000 as margin and locks up that amount or buying power effect while ToS treats the $135,000 as margin. Another tip in ToS's favor. Since this account is with OX and they lock up the full $150,000 that money is set aside and the $15,000 return is on that capital so I want to be as honest as I can. If I only had $150,000 in my account then OX would treat the entire amount as margin and therefore my return is technically on that amount since that is my investment. For those with ToS, they correctly treat the buying power in this case as $135,000 being locked up and not the $150,000.

So I use the OX approach for the higher risk calculation to present the strictest case. Does that make sense now?

Phil

Quote from rjg96:

Thanks Coach. Makes sense. Although I'm not sure I understand your margin at risk explanation. That 15k is yours in the sense that if the options expired in the money, your max loss is 150,000-- but that 15k is still yours-- you're not going to "lose" it-- so I don't understand how the worst case loss could ever be more than 135?

Totally unrelated question-- where can I get historical SET prices? Yahoo doesn't seem to have them, and neither does CBOE or optionsxpress. Thanks.
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Quote from optioncoach:


OX treats the $150,000 as margin and locks up that amount or buying power effect while ToS treats the $135,000 as margin. Another tip in ToS's favor.
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I may have just found my reason to switch to TOS.

ryan
 
Hello Mo' thanks for commenting!

Quote from momoneythansens:

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.

Right, good idea! I´m unsure as to where realistic expectations for average fills would be, will have to test the waters..

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?

My thinking is to begin looking at spreads from that level and judge credit size accordingly when getting farther out otm, anything closer than 30 points is plain scary, not that 30 points cushion is safe in any way. Its just 3,3% away...

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.

Well, I am still a bit put off by the potential cost for adjusting considering the depressing spreads. However i do think that 830 will be untoutched before year end, might give that a try with a minor position. Thanks again/ Joe
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I called yesterday to have the following option strikes added:


Dec 1290
Jan 1290
Jan 1310

Glad to see that they have been added; however, it's not guaranteed that they will be added.

The number to call is 888-OPTIONS
 
DEC has 1290, did you mean 1295 which is what I am looking for....

Phil


Quote from rdemyan:

I called yesterday to have the following option strikes added:


Dec 1290
Jan 1290
Jan 1310

Glad to see that they have been added; however, it's not guaranteed that they will be added.

The number to call is 888-OPTIONS
More...
 
I'm pretty sure I requested the 1290. I currently don't see any open interest on it which is probably a good indication that it just got added. Also, it takes at least a day for the strikes to be added.


Quote from optioncoach:

DEC has 1290, did you mean 1295 which is what I am looking for....

Phil
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