SPX Credit Spread Trader

[andysmith]

A lesson I learned last month is that I will NEVER hold on till expiration unless I am miles (>50 points) away from the short strike, and even then I'll seriously consider closing for $0.05.

Now this has some impact on the types of spreads I'll put on. It no longer makes sense for me to get a 0.20 or 0.30 credit if I have to give back 0.10 when I close. I am trying to get at least $0.80 credit these days but aim for $1.00.

Quote from ryank:

The SET today keeps making me shake my head. From Thursday open to the SET today, you are looking at a roughly 24 hour time frame ad nincrease of roughly 22 points. Enough to make your head spin!

ryan

 

[El OchoCinco]

Treat the SET like a skunk.... you do not want to get too close to it. I think JULY was the only month where let some positions go to expiration where I was even 15 points close. Other than that, treat it like a skunk.

 

[rdemyan]

Andy:

I too am headed in this direction. I was out of all of my November positions over a week ago.

However, I'm not ready to put on positions that have my short strike closer so that I can get the higher initial credit (higher credit needed for reasons you mention below).

Instead I'm looking at putting my positions on a week or two earlier to get the higher credit. I'm trading off time to expiration with distance between short strike and price.

We'll see how this works out for me.

Quote from andysmith:

A lesson I learned last month is that I will NEVER hold on till expiration unless I am miles (>50 points) away from the short strike, and even then I'll seriously consider closing for $0.05.

Now this has some impact on the types of spreads I'll put on. It no longer makes sense for me to get a 0.20 or 0.30 credit if I have to give back 0.10 when I close. I am trying to get at least $0.80 credit these days but aim for $1.00.

 

[IV_Trader]

let's assume one is ready to sell 100 credit spreads (10 points spread) for 40 cents for each put and call:
Max gain=100*100*0.8*=8000
Max loss (or margins)=100*100*9.2=92,000

I'm suggesting to do it a bit differently(using 3 pm numbers below)
SPX at 1245
Sell 80 call spreads 1260/1265 for 1.25
Sell 80 put spreads 1230/1225 for 1.25
Max gain=80*100*2.50=20,000
Max loss(margins=80*100*2.50=20,000
Notice, that at this point I used only 1/4 of margins that first trader, but I obviously have much bigger chance to get to the danger zone , because my strikes are much close to the strikes. If the market hit one of my strikes , I will take another new position/zone that will be at different market/strikes level. I can do it up to four times in this example. zones/positions. At some point positions become mutual tied to market action : what is good for one zone is bad for another(read : both combine stays neutral). And maybe ones a year market does nothing for a hall month and then my initial position (only one , was no reason to take new) will make 20k max vs. 8k in the first trade.

 

[El OchoCinco]

1. 80 5-point SPX spreads is a margin of $40,000.

2. Your position basically bets that the market will not move 15 points in either direction by DEC expiration. In one day that can be covered and more and thus, although you will not be at maximum loss, it will be pretty significant. Once that occurs, you really cannot adjust out of it. You have to eat the loss and then perhaps open another spread using more margin to make it back but then you get into a Martingale type of situation- keep doubling up until you make it back.

Quote from IV_Trader:

let's assume one is ready to sell 100 credit spreads (10 points spread) for 40 cents for each put and call:
Max gain=100*100*0.8*=8000
Max loss (or margins)=100*100*9.2=92,000

I'm suggesting to do it a bit differently(using 3 pm numbers below)
SPX at 1245
Sell 80 call spreads 1260/1265 for 1.25
Sell 80 put spreads 1230/1225 for 1.25
Max gain=80*100*2.50=20,000
Max loss(margins=80*100*2.50=20,000
Notice, that at this point I used only 1/4 of margins that first trader, but I obviously have much bigger chance to get to the danger zone , because my strikes are much close to the strikes. If the market hit one of my strikes , I will take another new position/zone that will be at different market/strikes level. I can do it up to four times in this example. zones/positions. At some point positions become mutual tied to market action : what is good for one zone is bad for another(read : both combine stays neutral). And maybe ones a year market does nothing for a hall month and then my initial position (only one , was no reason to take new) will make 20k max vs. 8k in the first trade.

 

[IV_Trader]

Quote from optioncoach:

1. 80 5-point SPX spreads is a margin of $40,000.

2. Your position basically bets that the market will not move 15 points in either direction by DEC expiration. In one day that can be covered and more and thus, although you will not be at maximum loss, it will be pretty significant. Once that occurs, you really cannot adjust out of it. You have to eat the loss and then perhaps open another spread using more margin to make it back but then you get into a Martingale type of situation- keep doubling up until you make it back.

1. Why would the max loss of 20k(and never a dollar more) require 40k in margins ?
2. I knew somehow that I will not be able to explain it clearly

 

[rjg96]

So, a while back I foolishly opened a bear call spread on the SPX w/ 1265 as the short strike. I have plenty of margin left, so there's many choices open to me. Should I be nervous? What do you guys think of this rally-- will it continue throgh Dec expiration? My thought is that there isn't much news left that could move the market in an more positive direction...

I know that as soon as I adjust the market is going to tank...LOL

 

[piccon]

My thinking is that the market is due for a pullback. I really hope so. Today I entered 1280/1285 for and average of 0.65. But the fact that SPX closed above 1246 bothers me. I am going to watch Monday and Tuesday very closely. You can always buy some calls as protection. That what I think I am going to do.

If there is any pullback it will be just temporary and You should take the opportunity to open your Bull Put Spread.

If I was you with 15 points to go I would start buying some calls.

What do I know anyway.

Quote from rjg96:

So, a while back I foolishly opened a bear call spread on the SPX w/ 1265 as the short strike. I have plenty of margin left, so there's many choices open to me. Should I be nervous? What do you guys think of this rally-- will it continue throgh Dec expiration? My thought is that there isn't much news left that could move the market in an more positive direction...

I know that as soon as I adjust the market is going to tank...LOL

 

[andysmith]

My understanding is that historically, the market usually runs up during exp week. Id someone has the tools to check this, it'd be very useful.

Quote from rjg96:

So, a while back I foolishly opened a bear call spread on the SPX w/ 1265 as the short strike. I have plenty of margin left, so there's many choices open to me. Should I be nervous? What do you guys think of this rally-- will it continue throgh Dec expiration? My thought is that there isn't much news left that could move the market in an more positive direction...

I know that as soon as I adjust the market is going to tank...LOL

 

[andysmith]

IVTrader,

I exactly follow what you are suggesting and have looked at this strategy myself. Your total margin is $40k, your total credit is $20k, and your max loss is $20k. OK, so far so good.

But under the surface there is a big difference between what you are suggesting and Phil's method.

With Phil's method, you use far OTM spreads and adjust the spread when the index gets close to the short strike.

With your method, you take the ThinkOrSwim approach to trading, which is to leave the trade alone and rely in the long run, on probabilities. Even if the index crosses your short strike, leave it alone. Never adjust, let the probs work for you each month. For example: if the prob of expiring is 50% and the prob of touching is 60%, then you will most certainly lose in the long run if you adjust your condor every time it creeps up on your short strikes. Think about it and it'll make sense to you.

Quote from IV_Trader:

let's assume one is ready to sell 100 credit spreads (10 points spread) for 40 cents for each put and call:
Max gain=100*100*0.8*=8000
Max loss (or margins)=100*100*9.2=92,000

I'm suggesting to do it a bit differently(using 3 pm numbers below)
SPX at 1245
Sell 80 call spreads 1260/1265 for 1.25
Sell 80 put spreads 1230/1225 for 1.25
Max gain=80*100*2.50=20,000
Max loss(margins=80*100*2.50=20,000
Notice, that at this point I used only 1/4 of margins that first trader, but I obviously have much bigger chance to get to the danger zone , because my strikes are much close to the strikes. If the market hit one of my strikes , I will take another new position/zone that will be at different market/strikes level. I can do it up to four times in this example. zones/positions. At some point positions become mutual tied to market action : what is good for one zone is bad for another(read : both combine stays neutral). And maybe ones a year market does nothing for a hall month and then my initial position (only one , was no reason to take new) will make 20k max vs. 8k in the first trade.