SPX Credit Spread Trader

Rdemyan,

You mean people actually read my posts? LOL. I've tried to disguise my vendetta against the SPX market makers but obviously haven't done a very good job.

For credit spreads, diagonals etc. I do indeed trade the XEO. If it sounded like I was advocating not to do so, I just wanted to make sure people walked into that room with their eyes open.

I also use other products but none really consistently except for perhaps MNX as far as credit spreads are concerned but it all depends on market conditions.

I should point out that I have a different "style" to Phil when it comes to credit spreads so product selection criteria for me is probably quite different than for Phil.


Momoney.


Quote from rdemyan:

Mo, correct me if I'm wrong, but I think I've seen you post, more than once, that you don't trade the SPX.

Under the assumption that you trade credit spreads, what do you trade?
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Feel free to discuss your other criteria for credit spreads. Different perspectives are certainly helpful...


Quote from momoneythansens:

Rdemyan,

You mean people actually read my posts? LOL. I've tried to disguise my vendetta against the SPX market makers but obviously haven't done a very good job.

For credit spreads, diagonals etc. I do indeed trade the XEO. If it sounded like I was advocating not to do so, I just wanted to make sure people walked into that room with their eyes open.

I also use other products but none really consistently except for perhaps MNX as far as credit spreads are concerned but it all depends on market conditions.

I should point out that I have a different "style" to Phil when it comes to credit spreads so product selection criteria for me is probably quite different than for Phil.


Momoney.
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Quote from andysmith:

I'd bet you can split the traders on this board into two distinct camps: the ones that are using their lunch money for trading and the ones that are using some real coin. And I'd bet the latter have taken the time to know SET and everything else inside out.
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Andy,

We never know how many each people really invest in their own trading, may be some guys are paper trading and they claim they manage million $, other may be reading and asking occasionaly basic questions in this thread and they are managing millions in their trading accounts. Some make huge amount of money without telling to anyone, other will talk only if they win will not if they lose or vice versa.

Reading and studing doesnt bring you all you need to understand before trading (in my case for the SET I had no idea the gap could be so big and I dont feel shame of that) and people with real money or lunch money both can learn to trade and occasionaly lose some or all their money as part of learning. 90% of traders lose money I heard, did they all forget to do their homework before to start trading, I dont beleive so.

We are all trying to learn something if not we would not be reading Elitetrader.
 
A statistically oriented trader I know did an Exel spread sheet on the Iron Condor strategy on both of the indices. The results, going back to the 80's was that the 100 point spread on the SPX[distance between the sells] , and the 50 pt spread on the Xeo or OEX, had greater than 92% success rate. However , we have all been made aware that with high probability , low reward trades, how you manage the losses , are what makes or breaks the strategy. I would also like to add another take on the credit spread strategy, and that has to do with market exposure. Many times you can still put on a credit spread trade for decent premium with only 2 trading weeks to expiration, thereby eliminating a great deal of the movement and adjustments in the index. Less exposure time , less risk, however the spreads are usually 20 points wide, so even more risk there. You never hold to expiration on these, and if there is no premium there , the market is telling you that you dont trade it that month. I also believe that you want more than one gun in your holster for trading, not just credit spreads, although I realize that is what this forum is all about. Just my 2 cents., and possibly all its worth.
 
Phil,

It's Sunday so forgive me for being brief:

Criteria for selecting products to trade (credit spreads or otherwise) are quite simple really:

1) Familiarity with the personality of the index (assuming we stick with index based products). This can be a bit of chicken/egg.

2) Good liquidity. Tight "real" or inside markets (screens can be misleading) etc. This is more important for me than commissions.

3) Multiple exchanges to facilitate the above.

I have found MNX to fit the above quite well. It is now on CBOE, AMEX and ISE and I get good fills.

XEO doesn't really fit all of the above but I get excellent fills! And perhaps CBOEs hybrid model is what facilitates the "price improvement" that I experience now and then though I don't see how. Will investigate one day but not complaining right now.

QQQQs are super liquid but due to size of index usually comes out worse on slippage compared to MNX when comparing like for like. Still, I find some nice trades on there.

IWM also worth considering.

The main thing for me is to be able to get in and get out quickly when you need to without having to pay a high premium (slippage) to do so. When you regularly roll positions or close before expiration, round trip costs are a real consideration for me. One reservation I have with SPX is that although you can use ToS or whoever your broker is to facilitate going into the crowd for negotiating orders, when the stuff hits the fan and it's time to get out quickly, I personally wouldn't feel comfortable relying on that mechanism.

Other people may base their criteria on what premium is available on the given product and work backwards from there dealing with liquidity and other issues as a part of doing business and that is fair enough. Incidentally, I fully respect your choice of SPX and I think I understand the reasons why.

If anyone else is familiar with products that fit the criteria I've listed above I'd be interested in hearing about them. I try to keep the number of products I trade down to a minimum in general but right now I wouldn't mind a change of scenery to coincide with the new year.

Momoney.


Quote from optioncoach:

Feel free to discuss your other criteria for credit spreads. Different perspectives are certainly helpful...
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Agree, risk management or "cheating the probabilities" as I like to call it can make the difference between success and failure but I think there are more subtle factors at play too....it's Sunday damnit!

Just on the point of exposure time, this could be boiled down to an understanding of the shape of theta. There is clearly a balance between going too far out and leaving it too close to expiration. One has to balance the risk/reward with the probabilities. Leave it too late and yes you can still get decent premium but the probabilities are that much lower IMHO. Contrary to what you assert, if there IS premium there, the market is telling you that your spread is more likely to be ITM. The options are priced accordingly (soon to become my mantra).

My holster only holds one gun but thankfully I have many holsters :)

Guaranteed worth less than your 2 cents.

Momoney.


Quote from Extractor:

A statistically oriented trader I know did an Exel spread sheet on the Iron Condor strategy on both of the indices. The results, going back to the 80's was that the 100 point spread on the SPX[distance between the sells] , and the 50 pt spread on the Xeo or OEX, had greater than 92% success rate. However , we have all been made aware that with high probability , low reward trades, how you manage the losses , are what makes or breaks the strategy. I would also like to add another take on the credit spread strategy, and that has to do with market exposure. Many times you can still put on a credit spread trade for decent premium with only 2 trading weeks to expiration, thereby eliminating a great deal of the movement and adjustments in the index. Less exposure time , less risk, however the spreads are usually 20 points wide, so even more risk there. You never hold to expiration on these, and if there is no premium there , the market is telling you that you dont trade it that month. I also believe that you want more than one gun in your holster for trading, not just credit spreads, although I realize that is what this forum is all about. Just my 2 cents., and possibly all its worth.
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Thanks for your thoughts. I should've been more clear. I meant that I like to keep my initial margin req to about $20k, but I have up to $160k of available margin that I/m willing to use (gives me breathing room for adjustments). So, if I did double down 3 times, leaving me w/ a spread of 1295/1305, I'd be at my margin limit. I agree that doubling down is risky and that you can easily get crushed by a runaway train; I'm only considering it because I have enough headroom to get me up to 1295. Anything's possible, but it seems highly unlikely that the SPX will be "euphoric" enough to reach those levels between now and expiration. From a delta shortuct perspective, I think the current odds of reaching 1295 are around 5%. Like you, I'm quite worried about the possibility of reaching 1265, 1270, 1275 or even 1280.

I'm also thinking that its better to treat adjustments and trying to make back losses as 2 separate tasks. By rolling up and doubling down, I'd be mixing the 2 and that's probably not good risk management. ITs probably better to decide on increasing my position as a separate transaction and look at it w/ fresh eyes.


Quote from rdemyan:

You say you like to keep your margin requirement at $20,000 but you also say you have enough room to roll up three times. Isn't your current margin at $20,000 if you have 20 contracts of a 10 point credit spread? So, are you planning to potentially take this double down bet with even more margin?

I guess another possibility is to roll up early this next week and not just get out of the spread. Based on closing prices for the SPX as of Friday, 11/17/05, it looks like it could cost $3.05 to close the 1265/1275 and you might be able to sell the 1275/1285 for $1.60. If this could be realized, then the net loss from adjustment only would be $2900. Overall loss would be $1100.

The loss could be reduced further by putting on a bull put. I believe Coach recommended not going higher than 1180 with the short strike, but even the 1180/1170 has little value. It might be possible to go higher with the short strike.

Will rolling up to 1275/1285 be enough? Who knows. I can tell you that I'm a little concerned about my 1275/1280 that Coach has as well.

Just some caution about doubling down. I did this on CME back in June (except I tripled down) and I'm still trying to recover the loss on that one.

In that case I rolled up to the next train stop with the runaway locomotive barrelling down on me. The train didn't stop at that station and I got crushed.

Good luck.
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Good point and well said.

[/B][/QUOTE]
I'm also thinking that its better to treat adjustments and trying to make back losses as 2 separate tasks. By rolling up and doubling down, I'd be mixing the 2 and that's probably not good risk management. ITs probably better to decide on increasing my position as a separate transaction and look at it w/ fresh eyes. [/B][/QUOTE]
 
I have to agree with you that if there is still premium late in the game, it is due to the increased risk of being in the money. It is however all a balancing act of risk , reward , theta, probabilities, and directional diagnosis, so pick your poison. Lately , I have been more a buyer of options than a seller, and Oct and Nov. have given me reason to be happier than I would have been with credit spreads. I trade the SPX, Xeo, and the Spy, and am looking at the MNX, but I have been glad to have used the SPY for the last 2 months. Been doing this a long time, but am getting less risk tolerant in my old age.
 
Extractor, why are you looking at MNX?

Quote from Extractor:

I have to agree with you that if there is still premium late in the game, it is due to the increased risk of being in the money. It is however all a balancing act of risk , reward , theta, probabilities, and directional diagnosis, so pick your poison. Lately , I have been more a buyer of options than a seller, and Oct and Nov. have given me reason to be happier than I would have been with credit spreads. I trade the SPX, Xeo, and the Spy, and am looking at the MNX, but I have been glad to have used the SPY for the last 2 months. Been doing this a long time, but am getting less risk tolerant in my old age.
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