SPX Credit Spread Trader

I am still hesitant to persue that approach (i.e. closing out the short side only and letting the long run) because it will cost a lot, lot, lot of money to buy back that short and once you do, it just takes the index to park itself, pullback or move only little higher for that long to have the premium sucked out of it and you will have a loss much much higher than if you simply closed or rolled the spread.

Remember that even though I have made a few adjustments this year, NONE of my original positions would have been ITM at expiration. So if I simply bought back the short for a lot of cash, I would have then also lost on the long side as well adding to a significant loss that would take a long time to make back.

I have not studied the approach literally with prices and examples but my past experience is just telling me it might produce much greater losses due to the huge upfront cost of buying back that short alone.


Quote from rdemyan:

There is another alternative, but it is risky. I hesitate to post it, but I don't recall seeing Coach respond to this alternative (but with over 2000 posts, he probably did somewhere).

So here it is, but it can be risky.

If the market keeps moving up and you're convinced it will keep moving up, you can buy back the short and let the long run. Truthfully, I considered doing this with the CME spread I mentioned earlier. What happened then was that in the last hour of trading CME was up 12 points and severely threatened my short. It closed at the high. I considered closing the short and letting the long run because it looked like it had momentum and had closed at the high of the day. The next day I had the opportunity and missed it. If I had done that, I would have at worst broken even.

But that was a stock and this is a relatively slow-moving index. The situation was different and regardless it's risky. But on the other hand if one were to try it with the idea that if you by back the short and the index drops a certain percentage afterwards, then you throw in the towel and sell the long to minimize any further losses.

This is not an adjustment strategy that we discuss much on this thread, so I'm curious as to what others think. Also, to be clear, I'm not recommending it, but am throwing it out for consideration and discussion.

However, Coach, now that I think about it, since our position is only a 5 point spread, this strategy might actually be tryable, with the strong provison that a stop loss has to be put in place. In other words, after buying back the short, one holds on to the long but will sell the long if the SPX drops by a certain amount. Since we have 5 point spreads this may be a more viable strategy because the long position could readily catch up with the sold short on even a mediocre up day or two.

Thoughts, comments, experience?
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I'm not sure I'm as pessimistic on 1275/1280 position for a couple of reasons:

1) It's only a 5 point spread
2) There's almost 4 weeks left
3) The long will not be held until expiration, the idea is more to attempt to break even if possible.
4) Stop loss on the long is key.

Having said all of that, personally I tend to get too emotional when I have to adjust so this may or may not work for me. Also, I suspect this type of strategy works better with stocks that may have much more powerful moves up or down.

Here's another thought to throw out.

We all worry about the black swan event. So if initially one places a 50 pt OTM bull put spread and with time the SPX moves to within 20 or 25 points, that bull put could be highly susceptible to a black swan (even the 50 point could be, but this example is just for illustration). So, how about a contingent order to buy back the short put strike when it is breached resulting from a black swan event.

The assumption here is that one monitors their positions regularly to make sure that this isn't what is used to adjust a position where the SPX gets within 10 or 15 points of the short strike in non-black swan movement. The purpose is strictly for that morning when you wake up and the futures are down 25 or more points, your short strike is in the money and it looks bleak.

Major negative here is that IV will probably be really high and it will cost a fortune to buy the short back. And in this case the index better keep going down and not reverse or you could really be dead in the water.


Quote from optioncoach:

I am still hesitant to persue that approach (i.e. closing out the short side only and letting the long run) because it will cost a lot, lot, lot of money to buy back that short and once you do, it just takes the index to park itself, pullback or move only little higher for that long to have the premium sucked out of it and you will have a loss much much higher than if you simply closed or rolled the spread.

Remember that even though I have made a few adjustments this year, NONE of my original positions would have been ITM at expiration. So if I simply bought back the short for a lot of cash, I would have then also lost on the long side as well adding to a significant loss that would take a long time to make back.

I have not studied the approach literally with prices and examples but my past experience is just telling me it might produce much greater losses due to the huge upfront cost of buying back that short alone.
More...
 
Quote from rdemyan:


1) It's only a 5 point spread
2) There's almost 4 weeks left
3) The long will not be held until expiration, the idea is more to attempt to break even if possible.
4) Stop loss on the long is key.
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Right, lost me on all of the above lol but I'm sure you know what you mean.


Here's another thought to throw out.

We all worry about the black swan event. So if initially one places a 50 pt OTM bull put spread and with time the SPX moves to within 20 or 25 points, that bull put could be highly susceptible to a black swan (even the 50 point could be, but this example is just for illustration). So, how about a contingent order to buy back the short put strike when it is breached resulting from a black swan event.
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Nice idea. Similar to contingent short futures idea. Is it practical and cost effective though?

If you could build an intelligent ATS that was smart enough to detect a black swan event and then also smart enough to choose the right hedging instrument and price or adjustment strategy at the right time and was also smart enough to detect a reflex rally and take evasive maneuvers for that too, then I think you might be able to cover most scenarios.

It's all a bit fiddly and at risk of whipsaw. Probably better to have a contingent to close the entire position and be done with it? Who knows? I'm sure some enterprising trader will backtest all of these possibilities.

Going with instinct, if you're really worried about black swan events then perhaps be prepared to take less credit as a matter of course in order to fund downside potential/protection e.g. ratio your wings. Unfortunately, IV skew makes put backspreads harder to do for a decent credit, but it is possible and will also leave you long vega which comes in handy for crashes. Alternatively, come up with some other insurance where you will have downside potential/protection e.g. as Phil has done with SPYs, but this will always eat into your credit and can either be done from the start or on an ad-hoc basis.

I'm yet to be convinced that there is a better alternative to backspreads/ratioed wings for dealing with black swan events but I'm willing to listen to more of these ideas and be convinced otherwise.

Keep them rollling in.

Momoney.
 
Mo:

I'm not very familiar at all with backspreads/ratioed wings.

So if I was looking at a 1180/1190 bull put credit spread, what would be the corresponding backspread/ratioed wing that you would suggest? Something like buy 1.3 1180's and sell one 1190 (of course it depends on the premiums).

Thanks.

Quote from momoneythansens:

Right, lost me on all of the above lol but I'm sure you know what you mean.



Nice idea. Similar to contingent short futures idea. Is it practical and cost effective though?

If you could build an intelligent ATS that was smart enough to detect a black swan event and then also smart enough to choose the right hedging instrument and price or adjustment strategy at the right time and was also smart enough to detect a reflex rally and take evasive maneuvers for that too, then I think you might be able to cover most scenarios.

It's all a bit fiddly and at risk of whipsaw. Probably better to have a contingent to close the entire position and be done with it? Who knows? I'm sure some enterprising trader will backtest all of these possibilities.

Going with instinct, if you're really worried about black swan events then perhaps be prepared to take less credit as a matter of course in order to fund downside potential/protection e.g. ratio your wings. Unfortunately, IV skew makes put backspreads harder to do for a decent credit, but it is possible and will also leave you long vega which comes in handy for crashes. Alternatively, come up with some other insurance where you will have downside potential/protection e.g. as Phil has done with SPYs, but this will always eat into your credit and can either be done from the start or on an ad-hoc basis.

I'm yet to be convinced that there is a better alternative to backspreads/ratioed wings for dealing with black swan events but I'm willing to listen to more of these ideas and be convinced otherwise.

Keep them rollling in.

Momoney.
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Andy, I'm checking out MNX due to several issues mentioned here before. The product is traded on several exchanges, unlike SPX, that means more competitive pricing, easier fills, and possibly a better chance to bail without getting skinned alive by the MM and the huge bid and ask spread when things get dicey. I also like the 2 1/2 difference in the strikes. Havent really got into it , but I will after doing more homework.
 
I have a question for any who might be programmers or real computer experts. I use TOS as my broker for trading SPX and other indices. Sometimes instead of Iron Condors , I enter with a butterfly, and then adjust it to a condor as the market trends. I have even had to adjust a third time by adding aanther fly to extend a wing even further. I wasnt aware of this, but the risk profile scenario is not correct after these types of adjustments are placed. I manually keep track of expences used to purchase adjustments against the maximum profit potential of the strikes I bought versus what I have sold. In talking to Tom Preston about it, the best I can reason is that the computer program doesnt remember the past trades, but just what you have on now. I believe Tom speaks Martian when discussing this , but it has been a problem for me in the past. Anyone else find this a problem when adjusting the Irons?
 
Extractor,

I'm not "a programmer or real computer expert" but I've had exactly the same issue as you, and have talked with TOS about it.

The TOS P/L (as well as the risk graph on the Analyze tab) has no idea of "trade history". In other words, the platform only shows the current position's graphs and P/L, even if it took you 10 adjustments to the original trade to get to the current position. Like you (I'm guessing), I use a spreadsheet to track the exact cash flow of the original trade plus all subsequent adjustments, all the way to exit or expiration.

The folks at TOS will say this is by design, that this is the way all professional trader's manage positions. In other words, manage the position you have *now* irrespective of how you got there.

However, TOS is in the retail business now and retail traders want to know the overall/monthly P/L, and look at things differently than professional traders. I believe they have had this request from several clients. Therefore, I believe TOS in the future will add a page which tracks the P&L (like your spreadsheet) as you make adjustments.







Quote from Extractor:

I have a question for any who might be programmers or real computer experts. I use TOS as my broker for trading SPX and other indices. Sometimes instead of Iron Condors , I enter with a butterfly, and then adjust it to a condor as the market trends. I have even had to adjust a third time by adding aanther fly to extend a wing even further. I wasnt aware of this, but the risk profile scenario is not correct after these types of adjustments are placed. I manually keep track of expences used to purchase adjustments against the maximum profit potential of the strikes I bought versus what I have sold. In talking to Tom Preston about it, the best I can reason is that the computer program doesnt remember the past trades, but just what you have on now. I believe Tom speaks Martian when discussing this , but it has been a problem for me in the past. Anyone else find this a problem when adjusting the Irons?
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Andy , thanks, that is the best explanation I have had so far. My point is , like you, I will absolutely manage my current position, but I would like to analyze my profit or loss from the very beginning of the monthly trade. I think the Coach may want to broach the subject with these guys, and even perhaps on his show. We sure do ask the Coach to work hard on our behalf dont we? Here is to a flat Holiday Market, even though the buy and hold guys are looking for Santa, although , you can just play the upside with the bull puts. Thanks Andy
 
Rdemyan,

That's exactly right. Ratio more long legs than short. The ratio is dependent on what risk profile you are after and credit etc. The width of the spread can also impact quite substantially.

One large caveat to this approach is that it probably wouldn't be feasible for FOTM credit spreads so probably off-topic. Sorry. I haven't checked out the prices though so see for yourself.

It is more applicable for when establishing spreads closer to ATM. Or you can adjust into it, from a normal credit spread, for less than fair value if you are lucky with direction or assume some risk for a period of time.

Remember the backspread has a credit spread embedded in it, but is still probably off-topic :)

Momoney.

Quote from rdemyan:

Mo:

I'm not very familiar at all with backspreads/ratioed wings.

So if I was looking at a 1180/1190 bull put credit spread, what would be the corresponding backspread/ratioed wing that you would suggest? Something like buy 1.3 1180's and sell one 1190 (of course it depends on the premiums).

Thanks.
More...
 
Although TOS is always responsive I doubt they will make this change. It becomes too hard to determine when someone has finished adjusting the current position and is actually entering in new separate transactions. For example if you have DEC positions and make adjustments and then add in JAN/DEC diagonals and then some partial hedges, the programming headache might not be worth it. It is true what is on now is the most important but I think the individual will just have to keep a running tally until the month closes to get to net risk. I actually record it when I makes such adjustments so I can always see my risk.

Quote from andysmith:

Extractor,

I'm not "a programmer or real computer expert" but I've had exactly the same issue as you, and have talked with TOS about it.

The TOS P/L (as well as the risk graph on the Analyze tab) has no idea of "trade history". In other words, the platform only shows the current position's graphs and P/L, even if it took you 10 adjustments to the original trade to get to the current position. Like you (I'm guessing), I use a spreadsheet to track the exact cash flow of the original trade plus all subsequent adjustments, all the way to exit or expiration.

The folks at TOS will say this is by design, that this is the way all professional trader's manage positions. In other words, manage the position you have *now* irrespective of how you got there.

However, TOS is in the retail business now and retail traders want to know the overall/monthly P/L, and look at things differently than professional traders. I believe they have had this request from several clients. Therefore, I believe TOS in the future will add a page which tracks the P&L (like your spreadsheet) as you make adjustments.
More...
 
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