SPX Credit Spread Trader

[rdemyan]

Andy:

Funny you should mention this. I'm experimenting with the idea of putting on spreads 60 days out. I already have a January FOTM bear call position. My goal is to try and keep 50 to 75% of the premium and get out.

Haven't thought through the margin points your mentioning, but I too would like to put on a little more margin. I feel like this is possible with bear calls (again, I can see the catastrophe coming) but, for me, not bull puts (subject to black swan events).

Quote from andysmith:

I wanted to see if there is a way to put more money to work on credit spreads without increasing risk outright. Well, there isn't, but the following might be an interesting step in the right direction and I'm requesting some feedback.

The Problem: I haven't been thrilled with the credit received for safe, far OTM spreads with 30 days to expiration. If I want to get a decent credit, I have to go closer to the money than I'd like to.

Now I've read/heard several times that it is "safer" to go out 2 to 3 months such that the spread can be farther OTM than a 30-days-to-expiration spread. Mathematically, this does not make sense but intuitively, it seems safer. Why?

So here's the thought. Instead of using 50% of capital (as margin) on a 30-day spread each month, put 35% on a 60-day spread. One month into the 60 days, put on another 60-day spread using another 35% of capital. You are always 70% invested and even though you have 60-day spreads, you have an expiration event every month. You can do the same thing with 90-day spreads using 25% of capital each month.

 

[El OchoCinco]

Donna:

I do not think you are going to find any logic or reason as to why a SET is one way or another or the magnitude of the move. Since SET is created after all 500 stocks open, the SET will always have a different number than the index since the index starts at 9:30 AM no matter what, i.e. even if 100 of the stocks have slightly delayed openings. Friday when SET is determined is also equity option expiration day so there might be a lot more activity than normal at the opening which could affect SET. The SET iz what it iz and my advice is to avoid SET altogether and do not hold any posiitons on THU that are within 10 points of the index value. 10 - 15 is a coin toss since greater than 10 point SETs are possible but not as common. If you want to be super safe, nothing within 15 points.

MM do not control SET, the opening price of all 500 stocks do and I doubt any MM can determine the opening price for all 500 to sway a SET one way or another.

Quote from DonnaV:

ok so 2004 there were 4 months with down sets...DEC Thurs 16th close 1203.21 set was 1190.45...(I remember how sucky Dec was) Aug was less than one pt below set 1091.23/1090.65, June another small down 1132.05/1129.50 and Mar 2 pts down...my question remains WHY are so many months UP months???

 

[Hart9000]

Coach,
Say you have been nursing a credit spread along for a few weeks that you had sold for .50. If you close this the last week before expiration because it is 10 points from the short strike, you are going to take a loss. That is, close a potentially winning trade for a loss because of the fear of getting screwed at settlement. Combine with the large bid ask spreads and its easy to see why the SPX pit is so big and crowded, and dangerous for the retail trader.

Quote from optioncoach:

Market closed at 1242 on THU so we actuall had an 11-point SET. But if you use that 10-point rule- close all short strikes within 10 points of index on THU- it will save you from learning future lessons lol.

 

[El OchoCinco]

For those that have been following my trades from the beginning you will notice that I rarely hold to expiration. I usually try and close my positions for a profit and move to the next month to grab the premium. For example in NOV I was out the first week or so and rolled into the DEC put spreads and added the call spreads later on. This is just my approach. One or two times I waited until expiration simply because I could not get out at the price I wanted due to volatility of the index and it was better to simply let it go to expiration.

Like I said this is just one approach. I l ike to keep the money rolling forward because by the time expiration hits, the next month is less than 30 days often and premiums are shrinking fast. One friend who I am "coaching" with his account prefers to just hold to expiration and then the following MON or during that week look for the next month's positions (unless an adjustment was required). So we both do it differently, we both make money but whatever is most comfortable for you is all that matters. I like to keep margin open most times to get into the next month or get out of current positions with profits to move to the next month when I can. Once or twice I loaded up in a month and had to wait until expiration but my preference overall for now is to move forward whenever the opportunity presents itself.

Quote from momoneythansens:

I think SET was the least of people's problems that particular month.

The problem with credit spreads/ICs is that they often really only reveal their best profit potential as expiration nears. This is due to theta blah blah blah...

So, the question becomes, when is the optimal time to take off/roll a position that is short options/gamma?

The answer is probably subjective but some of the contributing factors are:

1) Settlement procedure e.g. SET
2) Any large arbitrage activity.
3) Black swan protection.
4) Profit potential.

Why do I mention black swan? Well if you trade a European style exercise product then you have a chance of recovery after a Black swan event, but that recovery might take a little time. If it happens on the Thursday of opex week then you don't have as much time as if it happened on the Monday. So routinely taking off positions on the Monday would cover you for a lot of cases...but then often miss out on the best meat of the profit. This is all stating the obvious I think and yet another balance of risk/reward.

So what is the consensus on best day of week to take off/roll positions?

Momoney.

PS

After all of my SPX bashing, I'm going to give it one more chance (thats about 8 and counting) and see what there is going on today. The market makers better treat me nice or I'm not going to play anymore.

 

[momoneythansens]

grrr...

Waiting to get filled for half an hour and I'm more than 15 cents off the mid. What is wrong with this picture?

Natural is .20 and Mid is .575. My order for .40 is just not getting filled. Admittedly only 20 lots but still that's just plain greedy.

Not playing anymore.

Momoney.

After all of my SPX bashing, I'm going to give it one more chance (thats about 8 and counting) and see what there is going on today. The market makers better treat me nice or I'm not going to play anymore.

 

[RichardRimes]

I agree that MM in no way can control/manipulate SET...I guess what I'm trying to say is...IS there an inherent bias in the trading that preceeds options expiration to the down side? More traders hedging positions or basically bearish keeping the spx lower than the underlying suggest it should be? idle thoughts not actionable thoughts

Quote from optioncoach:

Donna:

I do not think you are going to find any logic or reason as to why a SET is one way or another or the magnitude of the move. Since SET is created after all 500 stocks open, the SET will always have a different number than the index since the index starts at 9:30 AM no matter what, i.e. even if 100 of the stocks have slightly delayed openings. Friday when SET is determined is also equity option expiration day so there might be a lot more activity than normal at the opening which could affect SET. The SET iz what it iz and my advice is to avoid SET altogether and do not hold any posiitons on THU that are within 10 points of the index value. 10 - 15 is a coin toss since greater than 10 point SETs are possible but not as common. If you want to be super safe, nothing within 15 points.

MM do not control SET, the opening price of all 500 stocks do and I doubt any MM can determine the opening price for all 500 to sway a SET one way or another.

 

[Hart9000]

Market makers may not be controlling this but someone is. Who does control what time a stock begans trading? Think there could be some manipulation there? And who controls the opening price - the after and pre markets. Price manipulation is what those markets are all about. Does anyone doubt that the SPX is settled on the open to give someone a huge advantage?

Quote from optioncoach:

MM do not control SET, the opening price of all 500 stocks do and I doubt any MM can determine the opening price for all 500 to sway a SET one way or another.

 

[rjg96]

If you had a position that was less than 15 points to being ITM on the day before expiration, and closing it out to avoid SEt would mean taking a loss, I wonder how well doubling and rolling up would work?

 

[El OchoCinco]

I would not choose closing as my first choice. Depending on the market conditions I might simply roll up for space to take advantage of theta and worst case scenrio I take a very limited small loss which should be offset by my put spreads premium. I work hard to select strikes with a very low probability of being ITM at expiration so if I have to roll/adjust or close and take a small limited loss I will not hesitate to do it. I would rather take the small loss and move on to the next month then let myself get whipsawed into a huge loss. All my adjustments made this year were unnecessary since the market eventually moved away from my short strike but the one time I decide not to do it, I will most definitely get burned. Even with those adjustments I still made money so I would rather stick with the plan as best I can and the rest should work itself out.

The wide b/a spreads are certainly a shitty aspect of the SPX but few other products have the premiums that far OTM and have the variety of products as the S&P so I take the good with the bad.

Quote from Hart9000:

Coach,
Say you have been nursing a credit spread along for a few weeks that you had sold for .50. If you close this the last week before expiration because it is 10 points from the short strike, you are going to take a loss. That is, close a potentially winning trade for a loss because of the fear of getting screwed at settlement. Combine with the large bid ask spreads and its easy to see why the SPX pit is so big and crowded, and dangerous for the retail trader.

 

[El OchoCinco]

I doubt anyone frim can control the opening of 500 stocks. Stocks open past 9:30 for a variety of reasons that are unique to each stock. If a MM could truly manipulate I would assume they would fight huge SET deviations since their short options they are holding could also become ITM and lead to losses just as likely as they long options they are holding becoming profitable. Since they hedge so much I believe that they would be more concerned about neutralizing their deltas so a SET vaue does not affect them either way and they simply make their nice spread.

Price maniulation can occur at times in different securities but for someone to do it in 500 securities is quite difficult. Remember that those 500 stocks do not trade solely for the purpose of S&P. Friday is option expiration day so other MMs who are trading those individual stocks/options may have their own posiitons to hedge and you get a large market of people fighting over the price.

The SET was easy to understand. The pre-market was quite strong and the index gapped higher which means many stocks gapped higher. However since the SET had to wait to take every opening price of all 500, if all 500 gapped higher then the SET got a nice boost. The SPX however does not wait for all 500 so its value never got that boost past its high. If the morning was a very weak morning and everything was gapping lower at the open, then the SET would have had a nice push lower.

Perhaps you can find a list of S&P 500 stocks and opening times to see when most opened to get a feel for what caused the push.

Phil

Quote from Hart9000:

Market makers may not be controlling this but someone is. Who does control what time a stock begans trading? Think there could be some manipulation there? And who controls the opening price - the after and pre markets. Price manipulation is what those markets are all about. Does anyone doubt that the SPX is settled on the open to give someone a huge advantage?