SPX Credit Spread Trader

[El OchoCinco]

I started to but I realize my plate is a little full. I may look into them for actual SPX direction picks if I see some wonderful technical indicators line up but I think weeklies are just another way for MMs to make money since without a large move in the intended direction it is hard to make money. I want to continue looking into how to use them for diagonals somehow but for now the verdict is not in yet

Quote from rdemyan:

Coach:

Are you doing anything with the SPX weeklies?

 

[El OchoCinco]

UPDATE


With the move higher in the market I rolled my partial hedge into a bull call spread by selling 200 SPY DEC 128 Calls at $0.30, thus recovering my cost of the hedge and making a free trade out of it (minus commissions of course). I can now spend another $6,000 on a new set of calls for upside hedging and get two hedges for the price of one, so to speak.

I also have orders pending to roll my 1135/1140 put spread up to higher strikes to take in more credits and more money. Will update when order fills.



CURRENT POSITIONS AND REVISED HEDGES:

-300 SPX DEC 1135/1140 Put Spreads @ $0.30
-300 SPX DEC 1275/1280 Call Spreads @ $0.40

+ 200 SPY DEC 127 Calls @ $0.30
- 200 SPY DEC 128 Calls @ $0.30 (rolled into free hedge!)

 

[andysmith]

MoMoney,

You're right, the % return on margin of the iron flies were greater than FOTM spreads even after adjustments... BUT the position size of the fly was significantly smaller. And that's where the problem is, I think. Correct me if I'm wrong but the risk of blowing out of the iron fly is much higher than a FOTM spread and therefore, it's too risky to start with a fly that risks the same margin as a FOTM. So, even though the %ROM was higher for the fly compared to a FOTM spread, the total $ returned was not.

In case you're interested, here's the trade logic I used (learned from an experienced trader). Right now, XEO=575. Put on a DEC 560/575/590 iron fly. If the index moves to a wing (560 for example) convert to a condor 15 points OTM from the current price (in this example it'd be a 530/545/575/590 iron condor). After I have a condor (i.e. after one adjustment), if the index moves within 5 points of my short strike I either roll again 10 or 15 points away from the market or take the trade off if there is profit to protect. While trade is on, you can play the swings to build up some almost-free hedges.

Quote from momoneythansens:

Andy,

You may have been slightly unfortunate with movement of the index in the last couple of months!

Yes, the margin at risk can increase substantially depending on your adjustment but the question I have to ask is did you end up with a worse risk/reward ratio than if you had done a FOTM credit spread - typically in the region of 10:1 or even 20:1?

Looking at just the physcial amount of margin used alone is IMHO not meaningful unless used in relation to the reward.

If you look at it from that point of view, then you might consider yourself being no worse off than the FOTM credit spread practitioners. Were you? I have no idea. If the index hadn't moved as much as it did, then you would be considerably better off than the FOTM credit spread practitioners due to the superior initial risk/reward. That's obviously a big IF, but is why sideways markets can make this work.

As for deciding whether to adjust or hold, I find it's best to take that decision out of your hands and set a stop loss target from the beginning. As I'm sure you're aware, it's a whole different sensation letting your spreads go ITM and can take a mindset adjustment to deal with it rationally especially if your background is FOTM credit spreads.

If you're from the "Kelly Criterion" school of mumbo jumbo then that can help things balooning out of control in terms of what is at risk.

There's no doubt that this style of strategy requires A LOT more managment than a corresponding FOTM strategy and that's the cost of potentially greater rewards.

The middle road is perhaps, as I believe you may have mentioned, in the vein of Red Option's style. I'm not intimate with their approach as I haven't subscribed before. I have subscribed to their "Mini-Basket" to see what it's all about but that hasn't started yet.

Correct me if I'm wrong but their approach seems to be starting off with an IC that is not ATM but not FOTM either. Something like 2:1 risk/reward perhaps. Leveraging European exercise capabilities, they are quite happy to let the index meander through the spreads and play the probabilities that it will expire in the body. Perhaps they make the odd adjustment.

This approach appeals to me strongly if you can get the right kind of fill/credit for the given probability as detailed in one of my earlier posts.

Damn, I'm rambling again. Have to unlearn touch typing.

Hope you have better success with this strategy in the future. Have a feeling this month could be a better one for it.

Momoney.

 

[rdemyan]

So, you're buying the 560 OEX put and selling the 575 OEX put. You're also selling the 575 OEX call and buying the 590 call.

TOS shows the credit on this would be about $9.00.

Then if the market goes down to 560, you enter a two trades to adjust the position from 560/575 to 530/545 with a resultant debit that eats away at that $9.00 premium.

I'm thinking slowly today [vacation week ], so bear with me as I take this one or two steps at a time.

Am I right so far in the hypothetical example?

Quote from andysmith:

MoMoney,

You're right, the % return on margin of the iron flies were greater than FOTM spreads even after adjustments... BUT the position size of the fly was significantly smaller. And that's where the problem is, I think. Correct me if I'm wrong but the risk of blowing out of the iron fly is much higher than a FOTM spread and therefore, it's too risky to start with a fly that risks the same margin as a FOTM. So, even though the %ROM was higher for the fly compared to a FOTM spread, the total $ returned was not.

In case you're interested, here's the trade logic I used (learned from an experienced trader). Right now, XEO=575. Put on a DEC 560/575/590 iron fly. If the index moves to a wing (560 for example) convert to a condor 15 points OTM from the current price (in this example it'd be a 530/545/575/590 iron condor). After I have a condor (i.e. after one adjustment), if the index moves within 5 points of my short strike I either roll again 10 or 15 points away from the market or take the trade off if there is profit to protect. While trade is on, you can play the swings to build up some almost-free hedges.

 

[El OchoCinco]

Since I freed up my $6,000 in partial hedges I decided to put it back into more partial hedges since I was more than willing to part with the amount. Therefore I added the additional partial hedge listed below. If market keeps moving higher I will roll that into a partial hedge as well and add more as needed.

CURRENT POSITIONS AND REVISED HEDGES:

-300 SPX DEC 1135/1140 Put Spreads @ $0.30
-300 SPX DEC 1275/1280 Call Spreads @ $0.40

+ 200 SPY DEC 127 Calls @ $0.30
- 200 SPY DEC 128 Calls @ $0.30 (rolled into free hedge!)

+ 10 SPX DEC 1265 Calls @ $6.00

 

[andysmith]

rdemyan,

Yes, you're steps are correct. Only difference is that I'd probably roll down with one trade instead of two -- buy a regular 530/545/560/575 put condor. That'd leave me the 530/545/575/590 IC. It's good you plugged the numbers into TOS -- you see that $9 credit on $15 margin can be attractive!

Now that I've written this up, I'm tempted to put on this trade. But the market seems skittish....

Quote from rdemyan:

So, you're buying the 560 OEX put and selling the 575 OEX put. You're also selling the 575 OEX call and buying the 590 call.

TOS shows the credit on this would be about $9.00.

Then if the market goes down to 560, you enter a two trades to adjust the position from 560/575 to 530/545 with a resultant debit that eats away at that $9.00 premium.

I'm thinking slowly today [vacation week ], so bear with me as I take this one or two steps at a time.

Am I right so far in the hypothetical example?

 

[rdemyan]

Yes, yes, the put condor is the way to adjust. I orginally wrote butterfly to adjust but then realized that the body wouldn't be equal so changed it to two trades.

A couple of questions:

1) What's the profit range of the iron butterfly alone, without adjustment?

2) How much credit do you think you would lose if you have to adjust as in the hypothetical example?

3) Wouldn't this type of trade be better placed with say 2 weeks left to expiration?

Well, the client just called (I guess they don't believe that consultants are allowed vacations). I guess I have to put the thinking cap back on.

Quote from andysmith:

rdemyan,

Yes, you're steps are correct. Only difference is that I'd probably roll down with one trade instead of two -- buy a regular 530/545/560/575 put condor. That'd leave me the 530/545/575/590 IC. It's good you plugged the numbers into TOS -- you see that $9 credit on $15 margin can be attractive!

Now that I've written this up, I'm tempted to put on this trade. But the market seems skittish....

 

[andysmith]

rdemyan, exit at 50% of max profit, DO NOT hold till expiration are the profit-taking rules I use.

In terms of entry, you'll get less credit the closer you get to exp. Remember the equivalency that an iron fly is the same as a debit fly, only that in the former case you get a "loan" from the bank. And the closer to expiration you buy a fly, the more it costs.

Quote from rdemyan:

Yes, yes, the put condor is the way to adjust. I orginally wrote butterfly to adjust but then realized that the body wouldn't be equal so changed it to two trades.

A couple of questions:

1) What's the profit range of the iron butterfly alone, without adjustment?

2) How much credit do you think you would lose if you have to adjust as in the hypothetical example?

3) Wouldn't this type of trade be better placed with say 2 weeks left to expiration?

Well, the client just called (I guess they don't believe that consultants are allowed vacations). I guess I have to put the thinking cap back on.

 

[momoneythansens]

Andy,

Correct me if I'm wrong but the risk of blowing out of the iron fly is much higher than a FOTM spread and therefore, it's too risky to start with a fly that risks the same margin as a FOTM. So, even though the %ROM was higher for the fly compared to a FOTM spread, the total $ returned was not.

I see. If your focus is on total $ returned then I can see why this strategy might disappoint or not fit your criteria. I think you can find an optimal way of sizing the position and possibly pyramiding etc. to remedy that situation though. The goal being to get roughly the same amount of credit as you would have done from FOTM but by having much less margin tied up overall during the course of the position. In other words, if you look at it from that point of view, it is actually less risky.

Yes, we should say the probability, of blowing out of the iron fly is higher than a FOTM spread. And part of the strategy is probably dealing with more losing months than our friends that employ the FOTM strategy. However, as I'm sure you noticed, even when the spread is ITM, it doesn't cost as much to buy it back relative to the credit received compared to a FOTM equivalent in the same dilema. I know you know all of this but I'm just trying to formulate a way of emphasising some of the pros.

In case you're interested, here's the trade logic I used (learned from an experienced trader). Right now, XEO=575. Put on a DEC 560/575/590 iron fly. If the index moves to a wing (560 for example) convert to a condor 15 points OTM from the current price (in this example it'd be a 530/545/575/590 iron condor). After I have a condor (i.e. after one adjustment), if the index moves within 5 points of my short strike I either roll again 10 or 15 points away from the market or take the trade off if there is profit to protect. While trade is on, you can play the swings to build up some almost-free hedges.

Sounds pretty solid. Has the KISS factor. Not hugely different to how I approach it, though I'm not sure I could extract the heuristics of my schizophrenic style quite so concisely.

Interested to know what you mean by playing the swings to build up almost-free hedges. Are you talking about gamma scalping or building expectancy etc.?

I think you may have picked a couple of bad months to try it. Are you doing it this month too?

Momoney.

 

[El OchoCinco]

I closed my 1135/1140 Put Spread for $0.10, keeping $0.20 or $6,000, and rolled up to 300 SPX DEC 1190/1195 for $0.25. Given the market move to 1250 right before Thanksgiving, I feel comfortable with the 1195 strike today


CURRENT REVISED POSITIONS AND REVISED HEDGES:

Positions:

-300 SPX DEC 1190/1195 Put Spreads @ $0.25
(closed 1135/1140 Put Spread for $0.20 net profit)

-300 SPX DEC 1275/1280 Call Spreads @ $0.40

Hedges:

+ 200 SPY DEC 127 Calls @ $0.30
- 200 SPY DEC 128 Calls @ $0.30 (rolled into free hedge!)

+ 10 SPX DEC 1265 Calls @ $6.00