SPX Credit Spread Trader

Great back and forth discussions here and thanks to all for the give and take. The market is certainly showing significant strength and I am more than willing to just take my call spread off at some point. I still think the market has priced in its year end rally since we fall so far in OCT but nothing says the market cannot keep running. I will probably not roll to JAN because I would rather just get out of the way and move to the next month. I still have some margin left in my average margin used so I can ratchet up one more time if I feel it is necessary, but I would rather not naturally.

As far as adjustments in a year I have only had 3 months of adjustments (JULY, OCT and DEC, unless I am forgetting). The number of adjustments is usually 1 or 2 months in a year on average. Could be more or could be less I do not think 3 months this year throws that out the window. After all, a major Hurricane caused the OCT adjustments but the uneexpected event is always lurking and one should, ironically, expect it. However, the other 2 adjustments still led to profits so there is nothing negative about an adjustment. It is the nature of selling credit spreads. I have no problem taking a loss in DEC because it is part of risk management. Better to take a small loss than be forced to swallow a major loss.

As I have said before I do not do 100% credit spreads, so a blow up will never wipe me out no matter what happens.

As far as my book, this strategy and approach is NOT covered in the book so I want to be clear about that.

Also, in case it gets overlooked too often, this strategy has important risks and is not easy. For me it is easy in that I place 2 or 3 trades a month with it and it fits my trading style. But as with every strategy it has its pros and cons and you need to examine them fully to determine if you wish to persue this strategy. This month's price action is part of the risk and it is not that I do not care about the money, it is that I cannot afford to get stressed and emotional because it will cloud my judgement.

AS for the market, the DOW can get to 11,000 and would most likely find that a significant resistance point if the market does not pull back before then. That would get the S&P close to 1275. It is a very possible reality.

If strength continues then I will have to decide to simply get out of the way and make my money on the put side and keep taking in premium.

Hope everyone has a Happy Thanksgiving and we have a slow trading day Friday so we can attack the market again on Monday :)

Phil
 
This month has been a bit unnerving for a number of us. I woke up this morning at 5:30 with the thought that I should look to see if historical data validates the claim that November and December are generally rally months. We've been warned by both Coach and other experienced investors.

So since I had some free time before the turkey hits the platter, I did some research on SPX historical prices.

Attached is a spreadsheet that contains the following data for the SPX:

1) Change in the Expiration day SPX Thursday close from November to the Expiration day Thursday close of December from 1995 through 2004.

2) Change in the December SET price relative to the November SET price for the years 1998 through 2004.

3) The highest intraday high and lowest intraday low from SPX option period beginning (Friday) to SPX option period ending (Thursday). Also the range between the highest intraday high and lowest intraday low from expiration to expiration period is included.

4) Average monthly VIX


Since I spent two hours putting this together, I guess that gives me the right to make a few observations :)

1) Based on all of the anecdotal evidence, I expected to see a high percentage of the Dec option periods to be significantly bullish. A look at the data shows that for the ten years, 5 years showed increases in the SPX from the beginning of the option period in November to the end of the option period in December and 5 years showed decreases.

2) Over the ten year period, the average of the increases and decreases is about a 1% increase in the SPX.

3) Over the ten year period, the average of the increases and decreases is about a 0.5% increase for the SET.

4) The range between the lowest intraday low and the highest intraday high, IMO, gives us an idea of how likely we might be to adjust our positions. Except for 1995 the range was 40 points or higher with an average range over the ten year period of almost 56 points.


It seems to me that we need to be careful when looking at data and in assertions about trends. As option traders, we are interested in the option cycle (typically the middle of one month to the next). However, trend data is often stated for the month as a whole.

For example, this expiration period to expiration period does not include the last two weeks of December. I heard Bob Pisani on CNBC say this week that December is historically the strongest month of the year. I'm not sure this data bears that out, but I don't currently have any other months to compare it with and as I said, this data does not include the last two weeks of December (that would be part of the January option expiration period).

Having said that, I am not likely to go against the conventional wisdom regarding November/December in the future.

I welcome feedback, constructive criticism and please let me know if you find any errors in the data or calculations. If this is useful information to have, I'll try to prepare a spreadsheet for each option month prior to us putting positions on for the month.

DISCLAIMER: The accuracy of the data cannot be guaranteed nor can the calculations so please use this spreadsheet at your own risk.

Hope everyone has a great Thanksgiving!
 

Attachments

Rdeyman-

Thanks for putting this together-- I was also thinking about dooing something like this. This is great. I'm feeling a little better about my 1285/1295 position (not that much better, but still). I also think it was good news for us bear callers that the index tested 1270 as an intraday high on Wednesday but hten backed down to 1265. I had foolishly put on my position before November expiration, hoping for an intrady drop that would allow me to exit with a little profit. taht drop never happened, so I'm stuck.

I'm hoping that 1270 becomes a new resistance level. For the past 5-6 days its just been a straight slope up; so there's a chance that 1270 could take a littel more effort to break.

Also, it would seem to me that we've had quite a rally already, so I'm wondering how many more buyers will want to get in now. If everyone expects teh end of year rally, and buys in anticipation of it, and that creates the rally, then it might be possible that we've just seen the rally. If I was on the long side, I think i'd take my profits now and maybe wait for a drop in early January to get back in.

I'll also add that for the one time where the SPX closed about 5% higher in 2003, the market had been about 10-15 points prior to the Nov set, and the rebounded a day later. During Nov 2005, we've had a smooth runnup instead.
 
r-man , nice job but... what kind of conclusions can you get from only 9 points of historical data ? Its to little for brother statistical results. So SPX change in DEC was 6 times + and 3 times neg , so what ? You should off run similar stats month by month way before actual trades and compare odds and probs for this strategy. And why you are using VIX instead of SPX vols which is around 9 this month . Do you realize that 30 days premium for ATM straddle was only 25 points and represents only 2% from SPX nominal. If SPX will move more that 2% any direction , you will lose money and I don't care what was your original position , ATM or far OTM or which smart adjustment you will make or"roll over" to next month. Adjustments and roll overs can sometimes hurt your position more , many posters before me warned about it many many times.
Coach seems like a nice guy and I really belive that he want to help new traders. But I think his strategy making money because he is good/very good directional trader and NOT because of the ways he "adjust" positions when trade goes bad. THERE IS NO PROVEN WAY TO ADJUST SHORT STRANGLE FOR THE LONG TERM. Show me the way you planning to do it and I will find scenario that will go against you.
You can call me negative thinker or whatever many other posters was called here , but at the end it's your money and not mine.
Good luck and happy TG all.
 
IV:

Just a couple of things:

1) It's actually 10 years of data and the split is 5/5 not 6/3. The last two years though have been positive and it looks like this one will be too.

Your point about there being insufficient data for what I originally stated as the goal: to see if the oft repeated statement that Nov/Dec are bullish months is well taken. I have no doubt that such a statement was made well before 1995.

EDIT: Let me add something on that. The conventional wisdom about Nov/Dec being bullish seems to be for these months as a whole. But as option traders we are interested in the cycles. Maybe the last two weeks of December is where the bullish action is most of the time and this will affect my January credit spreads more than my December spreads on average. Assuming that this is correct, I think I need to know this when considering my strategy for January. Just my initial opinion.

2) This spreadsheet started from a different spreadsheet which had the VIX on it. I simply left the VIX on this spreadsheet for those who might be interested. The VIX was in not used in any of the calcs.


Good luck in your trading.

Quote from IV_Trader:

r-man , nice job but... what kind of conclusions can you get from only 9 points of historical data ? Its to little for brother statistical results. So SPX change in DEC was 6 times + and 3 times neg , so what ? You should off run similar stats month by month way before actual trades and compare odds and probs for this strategy. And why you are using VIX instead of SPX vols which is around 9 this month . Do you realize that 30 days premium for ATM straddle was only 25 points and represents only 2% from SPX nominal. If SPX will move more that 2% any direction , you will lose money and I don't care what was your original position , ATM or far OTM or which smart adjustment you will make or"roll over" to next month. Adjustments and roll overs can sometimes hurt your position more , many posters before me warned about it many many times.
Coach seems like a nice guy and I really belive that he want to help new traders. But I think his strategy making money because he is good/very good directional trader and NOT because of the ways he "adjust" positions when trade goes bad. THERE IS NO PROVEN WAY TO ADJUST SHORT STRANGLE FOR THE LONG TERM. Show me the way you planning to do it and I will find scenario that will go against you.
You can call me negative thinker or whatever many other posters was called here , but at the end it's your money and not mine.
Good luck and happy TG all.
More...
 
Quote from rdemyan:

IV:

Just a couple of things:

1) It's actually 10 years of data and the split is 5/5 not 6/3. The last two years though have been positive and it looks like this one will be too.

Your point about there being insufficient data for what I originally stated as the goal: to see if the oft repeated statement that Nov/Dec are bullish months is well taken. I have no doubt that such a statement was made well before 1995.

EDIT: Let me add something on that. The conventional wisdom about Nov/Dec being bullish seems to be for these months as a whole. But as option traders we are interested in the cycles. Maybe the last two weeks of December is where the bullish action is most of the time and this will affect my January options more than my December options on average. Assuming that this is correct, I think I need to know this when considering my strategy for January options. Just my initial opinion.

2) This spreadsheet started from a different spreadsheet which had the VIX on it. I simply left the VIX on this spreadsheet for those who might be interested. The VIX was in not used in any of the calcs.


Good luck in your trading.
More...

here is my final take on this strategy : its worked in FALLING iv/vols environment when price action was lagging the vols ( Vix at 30 , but price moved only 2.5% then vix at 25 but price moved only 2% , etc,etc). While we are at the lowest 10 percentile for VIX , one should ask himself how the strategy will perform if VIX will start to rise from here.
Unless you are a very good directional trader.
 
I think we need to read IV's post carefully (the part about trading directionally and about there not being a good way to adjust a short strangle).

Perhaps an alternate risk management strategy would be NOT to adjust/roll at all. After all, when you adjust, you adjust into risk at a time when short gamma is killing you.

Instead, put on carefully constructed hedges on Day 1, add calendar spreads near the short strikes to get long vega, and then, if things go wrong, take the spread off when your loss is 2x the credit received. You can always put on a new spread later after assessing the market. Anyone tried this?



Quote from IV_Trader:

r-man , nice job but... what kind of conclusions can you get from only 9 points of historical data ? Its to little for brother statistical results. So SPX change in DEC was 6 times + and 3 times neg , so what ? You should off run similar stats month by month way before actual trades and compare odds and probs for this strategy. And why you are using VIX instead of SPX vols which is around 9 this month . Do you realize that 30 days premium for ATM straddle was only 25 points and represents only 2% from SPX nominal. If SPX will move more that 2% any direction , you will lose money and I don't care what was your original position , ATM or far OTM or which smart adjustment you will make or"roll over" to next month. Adjustments and roll overs can sometimes hurt your position more , many posters before me warned about it many many times.
Coach seems like a nice guy and I really belive that he want to help new traders. But I think his strategy making money because he is good/very good directional trader and NOT because of the ways he "adjust" positions when trade goes bad. THERE IS NO PROVEN WAY TO ADJUST SHORT STRANGLE FOR THE LONG TERM. Show me the way you planning to do it and I will find scenario that will go against you.
You can call me negative thinker or whatever many other posters was called here , but at the end it's your money and not mine.
Good luck and happy TG all.
More...
 
Andy:

Can you provide an example trade of this alternate risk management strategy?

Thanks.


Quote from andysmith:

I think we need to read IV's post carefully (the part about trading directionally and about there not being a good way to adjust a short strangle).

Perhaps an alternate risk management strategy would be NOT to adjust/roll at all. After all, when you adjust, you adjust into risk at a time when short gamma is killing you.

Instead, put on carefully constructed hedges on Day 1, add calendar spreads near the short strikes to get long vega, and then, if things go wrong, take the spread off when your loss is 2x the credit received. You can always put on a new spread later after assessing the market. Anyone tried this?
More...
 
IV, Not being critical, but why do you think you have to be a very good directional trader to be following a rising trend with a bull put credit spread , or jumping on the train in a falling market with bear call spreads, but not nec. in the SPX. Please explain all the difficulty you see, espescially with DOM options. I know we are still dealing with large risk to reward scenario, but if the market proves you wrong , get out.
 
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