SPX Credit Spread Trader

Thanks for the honest info. Since both of us wrote the book and we had a time constraint, the focus had to be narrowed some and there just was not enough time to get everything in. TO answer Sampson's question, McMillian went into depth on the strategies and then provided short follow-up scenarios for some adjustments. We decided to flip it and provide short overview of the strategies and instead focus on the adjustments with additional emphasis on risk management. That is all I want to say on the book since I want to avoid mentioning it here.



Quote from DonnaV:

Phil is a co-author and I have read the book. A large part of the book is devoted to using options in conjunction with stocks which I found very useful. However probably not as much usage of adjustments in more complicated spreads, which many people looking at this thread may be expecting. There is a fair amount of spread strategies in making adjustments which can lock in profits etc and sometimes to minimize loss. It is well written and useful... there is no self-promotion or selling something else, which I thought Fontanills "Volatility Course" did ad- nausieum (sp?)...let me put it this way. I'll be happy to sell you at half (my)price my copy of "Volatility Course"..but I'm keeping "The Option Trader Handbook" :D
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RD- I did use this am uptick to sell 1300/1310 and close the put side. I will wait for the next week/10 days to hopefully find a down day to roll 1285/1300 or 1295 and open another put spread...downside is that temporarily I'm tying up gobs of cash with a 25 point spread:(

One other thing I've found is you have to be well capitalized to be playing with the spx:eek:
 
Donna:

Your last sentence is quite true. I have a pre-set amount of margin I use and I have that cash/margin segregated in my mind and the remaining portion of my portfolio is in other investments or free for other trades. That is why I talk about not using all your portfolio for this strategy or a huge part since you do not want to be locked up. Now do not be scared by ty the numbers I am using, you can scale it down to your own portfolio. Instead of $250,000, think of it as your $30,000 or your $10,000. This strategy should not take over your portoflio, that is not risk management. While trading these spreads I have been buying some closed-end funds and selling some others and looking at other option trades so I am not handcuffed. I am not saying you are but you brought up a great point worth mentioning.

Phil


Quote from DonnaV:

RD- I did use this am uptick to sell 1300/1310 and close the put side. I will wait for the next week/10 days to hopefully find a down day to roll 1285/1300 or 1295 and open another put spread...downside is that temporarily I'm tying up gobs of cash with a 25 point spread:(

One other thing I've found is you have to be well capitalized to be playing with the spx:eek:
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Coach, hope you had a nice Thanksgiving.

I have a couple of questions:

1) How long have you been trading credit spreads in general and specifically the SPX.

2) With regards to the percent return that you've mentioned a few times on the thread (I believe currently around 27%):

This return is only for credit spreads and adjustments/hedges that you specifically mention on the thread. In other words, you're not including any of the futures trading that you might be doing on the side.

3) I started reading some of the initial posts on the thread and found them very interesting. As you noted today, it was a different journal back then, than it is today. You mentioned I think in your first post that you might be trading other instruments, specifically:

SPX, XEO, OEX and possibly RUT.

Have you been looking at the RUT at all, or have you decided that it is not suitable?


Thanks.

Quote from optioncoach:

Donna:

Your last sentence is quite true. I have a pre-set amount of margin I use and I have that cash/margin segregated in my mind and the remaining portion of my portfolio is in other investments or free for other trades. That is why I talk about not using all your portfolio for this strategy or a huge part since you do not want to be locked up. Now do not be scared by ty the numbers I am using, you can scale it down to your own portfolio. Instead of $250,000, think of it as your $30,000 or your $10,000. This strategy should not take over your portoflio, that is not risk management. While trading these spreads I have been buying some closed-end funds and selling some others and looking at other option trades so I am not handcuffed. I am not saying you are but you brought up a great point worth mentioning.

Phil
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IV, if I understand correctly, X and Y should track very closely because the market is efficient. Where is 2.268 coming from SQRT (30/365) is not it....



Quote from IV_Trader:

Andy , some time ago I wrote a simple formula to calculated ATM combo premium when historical data is not available.

X=ATM combo premium= (XYZ * VOLS * 2.268)/1000
where time=30 days
XYZ=price of stock at the beginning of the month (which also used as a strike)
Sample : Starting price=42 , Vols =14 , then 42 straddle premium=1.33(on the ask)
Store ABS monthly % change of XYZ into Y.
Now you can compare average of X to average Y and assign the over/under value "labels".
obviously any back testing process needs more work , but a use of this formula will get you to the fast start.
PS : don't be surprised to find out that in many cases Ave X will be equal to Ave Y ; this is just another confirmation of "no free lunch" or "perfect option's pricing" theories.
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Quote from andysmith:

IV, if I understand correctly, X and Y should track very closely because the market is efficient. Where is 2.268 coming from SQRT (30/365) is not it....
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yes , very close , especially for Index. Different story for some individual stocks when and if you excluding One Time Event % change , then you can find a good discrepancies between X and Y and accordingly take a short or long position , but this subject should be discuss probably on another thread...
 
I hope everyone had a nice T-giving... Answers to your questions:

1) I have been trading credit spreads about 5 years give or take and SPX almost 2 years. This year I moved it up to larger amount than in previous years.

2) Yes the 27% to date, not counting current positions, is on the SPX spreads alone since that is what this journal is focusing on. The futures are in a Tradestation account and I am still in testing mode of different approaches using 1 - 3 contracts at a time. I am going to do this for another 2 months or so because I do not want to ratchet up the number of contracts until I feel more confident with the indicators and approach I am using. Same advice applies to those following this thread. Start small and use the time to learn and get better with small capital. Personally I put about 5% of my money in the TS account and it is pretty much flat since I am moving in such small increments and testing different indicators.

3) I looked at the RUT a lot more early on but just never saw any premiums worth it and just have not made it back yet. As you can see I occasionally dip back into the XEO but not very often. The Russell futures are much better than the RUT lol.

Yes this journal has certainly changed some since MAY and for me I have learned a lot myself. I know a lot of people at ET like to come off as professionals and experts and always seem to imply that they know all they need to and keep a closed mind. I am not embarrassed to admit how much I have learned from others in the discussions from this journal and with an open mind it will always improve. The more different viewpoints that are presented the more options we learn in how to trade-in general, not even just the SPX. I guess you could say I am thankful for it lol.

Phil


Quote from rdemyan:

Coach, hope you had a nice Thanksgiving.

I have a couple of questions:

1) How long have you been trading credit spreads in general and specifically the SPX.

2) With regards to the percent return that you've mentioned a few times on the thread (I believe currently around 27%):

This return is only for credit spreads and adjustments/hedges that you specifically mention on the thread. In other words, you're not including any of the futures trading that you might be doing on the side.

3) I started reading some of the initial posts on the thread and found them very interesting. As you noted today, it was a different journal back then, than it is today. You mentioned I think in your first post that you might be trading other instruments, specifically:

SPX, XEO, OEX and possibly RUT.

Have you been looking at the RUT at all, or have you decided that it is not suitable?


Thanks.
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Hello Coach Phil: 11/26/05

Thank you for the excellent forum, especially for emphasizing on the essential aspect of all trading which is money and risk management.

I have a question regarding the credit spread and if it can be replaced with ITM debit spread, if the premium is higher?

Many times I find more premium with ITM debit spread than credit spread for example: assuming I want to sell


the 1310 SPX call and buy the 1320 spx call for a credit of .40 (after splitting the B/A) . Instead I could:



Buy 1320 SPX put and sell the 1310 Spx put for a debit of 9.50

(after splitting the B/A). After Dec expiration if SPX stays bellow 1310 my credit will be .50 . So why not collect more with the same risk?

(assuming I'm using cash for the margin).

Thank you

Labib Imtanes
 
Quote from Samson77:

I completely agree !

Thanks I find that reading too many trading books only confuses me and I'm trying to be very selective in my choices these days.

That being said I have grown to like Phil and I will read his book I just wanted some comments on it's content.
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I've read the book, but am not a highly qualified trader. I learned alot from the book. The other book I read was McMillans. Phil does a nice job of explaining some of the complexities in "plainer English" so that I was better able to understand some of the trades. Phil's book filled in a number of "holes" I did not understand from McMillan.

If you are a highly versed investor, the book may be simplistic for you.

I'm a dentist by trade. Take Hundreds of hours of continuing ed. If I go to a course, and walk away with just 1 or 2 "pearls", it was a good course. For the few dollars Phil's book costs on Ebay (I bought mine used-sorry Phil) you can skim over the parts of interest to you.

That's as unbiased, though maybe as uneducated, as you can get!

Have a great day.:)
 
Quote from andysmith:

rdemyan,

Unfortunately, I can't give an example trade just yet -- need a few more days to work through this. But just take your current Jan spread and model it with a Day 1 hedge and put and call calendars to get overall positive vega, and see what your position does when the SPX moves and go from there.

The super-traders on this and other threads (riskarb, Dr. Zhivodka,...) who have been doing spreads for 15+ years have provided enough hints (which I've confirmed with the guys at TOS) for us to get this right.

I no longer believe you can just put on a spread, wait till the going gets tough and then put on a hedge, then roll when the going gets really tough and hope for the best, and finally take the spread off at the last minute if/when you reach hell's doorstep. And if VIX has popped, you're dead. Can you imagine say, a $100M fund with this strategy? (Check out Max Ansbacher's fund). I can't. No offense to anyone on this thread (especially Coach for being a wonderful leader) but I think we all need to get a little more sophisticated.

Perhaps the most important hint from the experts is that with VIX at an all time low, this may not be the right time to sell premium, but a good time to buy premium.... or even if you choose to sell premium, at least get your overal position vega back month positive. We're all learning here (including Coach) and I hope folks listen to the experts when they give us hints and try and follow through (at least that's what I'm trying to do).
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I'd like to see you expand on this please. Particularly, the put and call calendars. Are you doing calendars on SPX, or SPY as hedges? In what ratio are you suggesting? It's a great concept, just want to work out the devilish details!
 
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