SPX Credit Spread Trader

I am still not convinced on the legging in approach. If I buy the 1335 Call then I feel like I have all the risk of long call ownership and if the index hangs around or has some dips, that call could shrink. If the market never makes its nice move higher than maybe I will not have enough prmeium in, let's say the 1330 or 1325 call, to sell for a nice net credit. If the market goes down and you covert to bear call you might not get any net credit at all and it will not be worth it.

I am not saying it is a bad approach but not fully convinced yet. If you have a nice bullish slant than I do see some merits in doing it this way. However I would probably go as far OTM as possible to lower my cost so that if it does not work I lose little.

For example, I am focused mainly on puts for JAN. I will look into my put positions but also using a small amount of premium for buying a deep deep OTM call, in lower numbers of contracts naturally, and see if there are rolling possibilities. For example I might do 10 or 20 to test. Again the risk is that I am long the call and it decays away from flat or lower market movement so I would treat this more as little additions to the strategy not a consistent approach to legging into positions. I am not a fan of legging into these spread or IC positions at all. But this could be a way to take some chances on direction every now and again.

Still convinced but willing to look into it.....


Quote from rdemyan:

Coach:

Any chance you might try legging in to a call spread. I'm thinking buy the January 1325 and then if the market goes up it's profitable. If the market goes down, convert to bear call. Given the uptrend this could work. I guess the problem is knowing when to convert to bear call so that there's at least some credit.

Donna: I know you did something similar in November. Are you considering this for January?
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There is an interesting commentary today on the Red Option site. Monthly moves of the SPX are analyzed to see if they can be used for placing credit spreads using probabilities of the index being up or down based on the previous months closing. Likely based on info provided previously by members of this forum.
http://www.redoption.com/commentary/7/
 
With the index at 1268 I think 1190 is about as high as you would want to go for a high probability trade. I have looked at 1200 and 1205 as short strikes but just not comfortable with them as of today. 1190 looks a little better on the charts. Of course today's nice upday probably means not as nice premium in those strikes.

Quote from Synaptic:

Coach,

With a flat to bullish sentiment in place for the month of DEC, would you consider the JAN 1190/1180 too risky ?
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Someone on this fourm did that nice spreadsheet analyzing the closing prices of the SPX's and did some analysis to go with it. After the 1.5hr commute, I'm too lazy to find out who it was...anyway, I sent that over to jim to analyze it and see what he thought, and if he agreeded or disagreeded with what was said. He came back with that great analysis which I'm glad he posted on the public newsletter.

Go JIM, and that guy who did the spreadsheet in the first place!

sd


Quote from Hart9000:

There is an interesting commentary today on the Red Option site. Monthly moves of the SPX are analyzed to see if they can be used for placing credit spreads using probabilities of the index being up or down based on the previous months closing. Likely based on info provided previously by members of this forum.
http://www.redoption.com/commentary/7/
More...
 
No I'm not...the only reason I did it in Oct for Nov was they were sooooooo cheap...with the market overbought they arn't cheap and haven't a clue what Jan will bring.

remember Jan exp is a 5 week cycle so I'm waiting before doing anything.

Quote from rdemyan:

Coach:

Any chance you might try legging in to a call spread. I'm thinking buy the January 1325 and then if the market goes up it's profitable. If the market goes down, convert to bear call. Given the uptrend this could work. I guess the problem is knowing when to convert to bear call so that there's at least some credit.

Donna: I know you did something similar in November. Are you considering this for January?
More...
 
When we put a trade on the SPX , be it IC or credit spread, we hope that the index stays range bound . Less worry , no need to adjust, and no need to close the position with a loss. Unfortunately what we hope for and the reality are two different things.

Here are some of the statistics on the movement of the SPX for the last 3 years :

Taking the SPX from expiration to expiration using the close on 3rd Thursday of every month:

On 1/16/ 03 SPX closed at 914.60 and reached an intra day low of 806.29 on 2/13/03 and bounced back to close at 837.10 on 2/20/03
Difference between intra day high and intra day low for the month = 108.31 points
All 108.31 points to the down side 0 points to the upside

On 5/15/03 SPX closed at 946.67 and reached an intra day low of 912.05 on 5/20/03 and bounced to intra day high of 1015.33 on 6/17/03 and closed at 994.70 on 6/19/03.
Difference between intra day high and intra day low for the month = 103.28
34.62 points to the downside and 68.66 points to the upside (from the close).

On 10/14/04 SPX closed at 1103.29 and reached an intra day low of 1090.29 on 10/25/04 and intra day high of 1188.46 on 11/17/04 and closed at 1183.55 on 11/18/04.
Difference between intra day high and intra day low for the month = 98.17 points
13 for the down side and 85.17 points for the upside.

(By the way I lost all my 20 point margin for this month, I was stubborn and hopeful, which is a deadly combination).

On 2/20/03 SPX closed at 837.10 and reached intra day low of 788.90 on 3/12/03 and intra day high of 879.60 on 3/20/03 and closed on the same day at 875.67.

Difference between intra day high and intra day low for the month = 90.70 points
48.20 points for the downside and 42.50 points for the upside.


These are the 4 biggest moves between the Intra day high and the Intra day low during the 37 past months . The rest of the 33 months’ difference between high and low are:

arranged according to the size of the move:



73.96
69.75
68.76
68.04
65.61
63.43
63.41
61.21
60.62
60.06
59.08
58.30
57.15
56.59
55.55
54.94
53.31
52.99
52.92
49.61
48.69
45.33
44.95
44.38
43.75
42.06
40.76
40.08
36.96
36.60
30.28
29.93
26.91


Labib Imtanes
 
Thanks for the great data and research.

Just to clarify, when I put on a credit spread, I do not need the market to be rangebound. With bull put spreads the market can go down somewhat, stay sideways, or explode higher and it all means a profit. So credit spreads can be directional to an extent.


Quote from labib52:

When we put a trade on the SPX , be it IC or credit spread, we hope that the index stays range bound . Less worry , no need to adjust, and no need to close the position with a loss. Unfortunately what we hope for and the reality are two different things.
More...
 
labib52,

Interesting .... I did a similar type of theoretical analysis a few months back on the OEX and found that opening spreads at least 30 points away from the money on day one of the option cycle provided a very good success ratio. Granted, you aren't typically opening spreads on Day One of each cycle and you're looking at very small premiums, but it provided another small piece of info to stash away in my "Trading Black Book". Slow and steady CAN win the race I suppose. :)
 
Quote from optioncoach:

Thanks for the great data and research.

Just to clarify, when I put on a credit spread, I do not need the market to be rangebound. With bull put spreads the market can go down somewhat, stay sideways, or explode higher and it all means a profit. So credit spreads can be directional to an extent.
More...

Sometimes I find that I look too hard to complete an IC after I put on one credit spread. The tempting part about the IC is that once you put on your initial position, you can put on the other side for "free" (i.e. no additional margin but you get a credit). The thing to keep in mind is that you are adding RISK to go along with the "free" margin you are using, so things aren't so "free" in reality. Right now the market has a definate bias to the upside so it may be a better play to chase the market upwards by using bull put spreads and not do any call spreads.

ryan
 
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