SPX Credit Spread Trader
- Thread starter El OchoCinco
- Start date
closed Jan spx 1290/1300 call
profit: 2%
This was put on as a directional trade. I was hoping to close with more of a profit if the index went to about 1245, but the SPX seems to be holding above 1250 with upside potential.
When you buy at the bottom of the volatility skew (volatility graph looks like a smile).
If the index price goes down, the option still retains/gains value as volatility increases. If the index goes up, the option gains value because of price and volatility. Is this reasoning correct???
Is buying the strike with the lowest volatility in the skew (smile shaped) a good choice?
(The last time I bought the Dec. 580 call with the lowest volatility in an expected uptrend of the index, that call went up 7X)
profit: 2%
This was put on as a directional trade. I was hoping to close with more of a profit if the index went to about 1245, but the SPX seems to be holding above 1250 with upside potential.
When you buy at the bottom of the volatility skew (volatility graph looks like a smile).
If the index price goes down, the option still retains/gains value as volatility increases. If the index goes up, the option gains value because of price and volatility. Is this reasoning correct???
Is buying the strike with the lowest volatility in the skew (smile shaped) a good choice?
(The last time I bought the Dec. 580 call with the lowest volatility in an expected uptrend of the index, that call went up 7X)
Coach, we need a correction here.If the index is less than 5 points from the short strike on Thurs. there is no way to get out for .05 It more likely will cost you several times the credit received and you will get out at a loss.
That may tempt some to hang on and hope for the best. What happened last month could easily happen again.
On Thurs. expiration, Nov. 17 the SPX opened the day at 1231, closed at 1242, and the set the next morning was 1254. No position was safe unless it was at least 24 pts away from the Thurs. open.
I'm a little wary of the FOMC meeting tomorrow (to the upside that is) so here is what I did:
Had a 1300/1310 call spread I put on a few weeks ago. I bought back the 1300 call for .10 today (I usually look to close out my spreads for .05-.10 anyway) leaving myself with a "mini-lottery ticket" being long the 1310 call. I am looking for good news tomorrow with retail reporting and the Fed announcement (maybe just a brief relief rally in the afternoon) and sell my calls for some small change. I probably won't make any more profit this way than if I let my spread expire but I generally don't wait until expiration anyway and doing it this way seemed interesting. Got to keep myself amused somehow (other than thinking about Jennifer Alba)
I will also look to close my puts tomorrow and move into January positions by the end of the week.
ryan
Hart:
I'm not sure, but if you wait until the last hour on Thursday and your short strike is 5 to 10 points away, you might be able to close it for a nickel or a dime even if you just have to buy back the short strike and forget trying to sell the long. I know I have done this in the past, but I don't have detailed records on where the SPX was relative to my short strike. Still if I was far away I would have let it expire, I think. Therefore, I'm thinking the SPX must have been close enough to cause me concern.
I think that this is an important point and it would be nice to see if anyone has any real-world experience. I'm talking about getting out in the last hour or so on Thursday expiration. I'm pretty sure I have still seen reasonably large credits on some of my past OTM credit spreads on Thursday morning only to have these rapidly disappear by the last hour (SPX was reasonably flat so it didn't appear to be the result of a big move on the SPX).
I just don't remember, didn't carefully document it and haven't had it happen recently. But I would like to know if what I think happened is reasonably correct.
I'm not sure, but if you wait until the last hour on Thursday and your short strike is 5 to 10 points away, you might be able to close it for a nickel or a dime even if you just have to buy back the short strike and forget trying to sell the long. I know I have done this in the past, but I don't have detailed records on where the SPX was relative to my short strike. Still if I was far away I would have let it expire, I think. Therefore, I'm thinking the SPX must have been close enough to cause me concern.
I think that this is an important point and it would be nice to see if anyone has any real-world experience. I'm talking about getting out in the last hour or so on Thursday expiration. I'm pretty sure I have still seen reasonably large credits on some of my past OTM credit spreads on Thursday morning only to have these rapidly disappear by the last hour (SPX was reasonably flat so it didn't appear to be the result of a big move on the SPX).
I just don't remember, didn't carefully document it and haven't had it happen recently. But I would like to know if what I think happened is reasonably correct.
Quote from Hart9000:
If the index is less than 5 points from the short strike on Thurs. there is no way to get out for .05 It more likely will cost you several times the credit received and you will get out at a loss.
That may tempt some to hang on and hope for the best. What happened last month could easily happen again.
On Thurs. expiration, Nov. 17 the SPX opened the day at 1231, closed at 1242, and the set the next morning was 1254. No position was safe unless it was at least 24 pts away from the Thurs. open.
Chrdso,
If you're talking about simply going long a call for example, then yes, buying ATM which will be at the bottom of the smile might be considered wise from an IV point of view. If you buy further OTM then as the underlying rises the option slips down the smile which might offset any delta benefits.
So it's all a balance between delta/gamma/IV of the relevant option series etc. so always buying the lowest IV is not neccessarily what you really want.
Indices like SPX tend to have less of a smile and more of a skew, generally speculated as a consequence of downward pressure from institutional put buying, covered call selling or both i.e. collaring etc.
You will get more of a smile closer to expiration though where IV of OTM options imply a higher probability of finishing ITM than reality usually turns out, but I digress.
Momoney.
If you're talking about simply going long a call for example, then yes, buying ATM which will be at the bottom of the smile might be considered wise from an IV point of view. If you buy further OTM then as the underlying rises the option slips down the smile which might offset any delta benefits.
So it's all a balance between delta/gamma/IV of the relevant option series etc. so always buying the lowest IV is not neccessarily what you really want.
Indices like SPX tend to have less of a smile and more of a skew, generally speculated as a consequence of downward pressure from institutional put buying, covered call selling or both i.e. collaring etc.
You will get more of a smile closer to expiration though where IV of OTM options imply a higher probability of finishing ITM than reality usually turns out, but I digress.
Momoney.
I still don't know WHO Jessica Alba is and refuse to google her (no more pic's please) I would ask for equal beef-cake but am afraid of what I might receive
C'mon Donna, you know you're going to click the link...
http://www.cfox.com/shared/corus_content/cfoxfm/images/general_content/jessica-alba-0105-003.jpg
http://www.cfox.com/shared/corus_content/cfoxfm/images/general_content/jessica-alba-0105-003.jpg
Coach,
Excellent thread as far as discussion, examples, and actual trades go. Some very insightful information from multiple members. Correct me if mistaken, isn't it now Quadruple witching with the expiration of SSF added to the above mix. BTW, SSF = Single Stock Futures.
Take Care, Trade Well, Give Back, and God Bless!
Kelly
P.S. Simple is good and most accurate in this instance I believe.