SPX Credit Spread Trader

[RichardRimes]

Reading coach's cef thread and looking at the cefa.com link provided read a very interesting stat

Average absolute monthly change in the s&p 500

2001....4.3
2002....4.0
2003....4.5
2004....2.1
2005....2.1 (to date)

thoughts? I guess thats why OTM IC's are working this year....

 

[andysmith]

Donna,

Actually, if you read some of the materials from Anbacher, Chang,... and other index premium selling funds, you'll see that 2001, 2002 and 2003 were great years for premium selling -- much better than right now. Even though the absolute monthly change was much higher back then, so was VIX -- which meant you could go much father OTM (relatively) than you can in 2005 and still bring in the same credit.

The situation to watch out for right now is if the monthly (or daily) range increases suddenly, and you have an IC already on which was sold prior to the range expansion for a very low credit...

Quote from DonnaV:

Reading coach's cef thread and looking at the cefa.com link provided read a very interesting stat

Average absolute monthly change in the s&p 500

2001....4.3
2002....4.0
2003....4.5
2004....2.1
2005....2.1 (to date)

thoughts? I guess thats why OTM IC's are working this year....

 

[RichardRimes]

They certainly were...I did so much better with CC back then the past two years call prem's dried up....and again your correct if that range starts to suddenly expand watch out!

Quote from andysmith:

Donna,

Actually, if you read some of the materials from Anbacher, Chang,... and other index premium selling funds, you'll see that 2001, 2002 and 2003 were great years for premium selling -- much better than right now. Even though the absolute monthly change was much higher back then, so was VIX -- which meant you could go much father OTM (relatively) than you can in 2005 and still bring in the same credit.

The situation to watch out for right now is if the monthly (or daily) range increases suddenly, and you have an IC already on which was sold prior to the range expansion for a very low credit...

 

[andysmith]

I was checking out some JAN 1200/1190 puts spreads today -- there's hardly any credit there and yet it's only 70 points below the current market (and 70 points is not that much since that was the size of the move in Oct).

I might just resort to buying calls/puts/strangles... until vol goes up a bit! Anyone doing any calendars?

Quote from DonnaV:

They certainly were...I did so much better with CC back then the past two years call prem's dried up....and again your correct if that range starts to suddenly expand watch out!

 

[El OchoCinco]

Remember this is not an Iron Condor thread so the focus is not that OTM ICs are doing well, it is credit spreads are doing well. Even if the volatility picks up you should still be able to do well simply going further OTM. That is why studying the market and using as many analytical tools as possible as well as risk management is important. If the market is exploding in an up year I simply stick with OTM puts like I am doing now for JAN and possibly FEB. The large unexpected move is always a possibility but you have to use risk management to ensure that it does not blow up your entire account.

Quote from DonnaV:

Reading coach's cef thread and looking at the cefa.com link provided read a very interesting stat

Average absolute monthly change in the s&p 500

2001....4.3
2002....4.0
2003....4.5
2004....2.1
2005....2.1 (to date)

thoughts? I guess thats why OTM IC's are working this year....

 

[andysmith]

Coach,

Several newsletters I subscribe to seem to indicate that there's not too much upside left in the short term.

My own analysis also indicates the same -- look at a weekly chart of SPX and draw the channel over the last few months. It looks like SPX is at the peak of its cycle, ready to roll down.

Quote from optioncoach:

If the market is exploding in an up year I simply stick with OTM puts like I am doing now for JAN and possibly FEB.

 

[gatorplease]

Quote from andysmith:

Donna,

Actually, if you read some of the materials from Anbacher, Chang,... and other index premium selling funds, you'll see that 2001, 2002 and 2003 were great years for premium selling -- much better than right now. Even though the absolute monthly change was much higher back then, so was VIX -- which meant you could go much father OTM (relatively) than you can in 2005 and still bring in the same credit.

The situation to watch out for right now is if the monthly (or daily) range increases suddenly, and you have an IC already on which was sold prior to the range expansion for a very low credit...

EXCELLENT POST!

We're doing some calendar spreads in the Cal Sprds board. Check it out:

http://www.elitetrader.com/vb/showthread.php?threadid=58716&perpage=6&pagenumber=1

I'm trying to learn to leg into calendars in this environment. Bought some Feb IWM puts on a projected rollover (wow, I actually saw one coming for a change!), will sell the Jan's when I see a short term bottom.

I would love to hear MORE about others particular strategies for the current environment.

GATOR

 

[El OchoCinco]

I could see us pulling back of these new highs but I do not see a huge drop back to 1200. I think going into the new year the range has shifted higher somewhat.

Quote from andysmith:

Coach,

Several newsletters I subscribe to seem to indicate that there's not too much upside left in the short term.

My own analysis also indicates the same -- look at a weekly chart of SPX and draw the channel over the last few months. It looks like SPX is at the peak of its cycle, ready to roll down.

 

[rjg96]

What do you guys think of using wider spreads (say 15 or 20 pts rather than 5 or 10), even when these spreads don't give a higher yield than the tighter ones. For example, instead of selling the 1310/1320 for about .9, sell the 1310/1330 for 1.3. Yes, you're getting slightly lower return, but it seems to me that you're gaining:
-the ability to instantly double and roll-up 20 points at a time if the market moves against you. This might also give you the comfort to open a position that's less OTM, because you could roll it up easily if the need arose.
-If for some reason, you did hold the position into SET, and it closed in the money, every point ITM would do less damage than it woudl with a tigher spread.

Suppose we compare what would happen if:
-you wanted to risk an initial 10k of margin writing an OTM call spread
-You have up to 80k of margin that you're willing to use

With a 1325/1330, you could get about .15, which would get you about $300 for that 10k.
-If the market moved against you, you could roll up a maximum of 3x, getting you to a 1340/1345 position.

With a 1310/1330, you'd get about $650 for your 10k.
-if the market moved against you , you coudl roll up to a maximum of 3x, getting you to a 1390/1410 position.

It seems me that you're gaining the chance to get a higher return, while giving yourself a much larger "escape hatch" if things go wrong.

 

[El OchoCinco]

Well with DEC expiration is in the books and I was making some preliminary annual return calculations for the credit spreads. Now the profits are easy to calculate because I just added up all my premiums/profits minus commissions and included partial hedges. I used SPX, XEO, OEX, SPY and XSP for the year and netted all those together.

The harder part was determing on what margin amount that return was earned. Going back to the first few months of April - June, I was using margin of $200K and under. Same for most of the summer. The last few months I had gone up to $250K although DEC was only $200K. Without spending a tedious amount of time of averaging my maring used per week or month I decided to present all numbers and simply let you choose or take what you wish. Partial hedges have reduced the profits in some months but also saved me in two months so they serve a purpose.

I di this so no one can say I am padding or skewing my numbers. I assume based on quick reviews that my average margin used through the year was between $200k and $250K. Total portfolio return depends of course on how much of it is in this strategy. Based on profits as of 12/19 my net profits (after commissions and factoring in partial hedges) are as follows:

2005 Prelim Results.

Assuming $200K avg. margin: 25.9%
Assuming $250K avg. margin: 20.7%

Split the difference if you wish: 23.3%


Naturally I am quite pleased and 20% is a target for me for return on margin. I hope you all have had success, even if that success is more based on trading knowledge acquired. We can fix the monetary profits in 2006 . Feel free to share your returns and experiences and personal opinions. Throughout the next week I will post random observations nad lessons learned as I review my trades for the year. Now is the time to do that and take your lessons learned into 2006.