SPX Credit Spread Trader

Two clarifications on two points you made:

"-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 the market moves against you the short option in a 20-point spread will gain a lot more than the long option which is now further OTM. SO if you roll up 20 points you are selling another spread even deeper OTM and the net cost to roll miught be quite high. In other words you will pay a lot to close that spread and since you are going 20 points OTM you might get less than rolling up 5 or 10 points. Not a pro or con, just a consideration when using wider spreads. The long option is much further OTM and and works less to offset delta and vega. The flipside is you get mroe credit when the position is opened. These have to be weighed against each other to see if the wider spread still fits your parameters.

"-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."

A short option is going to hurt you if it is ITM after a SET no matter how wide the spread is. Whether the spread is 5 points or 20 points, a move 5 points ITM on SET will hurt both positions equally. A narrow spread will at least get help from the long option to limit the risk sooner from a large move ITM. A wide spread will need a deeper move ITM on a SET for the long option to offset any losses. If you put the same amount of margin in both positions ($10,000), then there might be a noticeable difference between the two but of course it has to be examined in detail each time you analyze possible positions.


Wider spreads may allow you to roll the short one or two times before moving the whole spread so that does provide more choices.

Basically you have to realize that the wide spreads v. narrow spreads is just a weighing of the pros and cons of both and choosing the one that best meets your criteria. Both are valid positions but the difference really is personal when choosing one over the other IMHO.


Quote from 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.
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Thanks for the response Coach. I understand what you're saying; you can't make blanket statements everything needs to be analyzed. I wanted to make sure I wasn't missing anything.

In looking at the current prices, it looks you could double and roll a 20 pt spread, but anything wider than that doesn't work (if i look at what would happen if you I had 1270/1290 and wanted to roll to a 1290/1310).

When I was talking about being "hurt" by a set, yes, I meant when comparing identical margin. I guess my thought was that in cases where you can get a similar return for a wider vs narrow spread, the wider spread will "hurt less" for each point it goes ITM (given the same margin).


Quote from optioncoach:

Two clarifications on two points you made:

"-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 the market moves against you the short option in a 20-point spread will gain a lot more than the long option which is now further OTM. SO if you roll up 20 points you are selling another spread even deeper OTM and the net cost to roll miught be quite high. In other words you will pay a lot to close that spread and since you are going 20 points OTM you might get less than rolling up 5 or 10 points. Not a pro or con, just a consideration when using wider spreads. The long option is much further OTM and and works less to offset delta and vega. The flipside is you get mroe credit when the position is opened. These have to be weighed against each other to see if the wider spread still fits your parameters.

"-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."

A short option is going to hurt you if it is ITM after a SET no matter how wide the spread is. Whether the spread is 5 points or 20 points, a move 5 points ITM on SET will hurt both positions equally. A narrow spread will at least get help from the long option to limit the risk sooner from a large move ITM. A wide spread will need a deeper move ITM on a SET for the long option to offset any losses. If you put the same amount of margin in both positions ($10,000), then there might be a noticeable difference between the two but of course it has to be examined in detail each time you analyze possible positions.


Wider spreads may allow you to roll the short one or two times before moving the whole spread so that does provide more choices.

Basically you have to realize that the wide spreads v. narrow spreads is just a weighing of the pros and cons of both and choosing the one that best meets your criteria. Both are valid positions but the difference really is personal when choosing one over the other IMHO.
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rjg...I did several 15pt spreads and it did give the flexibility to roll up but remember you will need to keep margin in reserve in case you need to roll, it is also much more expensive (obviously) to close than just a 5 pt spread....and I would think twice before selling the 1310 with almost 5 weeks left... I have a 1325/1335 which I haven't a clue is "safe"
Quote from 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.
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For anyone interested:

Phil seems to never tire of answering the same questions over and over and over and over and over again...is that why this journal is the longest on ET? Hmmm....food for thought.

Anyway, I'm not berating anyone for asking this question :) There is no such thing as a stupid question on this thread!

Here's one prepared earlier:

http://www.elitetrader.com/vb/showthread.php?s=&postid=868115&#post868115

Interestingly, if you have followed this saga/epic since the beginning you may recall that Phil predominantly used to use 10, 15 and 20 point spreads and it seems only more recently, perhaps using ToS to call down to the crowd, that he has utilized the better return on margin aspects of 5 point spreads...but I'm just speculating.

I believe one of the first posts from someone was questioning the use of 15 points spreads and favoring 5 point spreads instead! So now we have the opposite question being posed.

Although this has been discussed a few times on this thread before, I believe the main points to grasp other than return on margin and commission issues, are that the narrower the spread, the more the short leg is hedged by the long leg.

When the strikes are close together, both options will decay at similar rates - this can be extrapolated to the other greeks too. On the PUT side, the wider the spread, the more the skew is arguably working against you.

The implications of the above are numerous, and one needs to perform his/her own what-if/stress test analysis to see how this plays out under various circumstances and come up with what fits within each person's risk and comfort zone. Deciding purely based on credit, margin and commissions would be missing some vital aspects IMHO.

In addition, one has to look at the strike width in relation to the index size if you happen to be trading instruments other than SPX.

MoMoney.

Quote from 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.
More...
 
Just to clarify I am not wedded to one strike spread or the other. I go where the money and return is and where I can get the best fill. Last month had 5- poont spreads but do not forget my JAN position has 10-point spreads (1165/1175 JAN Puts) and that my NOV positions were 15-point spreads ;).

I see no reason to pre-determine my spread distance. I grab what looks the best given the spread premiums and let it run. I have used 5, 10 and 15 point spreads all year long with no specific preference for either.
 
Good call :D

Quote from Sailing:

Mo..

The OEX 565/580/595 paid off big also...

I've been entering these FLYs with just over two weeks remaining in the contract....

It's been interesting to say the least.

Murray
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Premium really got sucked of the market today. The mid on the put spread I am trying to get filled has actually dropped with the market going down.

ryan
 
Quote from ryank:

Premium really got sucked of the market today. The mid on the put spread I am trying to get filled has actually dropped with the market going down.

ryan
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...sucked OUT of...
 
Quote from ryank:

Premium really got sucked of the market today. The mid on the put spread I am trying to get filled has actually dropped with the market going down.

ryan
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Strip-vols have increased slightly. I think the MM's are simply a little hesitant buying gamma into the holiday.
 
Dude, you realise you can edit your posts after you've sent it out into the ether? It's all like hi-tech and stuff. Superb for revisionist historians like me.

I do it all the time, you should see the nonsense I write the first time around.

Quote from ryank:

...sucked OUT of...
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