SPX Credit Spread Trader

[momoneythansens]

As you say, a lot of info gets buried on this thread.

If folks are interested I believe he has a PDF only version of the new book (no printing though grrr...) for $22.95 which is worth it IMO.

He certainly is interesting and has some hilarious anecdotes from when he was a floor trader. I'm sure you'll hear about them.

My fear with risk based haircut is that it takes away the limiting factor that prevents one from putting on ridiculous position sizes. Not a problem for you with your risk management skills but certainly I would be worried about it for me!

For IC fans, the double pregnant fly is also quite nice. Again, similar to what riskarb, GATrader and many others have described here and on other threads/forums:

1) Put on your IC as normal.
2) Buy some ATM straddles (ratio up to you, perhaps even spending as much as your IC credit)
3) By taking advantage of the almost inevitable movement of the underlying, convert the long straddle into a short butterfly as cheaply as possible. Or in other's terminology, "build up free hedges".

This is nice because you are virtually guaranteed that the underlying will move therefore allowing you to drastically reduce the cost of the straddle whilst increasing profit potential/reducing risk. You're playing the probability that it won't move enough to make your IC a loser, but at the same time that it will move enough to reduce your straddle cost. It's a play on "sigmas" if you will. Again, this is all very similar to what you are actually doing with your SPY hedges etc. just another way of looking at it.

Anyway, I'm not supposed to be on this thread, just couldn't help noticing that people were on here at the weekend and yesterday! Take a day off.

MoMoney.

Quote from optioncoach:

Mo:

re-reading GATrader replies it was lost on me but reading further he was quoting Cottle so I guess I just needed to hear it from the horse's mouth- Cottle himself LOL. So apologies to GATrader and you if I missed it.

In fact Cottle explained it to me by laying it out on his laptop with strikes and demonstrating the breakdown so it made it a lot clearer. Cottle is quite interesting and I truly enjoyed chatting with him at length (we were both invited to a Chartbender.com symposiun on option trading-

http://www.chartbender.com/cboss.aspx )

Great news on Cottle, he is taking all the info from Coulda Woulda and Shoulda and re-publishing it in a new book with even more info. It is coming out end of this month. If enough of you are interested I could maybe get a discount for a group or if you mention me as a referral (nothing back for me, just to get you a better price than the proposed $79.99 price of 430 pages) hardcover and in COLOR.)

Anyway, one of the reasons I am looking forward to risk based haircuts, is that rolling into the Prego Fly will reduce my haircut to the net debit and then I can sell further OTM credit spreads to finance that and have a FLY at no cost (still risk since I added another credit spread). However as an adjustment it allows for huge returns if the index enters the Prego Fly' belly and I can adjust the new credit spread the same way and keep taking my risk off the table and reducing it.

 

[El OchoCinco]

You are correct. In the example I am citing I would not cover the full net debit of the adjustment from selling a deeper OTM spread but would certainly like at least half. THis would further reduce the limited loss I would take if the market rversed higher and everything expired worthless. If market fell hard, I could probabably take the whole mess off for a profit under right circumstances (i.e. closer to expiration where Uncle Theta would be in town).

The point would be that when the water was rising and getting closer to my house, instead of some sandbags I would drop a 10' tall concrete wall. Some water might splash over the wall from the current but the house would be safe .

Phil

Quote from ryank:

And to add to that Coach, you also said you would look at putting on a deep OTM put credit spread to help finance the debit position you just created. Not sure if you could get all of the $7,000 or not, depends on many things.

ryan

 

[ryank]

Quote from momoneythansens:

As you say, a lot of info gets buried on this thread.

If folks are interested I believe he has a PDF only version of the new book (no printing though grrr...) for $22.95 which is worth it IMO.
MoMoney.

Free Download Of Charles “Risk Doctor” Cottle’s
book Coulda, Woulda, Shoulda

Go to http://www.riskdoctor.com/books.html

ryan

 

[El OchoCinco]

The question of when to impregnante the FLY would come down to the following:

1) First and foremost would depend on market action. The market would have move such that some strong support/resistance levels were broken and the moves woul dhave to be significant (i.e. no little poke throughs but real breakdowns.) Good examples are post-Katrina collapse and pre-Thanksgiving surge higher.

2) Expectation that the move could bring the index close to my short strikes. If support breaks but I have two very strong support levels on the charts and I am still far OTM with little time left, I will just let theta do its job. However if the threat is real, then sound the horn!

3) I would price all the different variations and see which gave me the best net debit and which gave me also a potential for some profit of the market kept moving. For example, if I have 100 of the 1190/1200 put credit spreads, I will look at 50 1220/1200 spreads, 25 1240/1200, 10 1300/1200 spreads and everything in between. If the market is down to 1255 I would probably like the 1240/1200 spread to add on since another 20 point drop creates the potential for profit as compared to the 1220/1200 spreads which would need much large drops. It is all trade off with no right answer.

4) Time to expiration, more time and stronger moves would make me more inclined to hedge over strong move and really short time to expiration.

I do not have rigid rules but these are great guidlines.

Quote from Heatheranderson:

Optioncoach
Thanks for sharing this strategy with us.I have a question, though.At what point would you put on this debit spread.I mean, if we take your example.when the market enters 1240 or before that?.

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If you want a real life example, assume you got 100 1190/1200 for $0.45 and want to add 25 of the 1240/1200 bear put spreads to roll into the FLY. When I last priced it I believe it would be a net debit of $7,000. So you go from risking $95,500 to make $4,500 to risking $7,000 to make $93,000.

The point is that you just do not put it on at anytime. It is when you think the pending market moves could potentially put your spread in danger. So it is a "Break Glass in Case of Emergency" approach.
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[El OchoCinco]

I think you will want the new book which incorporates all of that info and more and is updated. I am looking forward to my copy when it comes out in 2 weeks. He told me the new book has more than his original work which you can get on his site. Maybe if enough of you are interested I can get some sort of discount (it is self published and sold directly by him).

Quote from ryank:

Free Download Of Charles “Risk Doctor” Cottle’s
book Coulda, Woulda, Shoulda

Go to http://www.riskdoctor.com/books.html

ryan

 

[El OchoCinco]

My desire for risk-based haricuts is that brokers do not recognize the limited risk, non-margin nature of FLYs unless they are equidistant in strikes. I most likely can call in to compliance at OX or ToS and they can treat it that way but risk-based haricut would automatically drop the trade requirements down to almost nothing. This is most useful when then selling further OTM spreads to bring in more credit as the Prego Fly will then work to reduce the haircut on the new credit spread as the profits up to a certain % move in the index will offset the margin. Thus I can achieve more for less and better manage the risks.

Quote from momoneythansens:

As you say, a lot of info gets buried on this thread.


My fear with risk based haircut is that it takes away the limiting factor that prevents one from putting on ridiculous position sizes. Not a problem for you with your risk management skills but certainly I would be worried about it for me!

For IC fans, the double pregnant fly is also quite nice. Again,

 

[momoneythansens]

Just so there's no confusion (my fault):

The original "Coulda, Woulda Shoulda" PDF download is still available and FREE from the site. This is worth reading whilst you wait for the new book if you haven't read it before.

The new book "Option Trading: The Hidden Reality" is available in two formats:

1) PDF-only. Non-printable for $29.95
2) Color hardcopy for $79.95 available from Feb 1st. This is what Phil is presumably offering to negotiate a discount for.

All details from the page Ryan pointed out: www.riskdoctor.com/books.html

I have to say the new book has slightly gratuitous use of 3D graphs which takes up a lot of pages! JMO. And a lot of the additional info that it contains over CWS is/was available in the forums as separate papers e.g. the Slingshot article. Still, is probably nicer to have everything in one place in the new book.

MoMoney.

Quote from ryank:

Free Download Of Charles “Risk Doctor” Cottle’s
book Coulda, Woulda, Shoulda

Go to http://www.riskdoctor.com/books.html

ryan

 

[El OchoCinco]

Mo:

You are right on the 3-d charts there. He was showing us the book on his computer in word form and there would be bunches of pages with 3-d charts and were joking it looked like Tron.

The value added is having it all in one book together with whatever new points he added. The 3-d color charts in addition to the 2-d charts are just fun to look at when you are drunk.

Quote from momoneythansens:

Just so there's no confusion (my fault):

The original "Coulda, Woulda Shoulda" PDF download is still available and FREE from the site. This is worth reading whilst you wait for the new book if you haven't read it before.

The new book "Option Trading: The Hidden Reality" is available in two formats:

1) PDF-only. Non-printable for $29.95
2) Color hardcopy for $79.95 available from Feb 1st. This is what Phil is presumably offering to negotiate a discount for.

All details from the page Ryan pointed out: www.riskdoctor.com/books.html

I have to say the new book has slightly gratuitous use of 3D graphs which takes up a lot of pages! JMO. And a lot of the additional info that it contains over CWS is/was available in the forums as separate papers e.g. the Slingshot article. Still, is probably nicer to have everything in one place in the new book.

MoMoney.

 

[momoneythansens]

Hmm, I think I understand what you're saying but do you not think that the risk based haircut in your example might encourage someone with less appreciation for the risks to increase the size of that new further OTM spread? As the haircut changes with movement in the underlying, if it moved to a point where it was past the fly, the haircut could grow quite quickly...larger than one was prepared to take on. This could not happen with Reg-T.

Perhaps I'm missing something. I'm certainly all for risk-based haircut and the potential better bang for the buck that it brings to the table. Just not sure I would trust myself with it indefinitely.

MoMoney.

Quote from optioncoach:

My desire for risk-based haricuts is that brokers do not recognize the limited risk, non-margin nature of FLYs unless they are equidistant in strikes. I most likely can call in to compliance at OX or ToS and they can treat it that way but risk-based haricut would automatically drop the trade requirements down to almost nothing. This is most useful when then selling further OTM spreads to bring in more credit as the Prego Fly will then work to reduce the haircut on the new credit spread as the profits up to a certain % move in the index will offset the margin. Thus I can achieve more for less and better manage the risks.

 

[El OchoCinco]

Well if I can quote from my legal profession citing hearsay, I cannot accurately testify as to what someone else would do in a situation, only what I could do. Reg. T was not intended to protect you, it was to protect the brokers lol. The haircut could never be any bigger than the max loss of the position so as long as you do not expose yourself to a maximum loss greater than your capital, the haircut cannot eat you up. So if I have $100,000 and use haircut risks, as long as I never do more than $100,000 of credit spreads, the haircut does not make my trading riskier, it just requires less capital/margin up front.

So the risk management approach should not be changed, in fact risk management should be improved because the haircut actually takes into account what you could REALLY lose as opposed to simply applying margin requirements blind. So if I add hedges to a credit spread, the margin in retail accounts does not change but the haircut recognizes I have reduced my risk so my real loss is reduced. I think the haircut is more realistic in that sense.

Any trader could abuse his margin allowance and blow himself up whether it be Reg T or risk-based haircut (Under Reg. T you could short stock and get wiped out on a large unexpected move).

Quote from momoneythansens:

Hmm, I think I understand what you're saying but do you not think that the risk based haircut in your example might encourage someone with less appreciation for the risks to increase the size of that new further OTM spread? As the haircut changes with movement in the underlying, if it moved to a point where it was past the fly, the haircut could grow quite quickly...larger than one was prepared to take on. This could not happen with Reg-T.

Perhaps I'm missing something. I'm certainly all for risk-based haircut and the potential better bang for the buck that it brings to the table. Just not sure I would trust myself with it indefinitely.

MoMoney.