SPX Credit Spread Trader

I trade the SPX because it is the underlying I know best and has the most liquid options and activity, despite the annoying wide bid/ask spreads. Also the S&P index is what I follow and analyze the most and is what I am comfortable with. I know nothing about the Swiss market and I doubt I would have as much information or access to it like I would the S&P.

There are not high margin requirements for selling credit spreads on the SPX, only naked option and I never recommend selling naked options on the indexes. ALso the SPX has a nice put skew which makes it nice to trade the puts.

Finally with the SPX I have access to so many tools for hedging (XSP,SPY, SPX, ES, SP etc...).

I do not sell options on futures because right now I do not have access through my brokers. When I start prop trading i will certainly dabble in ES and SP options as well as SPX.


Quote from CALLumbus:

Coach,

if there are such high margin requirements for writing SPX options, why dont you sell options on other contracts ? I just had a quick look on the eurex-website. For example, you could sell a Feb. CALL on the SMI (swiss market index), premium would be 130€ for the 8000-Call (SMI now at 7692). For that trade, you only need a total margin of 1300€. I think for a similar premium in the SPX-options you would need more than 100.000$ margin.

So why do you only trade the SPX-options ?
just21 mentioned the ES-options. What are the advantages and disadvantages of these options, compared to the SPX-options ?
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Coach:

Just out of curiousity: Will your plan to chronicle your SPX trades differ once you start prop trading? Are you going to be comingly (sp?) your trades at the prop shop with your trades at OX/ToS when you document them here in the forum?
 
Quote from optioncoach:

1. That is why we never sell naked options on SPX, the margin requirements are way too high. Credit spreads are way better.

2. Yu Dee Chang and his cohorts are selling deep OTM naked puts on the SPX. The margin is high but they usually sell against a cash portfolio. They are managing a large sum of money so they can sell naked puts and even leverage it up with generous margin rules. As for their annulized returns, I never believe anything I read. If they are making 64% a year than they are leveraging up their accounts. Then again they only need to shoot for 6% a month with no losses to get there and if they have good margin requirements, like risk-based haircuts, then it is certainly achievable. But a lot of risk is being taken on.
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Coach,

I cannot agree with you, sorry.

Your approach to this is too general. I have been trading similar strategy myself and there is no excessive risk taken.

Also, we have done deep studies regarding spreads and naked options. Spreads are not necessarily better, it is too general assumption. It all depends on how you defend your positions when market goes against you.
 
Quote from ChrisM:

Coach,

I cannot agree with you, sorry.

Your approach to this is too general. I have been trading similar strategy myself and there is no excessive risk taken.

Also, we have done deep studies regarding spreads and naked options. Spreads are not necessarily better, it is too general assumption. It all depends on how you defend your positions when market goes against you.
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Sgreed

I sell naked puts all the time and far out of the money. I have been doing this for two years now and I have never taken any loss and very rarely I have rolled into future month. I only do near month and at expiry all my margin is free.

At the moment I use ER2 ,YM and Z . I am in search of other better products and want to move into commodities and all comments ,advise so much appreciated.. Thanks
 
Sorry I think I was not clear. I was not trying to make any general assumption but talking specifically about selling naked options v. credit spreads on the SPX. The naked option margin requirements are way to high to be done as effective as credit spreads for the retaiil account in general trading SPX. If you have risk-based margin and a large account then fine, but the average trader here does not have the capital to trade naked puts or calls and achieve the same returns on risk capital as is done with credit spreads.

I have always said that the strategy does not matter it all comes down to risk management. As long as you have that it does not matter what you trade. So naked options can be traded by those with good risk management plans and appraches.

But the larger capital requirements, greater delta/gamma and vega exposure and chance for loss greater than your allocated capital makes credit spreads, in my opinion, a better strategy for the average trader to be able to do on the SPX when selling premium is the stated goal.

You cannot make a general assumptions that credit spreads are no better without taking into consideration the level of traders we are talking about here. Since we are focused on the SPX specifically and the level of trading here, I would not recommend naked options at all.


So I do not disagree with you in general, I am just making my comments specific to the topic of this thread. With risk-based haircuts and access to multiple products and cross-margins, one can hedge naked options quite effectively. For retail traders, credit spreads on SPX are preferable.

Quote from ChrisM:

Coach,

I cannot agree with you, sorry.

Your approach to this is too general. I have been trading similar strategy myself and there is no excessive risk taken.

Also, we have done deep studies regarding spreads and naked options. Spreads are not necessarily better, it is too general assumption. It all depends on how you defend your positions when market goes against you.
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It depends on what works better lol. But that is still a few weeks out so we will see ;). Many of you may want to still follow along with retail trades but for those that are interested I can relate my prop experience since it will be new for many of us.


Quote from rdemyan:

Coach:

Just out of curiousity: Will your plan to chronicle your SPX trades differ once you start prop trading? Are you going to be comingly (sp?) your trades at the prop shop with your trades at OX/ToS when you document them here in the forum?
More...
 
Quote from osho67:

Sgreed

I sell naked puts all the time and far out of the money. I have been doing this for two years now and I have never taken any loss and very rarely I have rolled into future month. I only do near month and at expiry all my margin is free.

At the moment I use ER2 ,YM and Z . I am in search of other better products and want to move into commodities and all comments ,advise so much appreciated.. Thanks
More...

Two years? You've been doing this for two years? OMG. You post long enough on ET and I guess you see just about everything. I'm sorry, but I find it laughable that two years qualifies as experience. I've been in this business a little longer and I will tell you were 99% of naked option sellers end up. Broke. Of course it only happens every 5 to 10 years. But the rub is, you don't know how close you are to that day. It could be tomorrow, it could be 8 years from now.
 
Quote from optioncoach:

I

You cannot make a general assumptions that credit spreads are no better without taking into consideration the level of traders we are talking about here. Since we are focused on the SPX specifically and the level of trading here, I would not recommend naked options at all.


So I do not disagree with you in general, I am just making my comments specific to the topic of this thread. With risk-based haircuts and access to multiple products and cross-margins, one can hedge naked options quite effectively. For retail traders, credit spreads on SPX are preferable.
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Agree,

naked options are different vs. credit spreads, not better. If you know how to combine naked puts (at this point they are not precisely naked) with other options and how to convert them in case of disaster your benefits might be fully comparable to credit spreads, or even better.

Still cannot agree on SPX. There are other ways of approaching this, besides credit spreads.
Besides trading our program now, we have been working to enginner another option program, based on credit spreads. My problem at the moment is that in the end of the day, it brings worse results, because to achieve similar profitability level I have to sell them closer to ATM.

Regarding margin - is high, but you can manage. We manage margin in similar way as traders manage risk. There are ways of lowering margin - e.g. using additional potions.

Talking about retail traders - I could grow 10K accounts, so this is not necessarily a problem. I use large S&P and ES now, but due to liquidity rather, than other reasons.
 
Quote from Maverick74:

Two years? You've been doing this for two years? OMG. You post long enough on ET and I guess you see just about everything. I'm sorry, but I find it laughable that two years qualifies as experience. I've been in this business a little longer and I will tell you were 99% of naked option sellers end up. Broke. Of course it only happens every 5 to 10 years. But the rub is, you don't know how close you are to that day. It could be tomorrow, it could be 8 years from now.
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Maverick,

good to see you back :)
Regarding your example - I think you know AIM managed by Max Ansbacher ? He sells naked puts and calls and has performance record of over 10 years length.
Had losing year though (I think 2000), but still in business.
 
Quote from ChrisM:

Maverick,

good to see you back :)
Regarding your example - I think you know AIM managed by Max Ansbacher ? He sells naked puts and calls and has performance record of over 10 years length.
Had losing year though (I think 2000), but still in business.
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He is part of the 1%. And you are leaving out the fact the guy has 200 million dollars. His returns have been borderline pathetic the last few years. I don't think most ETers are trading 200 million dollar accounts and I don't think most ETers are trying for 7% to 9% a year returns. Apples to oranges.
 
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