Trading credit spreads

[Ironplates]

It appears that risk control is more about the rolling and the adjustments.

I may have found .10 and bought some clues.

Building around the premise of covered writes and married puts inherently vertical spreads in and of themselves.

If I am long premium, I will risk less to make more with time against me.
If I am neutral premium, time decay will not be such an issue
If I am short premium, I will risk more to make less with time on my side.

There can be an illusion that credit is better, when maybe it may be more risk some times more than others.

Roll options closer to the strike for more firepower or Roll options farther away to collect premium and avoid assignment.

Up next to learn about "Gamma Scalping" and strangles, gut strangles.

 

[daninemonic]

I trade credit spreads but I use a different strategy. You can find many useful videos in tastytrade.com about strategies for selling premium. Take a look as it will help you see what other people are doing.

In short, the most typical strategy is to sell credit with 30 to 50 days to expiration, around 15 to 20 deltas (1 SD), manage winners after 50% profit and losers after you've lost double the credit.

 

[rickty]

I trade credit spreads but I use a different strategy. You can find many useful videos in tastytrade.com about strategies for selling premium. Take a look as it will help you see what other people are doing.

In short, the most typical strategy is to sell credit with 30 to 50 days to expiration, around 15 to 20 deltas (1 SD), manage winners after 50% profit and losers after you've lost double the credit.

You know that the tastytrade way is not to use a stop loss on defined loss trades since the probability of touch is twice the probability of ending up ITM. Do you have any objective results that indicate your approach is better?

 

[daninemonic]

Yes, and I don't use a stop loss. I monitor the positions daily.

My comment about a different strategy was in relation to this comment from the first post "I am trading sometimes weeklys, 3-2-1-0 days before expiration on 5 or 20 minute periodicity. " since I don't use short term options.

I was not saying that my method is better than anyone else's. I was only providing information for a different approach.

 

[OTM-Options]

I trade credit spreads but I use a different strategy. You can find many useful videos in tastytrade.com about strategies for selling premium. Take a look as it will help you see what other people are doing.

In short, the most typical strategy is to sell credit with 30 to 50 days to expiration, around 15 to 20 deltas (1 SD), manage winners after 50% profit and losers after you've lost double the credit.

In theory that might work and it does make good reading material. But in real market/physiology conditions when money is at stake the outcome will be much different. Some points to ponder:

• 30 to 50 days is way too much time to be exposed to after hour spikes.
• Forget the option greek hokus-pokus nonsense. The underlining either moves in your direction or it doesn't, no amount of option greek BS is going to change that.
  
• Options are too volatile to set 50% profit/loss parameters to exit. You can be down 90% one day then up 100% the following day.

 

[daninemonic]

I don't necessarily think that this is the way to look at it:

1. 30 to 50 days is way too much time to be exposed to after hour spikes.
2. Forget the option greek hokus-pokus nonsense. The underlining either moves in your direction or it doesn't, no amount of option greek BS is going to change that.
3. Options are too volatile to set 50% profit/loss parameters to exit. You can be down 90% one day then up 100% the following day.

1. When you use 30 to 50 days, the option will be so far from the current price that you don't care about after hour spikes or day to day moves. Depending on the conditions, I may be 5% to 10% out. In my case, I like to use the RSI indicator to enter at the extremes, giving me a good chance that the stock will not move 'fast' against me. Example: I entered a call spread on GDX a week ago when the RSI got to 70. The price has moved up and down and it's now where it started. If I had had a smaller time frame, I would've have to care about daily moves.

2. I don't disagree but I find the delta useful to know how far I can get, how much I can get paid and to make my position neutral if I want to. Also to know how much the option can move.

3. This is not correct in longer terms. The options spreads 50 days out with low deltas are going to move very little every day and your account will barely move if you're delta neutral (eg. iron condor). This is evident if I have a spread +5% of the price and another -5%. The stock would have to move 10% every day for me to be -90% and then +100% as you say, but if the stocks moves 10% each day, the options are going to be so expensive that I will be even further.

 

[Ironplates]

I don't necessarily think that this is the way to look at it:



1. When you use 30 to 50 days, the option will be so far from the current price that you don't care about after hour spikes or day to day moves. Depending on the conditions, I may be 5% to 10% out. In my case, I like to use the RSI indicator to enter at the extremes, giving me a good chance that the stock will not move 'fast' against me. Example: I entered a call spread on GDX a week ago when the RSI got to 70. The price has moved up and down and it's now where it started. If I had had a smaller time frame, I would've have to care about daily moves.

2. I don't disagree but I find the delta useful to know how far I can get, how much I can get paid and to make my position neutral if I want to. Also to know how much the option can move.

3. This is not correct in longer terms. The options spreads 50 days out with low deltas are going to move very little every day and your account will barely move if you're delta neutral (eg. iron condor). This is evident if I have a spread +5% of the price and another -5%. The stock would have to move 10% every day for me to be -90% and then +100% as you say, but if the stocks moves 10% each day, the options are going to be so expensive that I will be even further.

It is for these reasons that I initially posted this thread.

YES YES YES it is about good market structure, good trade location, and knowing where structured stops should be.

IMHO, most indicators lag and RSI looks much different before than after, if you like the proof, that a snapshot of your screen at entry and thereafter, nevertheless, indicators lag. This is why I use pitchforks.

The reasons my credit spreads work is because I choose good trade location, but the challenge I am having is balancing "waiting for the right time to enter" and not making my focus too much about strike spread where I tend to get to myopic and lose a sense of the overall price action.

Greeks matter relative the option trade, but price action rules.

I try to enter put credit spreads as close to what I see as a equity buy point and call spreads as close to what I would see as a short entry. I set the spreads where my stop would be, but the risk return on these vexes me, so I am also considering debit spreads in addition to these.

In all humility, it gives me a headache trying to keep track of all these structures, so some kind of [option chart ups] to keep track of it all is used.

As far a expiration dates to use, that is relative. 3 days 1 day, 50 days, it all depends. I see 50 days for use on weekly or daily charts, and short stuff inside 5 minute or 20 minute, which is my favorite periodicity. I try to only focus on ONE time period relative the trade.

If I enter on a 20 minute, that is the only time frame used. Switching periodicity only can cause confusion for me.

 

[Ironplates]

It is for these reasons that I initially posted this thread.

YES YES YES it is about good market structure, good trade location, and knowing where structured stops should be.

IMHO, most indicators lag and RSI looks much different before than after, if you like the proof, that a snapshot of your screen at entry and thereafter, nevertheless, indicators lag. This is why I use pitchforks.

The reasons my credit spreads work is because I choose good trade location, but the challenge I am having is balancing "waiting for the right time to enter" and not making my focus too much about strike spread where I tend to get to myopic and lose a sense of the overall price action.

Greeks matter relative the option trade, but price action rules.

I try to enter put credit spreads as close to what I see as a equity buy point and call spreads as close to what I would see as a short entry. I set the spreads where my stop would be, but the risk return on these vexes me, so I am also considering debit spreads in addition to these.

In all humility, it gives me a headache trying to keep track of all these structures, so some kind of [option chart ups] to keep track of it all is used.

As far a expiration dates to use, that is relative. 3 days 1 day, 50 days, it all depends. I see 50 days for use on weekly or daily charts, and short stuff inside 5 minute or 20 minute, which is my favorite periodicity. I try to only focus on ONE time period relative the trade.

If I enter on a 20 minute, that is the only time frame used. Switching periodicity only can cause confusion for me.

Suppose an opinion is bullish with no expectations of vol one way or another. To buy any month Vertical Bull spread ATM 10 pointer for about 5 to make 5, one would think it better to buy the further dated spread because of more time. Throw out the logic because more time left means the spread will not maximize (also will not minimize) in price as fast as a nearer term spread will. While the front month spread goes from 5 to 10 on the upside or to zero on the on the downside the deferred month may have traveled only to 7 on the upside and 3 on the downside.

The question is "what is the appropriate time frame?"

 

[Ironplates]

Last week I sold a PCLN 980/975 credit put spread for $.40 using a 20 minute chart. It was sold when price action reached my predetermined buy point and demonstrated proven market structure above the 990 area. This credit spread expired OTM as part of the plan.

Next I purchased 14 FEB 1040/1050 debit call spreads using the 1050 calls to help finance the 1040's for a net cost of $1.3. This appears to be an excellent more than 6X risk aiming to make 8.7 provided price action moves close to 1050 before the time runs out.

I missed the opportunity to purchase yesterdays wonderful retest of my Median Line at 1,000. Then again the process matters, and today's price action provided immediate feedback.

 

[longthewings]

Suppose an opinion is bullish with no expectations of vol one way or another. To buy any month Vertical Bull spread ATM 10 pointer for about 5 to make 5, one would think it better to buy the further dated spread because of more time. Throw out the logic because more time left means the spread will not maximize (also will not minimize) in price as fast as a nearer term spread will. While the front month spread goes from 5 to 10 on the upside or to zero on the on the downside the deferred month may have traveled only to 7 on the upside and 3 on the downside.

The question is "what is the appropriate time frame?"

One thing to remember from a risk management perspective is that by utilizing said vertical spread, you are expressing a view on vol whether you like it or not. While verticals are seemingly straightforward spreads, they're actually a little tricky since you're exposed to an embedded risk reversal -- i.e. somewhere along the strike space your gamma will flip signs abruptly. If you're not trading delta neutral and making directional bets it matters less, but during vol blowouts, jumps, or high realized var, it can matter a lot.