I'm not a fan of buy and hold when it entails hundreds of dollars of theta decay each day.
Vertical Spreads for Aggressive Growth
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I'm not a fan of buy and hold when it entails hundreds of dollars of theta decay each day.
Yes .... watching my long puts has been aggravating last several days, but Sep should be tell-tale. If we can't sell-off in Sep then we are likely to rally one last time into next March, when the ultimate sell-off will be that much harsher.
Churn, churn, churn...
No good opportunities for an exit. Got a stop in place just in case we bounce higher.
No good opportunities for an exit. Got a stop in place just in case we bounce higher.
Makes sense if the probability on your side.
Probability, both gamma but also vega. Gamma -- range bound market, vega -- low end of volatility.
This is all pretty obvious but should be explicitly included in R/R. In my trading, perhaps it's a mistake, but I have been focusing on the probability of profit and not worrying too much about r/r. I am sure that will change over time.
Different strokes for different folks. Some like high probability trades which by definition have bad r/r. Others like good r/r (1:1 or better) and are willing to accept <50% probability. For me it is a question of both forecasting and activity. How closely so I want to be watching the trade, and how confident am I in my forecasts?
{edit} Some of us also have others to please. My partners/clients are interested in continual visual growth. Take the OTM credit vs OTM debit spread debate. It seems that the OTM debit spread provides greater expectancy in the long run than the OTM credit spread. But my partners don't care about that. They want to see a monthly return. The idea of losing small amounts repeatedly until the one big gain doesn't appeal to them at all. They want to see the small steady growth more characteristic of OTM credit spreads. It is then up to my abililties to prevent the large drawdowns that are also characteristic of OTM credit spreads.
But hey, whatever strategy gets the returns I'm after, suits me just fine. For those who are wondering, I utilize a combination of 4 different strategies, that can be tailored for any market conditions. I'm not advocating only selling OTM credit spreads.
Hello all, I'm relatively new to this thread and option spreads in general, and I have a couple of questions regarding exit strategies for FOTM vertical credit spreads.
Cache-I've really enjoyed reading this thread over the last couple of weeks, and sincerely thank you for all the time you have put into helping to educate others. On to the question...
I suffered a 37% loss on a position i had in the SPX AUG 1295/1300 call spread this month, and have been researching alternatives to just taking it on the chin when a major "screw-up" occurs.
I subscribe to an advisory service that uses a strategy that I have seen work personally, but don't think it would for FOTM. He sells ATM call spreads and then if it moves against him he buys a one strike in the money call for each contract of the spread that he has in order to hedge. As the spread is losing money, the call makes money at twice the rate. It averages out to a very nice return, but requires that you have your nose in the screen, be able to predict the direction very well, have a pretty good idea as to whether the move in the underlying that is affecting your spread will continue in that direction after you buy the "insurance", etc.... He also has the advantage of collecting 40-60% premium up front, so there is a much smaller loss to hedge than if you had only collected 3-7%. He guesses wrong on the original spread about 50% of the time, but because of the insurance still makes 10-20% ROM every month.
My question is: is there a similar, insurance-like strategy that could be used when one of your FOTM short points is being threatened to make back the majority of your loss if you were forced to buy back the spread atm or itm?
If not, is there an effective way to roll the position with such a small amount of initial premium being collected? If so, do you wait until your short point is ctm, atm, or itm?
Thanks in advance for any replies, and I apologize for such a long first post, but I felt the need to explain what I am looking for.
-john
Cache-I've really enjoyed reading this thread over the last couple of weeks, and sincerely thank you for all the time you have put into helping to educate others. On to the question...
I suffered a 37% loss on a position i had in the SPX AUG 1295/1300 call spread this month, and have been researching alternatives to just taking it on the chin when a major "screw-up" occurs.
I subscribe to an advisory service that uses a strategy that I have seen work personally, but don't think it would for FOTM. He sells ATM call spreads and then if it moves against him he buys a one strike in the money call for each contract of the spread that he has in order to hedge. As the spread is losing money, the call makes money at twice the rate. It averages out to a very nice return, but requires that you have your nose in the screen, be able to predict the direction very well, have a pretty good idea as to whether the move in the underlying that is affecting your spread will continue in that direction after you buy the "insurance", etc.... He also has the advantage of collecting 40-60% premium up front, so there is a much smaller loss to hedge than if you had only collected 3-7%. He guesses wrong on the original spread about 50% of the time, but because of the insurance still makes 10-20% ROM every month.
My question is: is there a similar, insurance-like strategy that could be used when one of your FOTM short points is being threatened to make back the majority of your loss if you were forced to buy back the spread atm or itm?
If not, is there an effective way to roll the position with such a small amount of initial premium being collected? If so, do you wait until your short point is ctm, atm, or itm?
Thanks in advance for any replies, and I apologize for such a long first post, but I felt the need to explain what I am looking for.
-john
You might want to listen to Dan Sheridan over at cboe.com -- look in the webcast archives on Income Generation series of lectures.
I suggest you investigate diagonals and calendar spreads as an alternative to verticals.
Finally, there is another journal thread dedicated to verticals, SPX Credit Spread Trader. Nearly 2000 pages of posts, many of which address your question.
I suggest you investigate diagonals and calendar spreads as an alternative to verticals.
Finally, there is another journal thread dedicated to verticals, SPX Credit Spread Trader. Nearly 2000 pages of posts, many of which address your question.
This was my point a few posts ago pertaining to the feasibility of hedging a low risk/reward position vs. a high risk/reward position.
Of course you can't entirely hedge your risk without eliminating the payoff.
With a high risk/reward position the cost of hedging (including whipsaw) the risk can usually quite easily outstrip the miniscule reward on the spread. In other words, you're better off just playing the hedge. Hence a "partial hedge" approach is often taken instead.
Rallymode et al would pose the "how do you hedge the hedge" questions etc. which is fair enough and it is worth considering the merits of that point of view. Arguably, the vertical is already a hedged position which was initiated with certain probability characteristics and forecasts for volatility and direction etc.
You identify the problems with rolling FOTM spreads etc. due to the small premiums starting out and this is also a very valid point. However, people have successfully employed doubling down/martingale strategies for rolling. Of course they are making the possibly fatal assumption that a black swan isn't going to arrive when they do that. Then there is rolling to a further month out. The same caveats apply but again, the very vast majority of the time, the vast majority of people will succeed with this defensive strategy.
Having a 50/50 strategy where you win more than you lose is obviously a winning proposition in the long run so you may want to consider sticking with the approach outlined in the advisory. It is psychologically harder for some people to deal with such a low win/loss ratio and hence the popularity of higher probability strategies such as FOTM credit spreads etc. There is also practicality issues such as one strategy needing more monitoring than another. Again, many people make money consistently from the FOTM strategy but your loss last month is not actually that uncommon unfortunately!
As already pointed out, the FOTM credit spread has been dissected ad infinitum over on the SPX Credit Spread thread.
If you are willing to accept a smaller credit and effectively play a strategy that is not FOTM but has a FOTM component coupled with insurance then there are many varieties to choose from.
I outlined a few here:
http://www.elitetrader.com/vb/showthread.php?s=&postid=971374#post971374
Suggest you read a few posts before the one linked to in order to get the context.
Probably the simplest is the combination of a long strangle and an iron condor with ratios and widths adjusted to your risk profile preference. In layman's terms this strategy says: the underyling is not going to finish where it started, it is going to finish somewhere else....but actually not that far away LOL
Most of the time, that's actually a pretty good description of what happens on a month-to-month basis. It's when it doesn't you need to be aware of. Good luck.
MoMoney.
trek,
as always mo has covered all points of the question with great details. I too would say that you either forgo the hedge all together and stick to your original forecast or play the hedge by itself. In my opinion, 5-10 point moves in the SPX is just noise and you shouldnt keep changing your directional forecast everytime that happens. Thats exactly what you are doing by buying the ITM options 1:1, you are now net long deltas and your desired directional movement has reversed and your risk has shifted from the spread to the straight options. If you want to trade with such frequency, why bother with credit spreads? There are better approaches. Gamma scalping being one of them. Mo has posted somewhere in this thread a variation of that where you buy the ATM strike and flip a short strike against it during a choppy price action.
Just my 2 cents.
as always mo has covered all points of the question with great details. I too would say that you either forgo the hedge all together and stick to your original forecast or play the hedge by itself. In my opinion, 5-10 point moves in the SPX is just noise and you shouldnt keep changing your directional forecast everytime that happens. Thats exactly what you are doing by buying the ITM options 1:1, you are now net long deltas and your desired directional movement has reversed and your risk has shifted from the spread to the straight options. If you want to trade with such frequency, why bother with credit spreads? There are better approaches. Gamma scalping being one of them. Mo has posted somewhere in this thread a variation of that where you buy the ATM strike and flip a short strike against it during a choppy price action.
Just my 2 cents.