Vertical Spreads for Aggressive Growth

Quote from OddTrader:

How could we calculate return rates without knowing how much initial capital to support the $10K nominal capital, particularly when dealing with trading size/ DD%/ heat? Just curious.
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Doesn't really matter from where I sit. Really just depends on one's own risk tollerance. My last journal update was as follows;

Year to Date P/L

Account Value: $14,854.50

YTD Gross P/L: 5,480.00

YTD Commiss: 625.50

YTD Net P/L: 4,854.50

YTD % P/L: 48.5%
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I calculate the returns based on the $10K nominal amount. IOW, the strategy that I employ on this thread doesn't require that I use funds beyond the proposed $10K. From there you can decide your own tollerance for risk and how much you would personally allocate toward a given strategy. You can then adjust the returns accordingly.

Size is really irrelavent as it doesn't change the % returns at all. I don't pay a flat rate on trades, so the cost to enter/exit a trade increases proportionately with the size. The returns aren't theoretical, so I don't need to adjust them for expected slippage. The slippage has been built into the trades that were made.
 
I'm only posting this because the trade is going against me, you know if I was making money on this one I wouldn't have anything to bitch about :p. My ATM XEO spread is underwater right now. I'm still holding on looking for a move lower but I'm not getting my way so far. That being said, with me putting this on ATM I don't have the "cushion" between me and the market that a CTM spread has. It's more of a psychological thing, having that cushion as a buffer between me and the market. I think ATM spreads are good, I just need to adjust my thinking a little bit when I do one.
 
Quote from ryank:

I'm only posting this because the trade is going against me, you know if I was making money on this one I wouldn't have anything to bitch about :p. My ATM XEO spread is underwater right now. I'm still holding on looking for a move lower but I'm not getting my way so far. That being said, with me putting this on ATM I don't have the "cushion" between me and the market that a CTM spread has. It's more of a psychological thing, having that cushion as a buffer between me and the market. I think ATM spreads are good, I just need to adjust my thinking a little bit when I do one.
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What you should notice is how much less you've lost with the ATM position compared to the CTM/OTM position.

The two hardest factors of switching from OTM/FOTM to ATM are;

1) The elimination of the fear of being ITM at some point during the trade.

2) Postion sizing. There are a few techniques that might make this a little easier.
 
Quote from ryank:

I'm only posting this because the trade is going against me, you know if I was making money on this one I wouldn't have anything to bitch about :p. My ATM XEO spread is underwater right now. I'm still holding on looking for a move lower but I'm not getting my way so far. That being said, with me putting this on ATM I don't have the "cushion" between me and the market that a CTM spread has. It's more of a psychological thing, having that cushion as a buffer between me and the market. I think ATM spreads are good, I just need to adjust my thinking a little bit when I do one.
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You're not going to be underwater much relative to your initial credit/debit!

Remember ATM spreads are neither long or short premium i.e. there is no decay benefit/harm to the spread. That has some interesting implications.

XEO/OEX nearly re-tested the May high today. SPX is obviously some 20+ handles away from doing similarly. I'd say there is the possibility of another 10-15 SPX/5-8 XEO points to the upside between now and SEP expiration...but don't pay attention to that; I'm just planting seeds of doubt in your mind to amuse myself LOL.

If you no longer believe your bearish forecast is likely to come to pass then adjust/close the spread!

If you think there is still a good chance for your spread to be a winner but you want to "hedge" your bets then take an appropriate hedge. Cue snakes on a plane.

Also, remember the real market for XEO spreads are a lot tighter than those quoted :)

Good luck!

MoMoney.
 
Quote from Cache Landing:

What you should notice is how much less you've lost with the ATM position compared to the CTM/OTM position.

The two hardest factors of switching from OTM/FOTM to ATM are;

1) The elimination of the fear of being ITM at some point during the trade.

2) position sizing. There are a few techniques that might make this a little easier.
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Being ITM doesn't worry me too much (but something to be monitored). When I was paper trading CTM spreads I had one where it went ITM and I was still profitable when it happened. That was a big eye opener for me and I started looking at CTM with less of a skeptical eye. I posted about it on the SPX Credit board showing how my CTM spread was ITM and was profitable while my FOTM was still FOTM but was losing money at the time. With ATM spreads the same thing can happen, I just happened to pick a bear call spread at a time the market decides to keep moving higher. Right now my spread is $2 ITM (XEO is at about 602) and my loss is $.45. I kept my position small so if I screwed up the loss would be minimized. We are approaching the highs from 2001/2002 and May of this year. Maybe we will back off this high, only time will tell. Trouble is, SPX still has about 25 points to go to hit its recent high, if it pushes towards that level it will probably mean XEO will blow by the 604 level. Will make my position that much more exciting to watch!
 
Quote from momoneythansens:

You're not going to be underwater much relative to your initial credit/debit!

Remember ATM spreads are neither long or short premium i.e. there is no decay benefit/harm to the spread. That has some interesting implications.

XEO/OEX nearly re-tested the May high today. SPX is obviously some 20+ handles away from doing similarly. I'd say there is the possibility of another 10-15 SPX/5-8 XEO points to the upside between now and SEP expiration...but don't pay attention to that; I'm just planting seeds of doubt in your mind to amuse myself LOL.

If you no longer believe your bearish forecast is likely to come to pass then adjust/close the spread!

If you think there is still a good chance for your spread to be a winner but you want to "hedge" your bets then take an appropriate hedge. Cue snakes on a plane.

Also, remember the real market for XEO spreads are a lot tighter than those quoted :)

Good luck!

MoMoney.
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I was typing my previous post and didn't see yours until I posted it. I'm going to take my chances with the economic data for the time being. I was bearish at the time and still think we could move back down some but the market keeps wanting to push a little bit higher. Let's see what the numbers are in the morning and go from there :).
 
Quote from ryank:

Being ITM doesn't worry me too much (but something to be monitored). When I was paper trading CTM spreads I had one where it went ITM and I was still profitable when it happened. That was a big eye opener for me and I started looking at CTM with less of a skeptical eye. I posted about it on the SPX Credit board showing how my CTM spread was ITM and was profitable while my FOTM was still FOTM but was losing money at the time. With ATM spreads the same thing can happen, I just happened to pick a bear call spread at a time the market decides to keep moving higher. Right now my spread is $2 ITM (XEO is at about 602) and my loss is $.45. I kept my position small so if I screwed up the loss would be minimized. We are approaching the highs from 2001/2002 and May of this year. Maybe we will back off this high, only time will tell. Trouble is, SPX still has about 25 points to go to hit its recent high, if it pushes towards that level it will probably mean XEO will blow by the 604 level. Will make my position that much more exciting to watch!
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Just a peak into my head...

It is true that the SPX highs were around 1325, but I consider those to be somewhat unimportant. This is because that was merely a hopeless rally at the time, with a very quick correction. The real resistance is 1310. That is the point of focus for me.
 
Quote from ryank:

Being ITM doesn't worry me too much (but something to be monitored). When I was paper trading CTM spreads I had one where it went ITM and I was still profitable when it happened.
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It was probably towards the end of the cycle though and theta had worked its magic. You dont get to benefit from it with ATM. Not in a worthwhile way anyway as your short deltas will overwhelm any theta gains. That's the price you pay for reducing your risk. I personally dont like ATM/ITM spreads on low vol instruments but thats just me. The churn can really be a killer for those, especially during the summer doldrums. I am sure mo will disagree :p
 
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