Writing Options on ES and SP (S&P Futures) instead of SPX

ktm,

This is very clever, particularly the part about collecting the condor premium PLUS potentially collecting a full/partial piece of the $10 from the debit spread.

Let me make sure I've understood you correctly. In an ideal case (I have not run the P/L and this is at a strategic level), I'd do the following:

- Sell the usual iron condor on SPX SEP 1140/1150/1290/1300 for a credit
- Buy an iron condor on ES OCT 1170/1180/1260/1270 for a debit, and I can use this hedge for 2 months.

1) I believe the credit per condor will be smaller than the debit per condor, so as you mention, I'd have to take a smaller number of ES condors. Typically, what is that ratio? 1 ES for 5 SPX?

2) I assume you put the ES hedge on at the same time as you put on the SPX condor, rather than wait to hedge until the SPX condor gets into trouble?

3) Why do you hedge with ES? You could have used SPY or SPX for the hedging condor?

4) A deep OTM iron condor will net me 5% to 10% return on margin in a good month. Roughly how much would that return-on-margin degrade due to the ES hedging strategy?
 
Quote from andysmith:

- Sell the usual iron condor on SPX SEP 1140/1150/1290/1300 for a credit
- Buy an iron condor on ES OCT 1170/1180/1260/1270 for a debit, and I can use this hedge for 2 months.

1) I believe the credit per condor will be smaller than the debit per condor, so as you mention, I'd have to take a smaller number of ES condors. Typically, what is that ratio? 1 ES for 5 SPX?

2) I assume you put the ES hedge on at the same time as you put on the SPX condor, rather than wait to hedge until the SPX condor gets into trouble?

3) Why do you hedge with ES? You could have used SPY or SPX for the hedging condor?

4) A deep OTM iron condor will net me 5% to 10% return on margin in a good month. Roughly how much would that return-on-margin degrade due to the ES hedging strategy?
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1)The ratio depends on what you want to achieve in terms of the level of protection or how aggressive you want to be about trying to capture both. Run your numbers and see where things fall. Buying the Oct is expensive relative to the Sept credit.

2) I always put everything on together.

3) I only trade commodity regulated, SPAN based section 1256 products. SPX and the like are reg-t and considered securities. Section 1256 gets 60/40 tax treatment regardless of the holding period.

4) See number 1. Much depends on exactly where you put the debit spreads and the ratio. Also consider different ratios for calls and puts since they are priced differently and behave differently when the market drives toward them.
 
Quote from ktm:

3) I only trade commodity regulated, SPAN based section 1256 products. SPX and the like are reg-t and considered securities. Section 1256 gets 60/40 tax treatment regardless of the holding period.

ktm,

As far as I understand from multiple sources, options on SPX are section 1256 products as well, since SPX is a wide-based index.
SPY is an ETF, therefore, options on SPY are taxed as securities.

If you, or anybody else, may want to comment on this observation...
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ktm,

"I only trade commodity regulated, SPAN based section 1256 products. SPX and the like are reg-t and considered securities. Section 1256 gets 60/40 tax treatment regardless of the holding period."

--But don't you put the "main" condor using SPX, which is reg-T? Unless SPX is 1256....
 
Quote from andysmith:

ktm,


--But don't you put the "main" condor using SPX, which is reg-T? Unless SPX is 1256....
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andysmith,

Don't confuse between tax treatment and margin rules. these are not necessarily related.

SPX options have margin rules according to reg T., but they are still regarded as section 1256 contracts for tax purposes.
 
OptionsWizard,

Yes, thanks for clarifying margin vs. tax treatment:

----------MARGIN------TAX TREATMENT
ES--------SPAN--------Section 1256 (60/40 rule)
SPX-------Reg-T-------Section 1256 (60/40 rule)
SPY-------Reg-T-------Securities schedue

So the remaining question I'm trying to figure out is why not do the entire structure (main condor as well as the hedge) on ES?
 
Optionwiz & Andy,

I think you are correct that SPX is reg-T and 1256. I use the SP contract for size, which is also SPAN and 1256 and just basically 5X the ES.

As to your other question, yes I do everything in ES/SP - the bodies and hedges and everything else. You can also hedge with ER2 (SPAN and 1256 as well.)
 
ktm,

"As to your other question, yes I do everything in ES/SP - the bodies and hedges and everything else."

OK, I get it, you use SP/ES (where SP is the "big" pit traded futures contract and ES is the mini ECN-traded futures contract). I misinterpreted that you used SPX/ES (where SPX is the index not the futures).

I still have one burning question: why do you hedge with ES? Couldn't you hedge with SP itself, just buy fewer? The only reason I can think of is limitations on the account size? What am I missing?
 
Quote from andysmith:

OptionsWizard,

Yes, thanks for clarifying margin vs. tax treatment:

----------MARGIN------TAX TREATMENT
ES--------SPAN--------Section 1256 (60/40 rule)
SPX-------Reg-T-------Section 1256 (60/40 rule)
SPY-------Reg-T-------Securities schedue

So the remaining question I'm trying to figure out is why not do the entire structure (main condor as well as the hedge) on ES?
More...

Somewhere I read (months ago) that one trader tax professional--Robert Green?--has made the case to the IRS that transactions involving SPY, QQQQ, and other stock index etfs can and should be taxed like their index counterparts and NOT like securities.

I cannot find the source of that right now, I am afraid.
 
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