Today's update--- SPX up 4, fairly quiet day overall Put position-- 1380-1355 value 1.37*700= $959, short delta=12 Call position--1470-1495 value 0.97*700=$659, short delta=10 Value against=$1638; credits received=$1608; net loss $30 Our position only improved slightly, but is now close to breakeven. No adjustment necessary, but days to expiry now are down to 8 trading days (including the expiration Friday). The situation is gradually improving, partly due to the fact that time is on our side.
Update for Sept 12 SPX moved up modestly +3 to 1437 Put position 1380-1355 spread.. $1.22*700= $854 short delta= 9 Call position 1470-1495 spread.. $1.50*700= $1050 short delta =13 Net value against = $1804, which is a noticeable decline for a measly 3 point move.. Now we are down $200 or so. We're 33 points away with about 7 days to go, including the expiry day. If the market were to grind higher by a bit more than 5 points a day, it could be painful. We'll need to watch carefully. IC's can definitely hurt you on the call side, even as the VIX declines, and much more than you might expect..
Of course these "what ifs" can get to the point where one won't walk outside because they might get hit by a meteor, or won't stay inside because there might be an earthquake! There's a certain amount of risk one has to live with. If the broker told me, "No, if all those 'what ifs' happened we wouldn't be responsible, you would." What would I do, never trade another Credit Spread? Close my account? I don't want either of those choices. That's why I don't need to ask them. It's good you've told me all this however. I've only been Assigned once, and that was early on in my spread trading. My rule is to close all losing Spreads 30-21 days before Expiration, to avoid the Rapid Time Decay near the end, and avoid a Max Loss. I've always stuck to that rule, except once. After what you've told me, I'll never break it again! Thanks.
IC's can hurt you on "both" sides. The only thing more risky than a leveraged single sided credit spread,... is a double sided IC spread. I think the attractiveness of the IC "potential" double credit, is not worth the double sided risk, double stress, double risk management, double commissions, ect....
would the double calender not be a much better way to play a range-based trade right now than an IC? a DC will stretch out the break-evens a little farther and can actually benefit from a spike in volatility. i'd imagine, that with VIX under 15 at the moment, an IC could be a dangerous thing to do. i'll hang up and listen...thanks
Put master, I agree with you generally, and the reason I started this whole exercise, is to demonstrate the risks involved. I don't think that delta neutral really captures the risk or is sufficient to be safe, and I also think that the upward adjustment is typically harder to do if things are "balanced". Let's quickly look at the hypothetical position that was established; The SPX rose +23 Put side 1380-1355-- Spread value $0.35*700=$245 Call side 1470-1495--Spread value $4.10*700= $2870 The call delta is now really in the disaster range, and the loss from this position is now about $1300 which would violate a stop loss scenario, resulting in the closing of the position. We're "out". The comment above about double calendars is insightful, and a double diagonal probably makes even more sense in a low VIX environment. Now for a little disclosure. I do have a hybrid IC in place which is working much better than the hypothetical one that we have been playing with. What changes do you all think would make these work better? I'll let you guys speculate about some ideas. I'm curious as to what you think.
Please somebody can elaborate what is double calender and double diagonal. Please give some hypothetical example. Thanks
Double calendar is a combination of 2 calendars. E.g: +SPY 150 Nov Call - SPY 150 Oct Call +SPY 140 Nov Put - SPY 140 Oct Put Double Diagonal is a combination of 2 diagonals (different strikes for long and short options). E.g: +SPY 150 Nov Call - SPY 151 Oct Call +SPY 140 Nov Put - SPY 139 Oct Put or +SPY 150 Nov Call - SPY 149 Oct Call +SPY 140 Nov Put - SPY 141 Oct Put