SPX Credit Spread Trader

El OchoCinco · Sep 25, 2006

About to put on an amazing adjustment to lock in some serious cash and allow for more, but trying to split some b/a spread sin the ES so we will see if I get it....

if not.... then nevermind....

Quote from tplast:

There you have it. Now could you please close your diagonal and let it crash ?
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Sailing · Sep 25, 2006

Quote from dqtmg2:

Murray,

Another great informative post- thanks. Some questions:

1) What do you consider low volatility for entering the trade? VIX<13? Or just a relative spike, i.e. a day when VIX is down 2+ points?

A VEGA spike is relative to your own interpretation... but let's get specific here... the volatility you're following is really not the VIX, it's the implied volatility of the options you're trading. If you're using ToS's platform, goto the analyze tab.... it will show you the implied volatility of the options. You're really looking to exit on a skew between the volatility you bought and what you could sell. Typically these volatility skews closely correlate to the VIX... but sometime seasonality, earnings, FOMC meetings... will skew them one way or the other. For example.. as of late.. NOV options have not reacted to the VIX going up.. as drastically as it did in previous months... probably due to seasonality of NOV/DEC X-mas rally trends.

2) What strategy do you switch to when VIX stays higher for a period of time?

This would be a time to use the increased volatility to buy your FOTM options for credit speads. The increased VEGA is allowing you to sell further out of the money for the same premium. IOW, you're looking to nuetralize volatility... Bull Calls, Bear Calls, Butterflies, Condors, etc.

Now if you're trading 'haircut margin', you would want to sell back month options against your front month positions... ie, reverse calendars. This way you could short VEGA, and profit from volatility decreasing. Unfortunately, it's way to expensive, practically prohibitive to trade this in a Reg-T or SPAN margin account. John could add some insight here if he so chooses.

3) When you exit on a VEGA spike are you saying completely exit the entire position, or just a portion of the position? Also how do you define a spike?

If you're not going to 'MORPH' into another locked position, then yes, you must close the position. It's the back month options which are yielding the profit from the increased VEGA. We'll discuss the "MORPH" concept at some other time.... but consider this:

If you could roll into two Butterflies, a Put Butterfly and a Call Butterfly for say a credit of .20, then you have locked in a profit and have the potential of making HUGE returns if the market moves toward the center of the butterfly.

If you could set up a years worth of butterflies... say you lock in 10 cents here... 20 cents here... maybe pay 30 cents here.. etc... and over the course of the year you breakeven on your rolls.... well... you don't make much money. But think of this... you have DEFINED risk.... the butterflies have created defined risk.... hopefully none if they are all credits.. but little losses if they are not.... but... here's the kicker... you also have LOTTERY TICKETs.... lots of them. On average... the market tends to move 3 times a years..... significantly during the last expiration week period... if the market moves into these butterflies... you could potentially make 10:1 returns... three times... but let's play it conservatively... say 5:1, three times... that's $15 pm a $1 risk... (oops, did I say risk, you probably won't have any if done for a credit)... This is called the game of Positive Expectancy... which certainly out produces the game of Risk/Reward each month. If you can live with 3 big winning months a year... with little or defined risk the other 9 months, you'll be a very happy, consistent, profitable trader going forward. It's similar to the Market Makers... they immediately hedge their risk and create a small, but positive expectancy between each position they take.

Hope this makes some sense....

M~

Tim [/B]
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Sailing · Sep 25, 2006

Coach,

I think you're seeing the light.....

Diagonals ? Credit Spreads?

Is the choice becoming more obvious now?

M~

Quote from optioncoach:

About to put on an amazing adjustment to lock in some serious cash and allow for more, but trying to split some b/a spread sin the ES so we will see if I get it....

if not.... then nevermind....
More...

Sailing · Sep 25, 2006

coach,

Funny how your adjustment was my suggestion in the previous post.... as I submitted the post and then read your adjustment... it made me chuckle.

You're now experiencing positive expectancy with TONS of potential upside!!!

Live Long and MORPH!

M~

Quote from Sailing:

Coach,

I think you're seeing the light.....

Diagonals ? Credit Spreads?

Is the choice becoming more obvious now?

M~
More...

El OchoCinco · Sep 25, 2006

Still do not like the put diagonals for a debit, so only sol don the call diagonals lol...

Quote from Sailing:

Coach,

I think you're seeing the light.....

Diagonals ? Credit Spreads?

Is the choice becoming more obvious now?

M~
More...

Sailing · Sep 25, 2006

You'll like them more.... just try a few.... it's where the real value of the strategy lies.

M~

Quote from optioncoach:

Still do not like the put diagonals for a debit, so only sol don the call diagonals lol...
More...

Sailing · Sep 25, 2006

You see...

as the call diagonal can "MORPH" into a butterfly.... the Put Diagonal side can "MORPH" into a butterfly... or even better, a reverse calendar.

It's difficult to apply the reverse calendar play on the call side.. because typically, volatility spikes to the downside movement.

I hope you're keeping a log of this.... or I'll have to have MO link all this stuff in a few months from now.

M~

Quote from Sailing:

You'll like them more.... just try a few.... it's where the real value of the strategy lies.

M~
More...

Sailing · Sep 25, 2006

P.S. It only took six months..... to sell you on the call side.

That's relatively quick compared to some of the people in our trading club.... at least you have an open mind and a will to learn. Some of them are so stubborn.... so difficult.... but that's what makes teaching them all the more challenging.

Quote from optioncoach:

Still do not like the put diagonals for a debit, so only sol don the call diagonals lol...
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rbsanders · Sep 25, 2006

Anyone here daytrade futures and have an opinion on T or S versus Interactive Brokers thanks

rallymode · Sep 25, 2006

Phil,

nice credit on your last adjustment. I must admit, i am clueless as to why you chose to offset your short 1340's ATM with 4 days to go. I would've thought you would've waited for the last few days of decay to kick in and given the fact you are short downside gamma, it wasnt to risky for you at this juncture but i am sure that's just optioncoach's finance an adjustment type of thinking i see here.