Had to share one of the luckier/smarter trading things I have glommed onto with my credit spread trading. This is probably nothing new to many of you but since coming to this forum I am now much more risk conscious. This is a handy little risk adjustment technique that can be quite nearly free or dirt cheap for credit spread traders. The scenario manifests itself close to expiration when residual time premium is all but burned & when there is a liquidity problem causing a price stratification phenomena of minimum bids (e.g. $.05) at the various strikes near one's short and wing positions. This can be finessed with a concomitant transient IV spike that can pay for the adjustment at virtually no cost and result in a position one can hold through SET & expiration with only half the original margin risk. ------- My Scenario: 1) With SPX at 1410'ish and 1 trading day left before expiration I could not get enough liquidity for an early close out of a winning DEC SPX 1435/1445 Call Credit Spread without eating a fairly ruinous debit impact (50%) to an almost fully earned premium. Strike 1... 2) Due to having to travel out of the country on the last trading day of the SPX option period I will be unable to baby-sit my position through expiration. The position is a high-probability winner if carried through expiration (e.g. the SPX bull is a bit tired with only minor chop and sideways motion into expiration week). But I am concerned that in my travel absence my current comfortable distance (about a 1.5-2.0 daily period sigma) above the underlying (currently about 15 points ) could be attrited on the last trading day by 5 or so points. That would hold my position within historical SET volatility range of an unfortunate but fairly plausible 2 sigma SET scenario (about 10 points). Bummer - that puts it right in the fuzzy zone of my risk management plan and I need to make a decision on what to do about 1 hr before today's bell so I can go pack. Strike 2... 3) This period I have a moderate concern about a SET gap up because CPI data is to be released before Friday's open, BEFORE SET determination. Depending on how far CPI deviates from expectation this could possibly cause a large up spike at the open and push SET into my short positions during the no trading period. bummer - what to do and still make a reasonable profit? Strike 3? Here is what I did: To be conservative I tried all day to close the position but due to very low trading volume (mostly other's trying to close shorts) I could not get any takers at less than .15-.20 debit. I also wanted an all or none fill (30 contracts) and only a few contracts were trading. This liquidity problem was forcing me to consider giving up about 50% of the original credit for just a single day of trading risk (plus SET) and in my assessment was completely unreasonable for current static market conditions. After considering the risks to holding through expiration I noticed that there WAS trading volume for a nickle ($.05) a contract on long calls at the strike 5 points closer (e.g. 1440) to my short. So I halved my spread and cut my margin risk in half at a cost of only $.05/contract by buying the closer wing. I intended to leave the other illiquid longs from the original 10 point spread in place to rot into expiration (no buyers). But just five minutes later I got a lucky minor uptick in SPX volatility and trading liquidity at adjacent strikes. So I was able to sell/close my original long wing (e.g. SPX 1445 CALL) for $.05/contract also! Essentially I was able to cut my margin risk to holding through expiration in half at no cost (except for a very minor broker commission)! So now I feel much better about leaving the new SPX 1435/1440 CALL position unattended through expiration. If I get bit it can only be half as bad as it might have been. And it only cost me a trading commission to reduce my worst-case margin risk by half from $30,000 to $15,000. I learned a good principal here: As you approach expiration liquidity problems can cause ridiculous prices to close out high probability winning positions. When you can't close these kinds of positions at a fair price due to liquidity problems it may be MUCH EASIER to cut your risk in half for a nickle; as many strikes will trend toward the minimum bid of $.05. Even better, after you adjust try to help somone else swap out risk further out for that same nickle on your defunct long wings. All it costs is two commissions and there can be a lot of interest in people looking to buy cheap margin relief for a nickle. TS
Yeah but that freaking lazy slacker isn't doing a very good job keeping his thread active. Oops... Forgot to sign on under a different ID before I bagged on myself.
I did ask last May for OC to consider it...however this thread has gone so far OT no one cares anymore as long as you spread (no naked stuff here) anything is fair game.
If you put the option at 20 posts per page it is more like 311 pages lol.. I could start a new thread for 2007, I guess I just hated to see this thread get pushed down into history and fade off into nothing
It will never fade into nothing...you have been very helpful to very many ppl and will always be appreciated
My vote is to keep this one going as long as the ET software will allow. There is a lot of info in this thread and it makes searches easier when you have to search only one thread. Cru
The VIX just dropped below 10 (9.98). It's reminestent of a couple of weeks ago. SPX is above 1422 and RUT is above 796 and reaching for 800. It appears we'll have a Bull Christmas. :eek: Cru
I've been looking at the TOS software and it is impressive. But for me, it's overkill. Way too much emphasis on things I don't want or need. Bottom line, it's useful, but not enough to encourage me to open an account for the minimum ($3,500). Mark