SPX Credit Spread Trader

It's OK. It was "on topic" since opportunistic "waiting" for favorable market swings is a big part of profitable SPX credit spread trading. So its important to find things productive to do while "busy waiting" to compensate oneself for the time-value-of-idle-money begging to be let loose. To that end I am personally picking up these conspicuously opportunistic "free-bees" the market apologetically flogs from its loins (such as APPL) as compensation for being so shamefully indecisive on its direction and low volatility. I in fact now count on this somewhat routine and conciliatory market lagniappe as fair compensation for the various other market mischief that we credit spread traders are made to suffer (e.g. such as shameful b/a spreads and low volatility and low volume). As such, this kind of profitable waiting has become an integral component of my trading strategy and leads to positive net expectation and can be conducive to a trading edge. So, it is relevant and I appreciate those sharing the joy in how they punish the market for not giving us any good occasions for SPX trades lately. I wonder if this dog chasing its tail market can be trained to run one way or the other and with more excitement (VIX) ?

By the way, part of my Risk Management plan is to keep myself entertained during SPX dog-days such as we currently suffer. Its an effective distraction from the temptation of jumping in on sideways motion to scalp a penny-ante pot and risk prematurely losing next months trading capital. As one can see here its fairly easy to induce a whining post dynamic behavior. The real value to the forum at large is that this forced dithering is an excellent way to get new topics introduced when discussion goes stale; which I find is correleated to current side-ways market conditions. Frankly, I look for a ratio of 3:1 - 4:1 critical overhead posts before unimaginative critics figure out that they are a bigger distraction and it settles into a new interesting discussion. As for me, its all entertaining and puts me in the proper jovial mood to deal with the occupational pessimism of being forced to make money by only playing the down side credit spread positions. But most personally important, as a part of my Risk Management activity it keeps me from rationalizing the need to hunt for symetrical optimism to the upside at any cost.


Cheers,
TS

 

That's why I go ITM on the Call side and CTM on the PUT. I try to enter the PUT on oversold condition.

 

Yes, they are all Credit spreads. Next time I will be more specific.

This morning I closed the short side of the 810/820@0.20 debit and still keep the 820. I am looking forward to closing it for 0.20 or more in the next coming days.

I am not worried about my 770/760 PUT at all for now as I know how to protect it. I am more concerned about my 740/730.

As I told you before I don't expect making money (a lot) in the ITM, CTM) spreads; The wings are the one that give you the extra (8-10K) a month.

As of today, I am up 11.5K for the month. I want to take it and RUN but there is so much money still to be made. There is a total of 25K of premium.

RUT is bear flagging below the 50-day MA and that's all I was hoping for. If it continues doing so until Friday, I would be very happy.

 

I don't want to continue the risk management discussion unless there is new info that will benefit some of us. But I really want to learn from you.

I don't quite understand why you are concerned about 740/730 and not the 770/760. Is it because you got a higher premium for 770/760 as well as the call spread? You also mention that you know how to protect it. Under what situation will you adjust and protect it, and how?

 

I too am very interested in your rationale here and was wondering the same thing. Thanks.

I am just now starting to get acquainted with the subtleties of the RUT underlying and its a new kind of animal to me. I have a slightly worrisome credit spread put on at the JAN PUT 76/73 strikes. I don't like the dips below the 50 day MA but support below an error band here seems to hold pretty well so far...

TS

 

1)The 740/730/810/820 condor @ 2.85

I have 40 of the 740/730 and I had 20 810/820 but closed it for 0.10 debit.

I can lose 40K 0n the 740/730.

2) I have 25 770/760/790/800 condor @7.20. The max I can lose is 2.80. If my 770/760 was to be in great danger today I could increase the size of my 790/800 call to compensate and later even if it goes even lower, I could go down to 770/780 call to make the BF. That's would make me break even or lose only 1$ or less total on the trade. That's the worse that can happen to this trade.

I know that my 740/730 is much safer than 770/760 but in term of what I can lose in case something bad happens like Katrina, 911, I am a little bit worried about 740/730.

I opened 740/730 @1.15 credit and now it's worth 0.45. I could close it but whe you consider there are only 5 trading days lef, I think it will be ok.

It's all, mathematical (Probability and Statistics). Even though I was sleeping in class during the course.

I took Probability and Statistics for Engineers back in 1991.

I hope my explanation helps. Hey, I am open to discussion and criticism (positive one).

I learned a lot from Coach and a lot of positive people on this board. I don't take everything somebody gives me, I analyze it and make my own decision.

 

RUT below the MA(50) is not a problem for now. I think that RUT has settled a little bit and reacting better than SPX today; that's a good sign. It may go and test the MA(50) in the next 2 days.

You just don't want a breakdown below 767 right now (december low). A close at or above 781.50, I will close all my positions and wait for opportunities the expiration week.

At 780, I think I would have made more than half of the total premium.

I need to warn you that I tried this concept with SPX and It failed. IWM is the ETF for RUT so they walk together; You should be OK

 

Piccon, out of curiosity, when did you get into that 770/760 790/800 IC?

 

Entry is key for CTM, ITM. I enter mostly on OB/OS conditions. I entered 790/800 when RUT was 793 and overbought and I entered 770/760 when RUT was 778 and overbought.

You need to understand your chart and applies to your trading.

Don't forget that MY OB/OS signal may not be the same for you. Be careful, If you are afraid of losing 3-4 points on the trade, don't even try it.

It's a risk/reward advantage but not Bullet Proof and you need to know how to close/adjust your positions.

Last month when I entered 790/800/770/760, RUT went to 801 and 767 but never closed my positions because I knew since the beginning how much I was willing to lose. Eventually the market would come back to the mean MA(20).

 

Ah, OK, the " I can lose $40K 0n the 740/730" part is what the concern is all about and you don't have a real concern on the position technicals or expectation. That's par for the course in credit spread trading and something that took me a lot of time to emotionally differentiate. Just wait till you start compounding your winnings and rolling them up to get to the 100-200 contract level with 10 point spreads. That's when life starts to get interesting so to speak. Technically its the same risk for a given sentiment & expectation but the stakes of losing really big can be gut wrenching at the higher numbers of total contracts. At some level of contracts there becomes a personal psychological inflection point between rational and emotional thought. I think a lot of people develop a cheap "lotto" ticket mentality in playing fewer contracts. With less total capital at risk no matter the expectation, losses are never fatal to lifestyle. So with a relatively small number of contracts at play I think it emotionally becomes more like a side bet at a sports bar and we shrug off small losses.

I think I have learned to trust my market analysis and sentiments and disciplined myself to not put on so many contracts that I could ever lose over 30% of my trading capital. I think the cardinal rule is being able to position size so that one had enough capital to come back after a significant loss to still get back in. I find however that the emotional tension generated by "worst case" loss thinking can be intellectually overcome by observing that in 99.9% of the cases traders can exit a losing position early for considerably less than worst case losses. Even in the 911 kind of events we can count on market trading circuit breakers to stop trading and filter emotion and irrational IV out. That and another factor I believe give us a more rational and orderly exit behavior than we used to have in the markets. I based this opinion in part on the fact that most hedge funds and institutional traders will hedge very large portfolios with cheap put protection when VIX is low (like currently). So there is less expectation for large block trading in a major negative 911, 3 sigma event since the big boys will be covered and not need to panic.

Frankly, judging by how many of us credit spread traders are currently having a hard time getting reasonable premium I suspect WE are the ones who are underwriting the big boys risk and indirectly also symbiotically providing a self serving hedge for ourselves against large instantaneous trading spikes down on the underlying. That sound like magic but I really think we credit spread traders are providing an underlying stabilizing influence and calm in this market. My theory is that option trading is so popular now with record total volume and large product supply WE are narrowing credit premiums. Thus the options products are reverting more toward true hedge/insurance products rather than as leverage products (lotto ticket bets to speculators). Thus WE diminish VIX with supply and become a buoying force. As the volatility is chased out with greater stability I suppose the theory is that volatility and risk diminish and we get less income. When we reach an indifference level and demand greater premium, supply contracts and volatility increases again.

I thus find it my patriotic duty to make money to stabilize the domestic markets at a higher level of total contracts than I probably should. ha-ha.

Of course some here will think this is nonsense. But I'll let them buy the cheap products and don't care if they use it as an insurance product or as a lotto ticket since its still money in my pocket either way.

TS