This is why I think I'm more comfortable just writing 5% OTM bear call spreads. The market tends to move up slower than it moves down; giving more time (and more liquidity) to exit a spread. What do you guys think?
Since many of us are retail traders without the low costs and access attributed to market makers or large insitutional traders, are your suggestions for trading the weak synthetical-straddle viable and selling futures into the events still achievable? We have to distinguish what the average retail trader here can do and what the large prop trader can do to lay out all scenarios.
I have heard others take this approach as well. One thing you have to remember is that this is not an IRON CONDOR thread but a credit spread thread. I have been legging into ICs do to the relatively sideways nature of this year's market. However if we look to be in a strong up or down trend, I play the opposite side mainly. In September I was expecting a post summer rally and only opened put spreads for SEPT in AUG. Katrina pulled the rug out of that but the 1200 support levels held. For November I am still looking to only go with put spreads if market conditions improve from the current mess. I will update my currnet positions including the one NOV put spread I opened a few weeks ago. I am curious if anyone is looking into use of the mini-SPX which launches I think the 28th of OCT? I want to see its pricing first.
Yes, it's viable for the retail participant. It doesn't solve for the entire debit risk, but offers some protection. Sell an otm put credit[buy itm call debit] and sell futures small. You wouldn't trade the otm call credits. Another method would entail buying VBI futures into your singular, bull credit. It's unlikely that the VBI will drop dramatically, and you're compensated a bit on your exposure on the smile. The VBI represents the vol-strip and you're isolated near the peak of the curve with your 5% otm credits. Granted, the credits are so small it's entirely moot, but it's not -edge[strike-vol/VBI price]
I've been thinking along the same lines. To me a large change in the market and therefore the SPX is like a catastrophe from the point of view of how it affects our spreads. The difference is that going down, it can be like an earthquake, which means little to no advance warning. Going up, it's more like a hurricane and I can see it coming and get out of it's way or adjust my positions if I think they won't be endangered. I'm going to try a new strategy that limits the number of put spreads I'll put on and increases the number of OTM call spreads (of course this is dependent on my analysis of the market if I decide to put on spreads at all). We'll see how it goes.
To me it's all about the dollar risk/reward for THAT trade. Every trade. Every single time I put on any position. What is my MAX loss? That is what is on my mind. To me the max theoretical loss, IS my max loss - not the loss I will get IF I can get a hedge on fast. With options, anyway. No, I don't assume every stock I trade can go to zero over night, but that happens and I do keep it in mind. I just don't put on positions with a large negative risk/reward. Even if you can say "I theoretically will only lose 1 time out of ten...", I just don't do it. But that's just me. I always assume the worst. But I have survived trading options the last 6 years, including lots of SPX contracts. This is JMHO, there are plenty other ways to trade and make money. Good luck to all. C
RiskArb, I understand you have problems with this strategy, and that it doesn't make sense when looking at the greeks, or the amount of risk taken on for the amount of reward. I do have respect for your views, because I worked along side of guys at SIG that were purly quant's and that whole firm was founded on Arb and delta neutral trading. These guys were genius's, along with the firms founders. What I would like to hear from you, is how you would suggest the retail (ie thinkorswim,ox user) should trade? Most of us have day jobs, and trading supplements our income. A lot of us can't be behind a computer all day watching the market, but can respond to alerts (ie text msgs), or trade wirelessly. Could you please inform the group of a strategy you think we should investigate, and possibly start working with on paper, when the markets don't "behave" like they have been. One thing I have noticed on this group, is that people want to hear experienced traders views on this and other strategies. As long as they don't follow along the lines of "You are a cheat" If you don't mind, please share your ideas, I'm looking forward to learning. Thank you, sd
I agree, it's only part of the picture. But it does illustrate how even the old quiet (lately) SPX can tear up and down month to month. It also doesn't show how bad it might have been between the months. People that try this strategy might want to go back and simulate how they would have adjusted between some of those crazy months. You could use VIX data to get a feel for the SPX IV during those months, and use a option calculator to come up with some test prices to examine what a typical spread could have looked like. And if you simulate some trades, be sure and account for a large b/a spread. It gets kind of wacky during big moves! :eek: Here is some vol and index data: http://www.cboe.com/LearnCenter/pricehistory.xls
I don't trade this strategy but I believe there are guys out there like Ansbacher, Zenith fund, etc.. who do and have done so successfully for years. If you look on www.iasg.com you can see how the returns have varied during the months you cite... It's also interesting to note how the AUM has moved...