SPX Credit Spread Trader

jeffm, i may have said this in the past; your posts says what i think, and are very clearly written. great job.....imo.

 

like dagnyt, i may also be lucky combined with hopefully skill also. i seem to put my spreads on after big moves. it takes much discipline. you (and mav)are right about how fast a market can move, even to fotm 10% people like me. i consistently allocate 15% of my premium received to debit spreads and straight long options. in the fattail events recently i have done quite well.

ps: my grammar in the previous post needs some improvement.

 

No worries, your answer like your posts are always interesting.

Its probably skill and patience combined with luck. One might think that ones safe and patting themself on the back putting on Credit PUT spreads after the recent falls, but what if there's another few 60 pts days in the coming weeks ? Just something to ponder...

Yes im also leaning toward using some of my credit to buy debit spreads or straight longs at the same time the Credit spreads are written. It becomes sort of like a ratio put spread. Not when the market is heading towards ones shorts and one feels threatened. I think its too late by then. I think DV is also doing this when she mentions putting on hedges with her credit spreads at initiation. Remember reading it a few few posts back.

 

I am not sure i understand the point of this hedge to null concept. This reminds me of an old FX thread where people were short and long spot simultaneously to reduce risk. LOL

Instead of buying debit spreads on top of credit spreads and/or to hedge your short gamma/vega, why not simply reduce the exposure in the original position and avoid the MM donation. All these debit spreads within CTM spreads within FOTM spreads add nothing but unnecessary -edge on the way in/out. Just an idea.

 

The concept of debit spread on top of credit spread is appealing, and I've begun using it in my trading. It's not a panacea, and fails miserably in a black swan scenario, but it does have one imprtanant advantage:

When short a credit spread, if the market approaches the short strike as expiration day nears, then the trader is essentially naked short the option that will soon be ATM. And many hate to buy in the shorts under that scenario. It's very risky to just sit there and hope, although that's the method of choice for some traders.

But, when owning the 'one strike up' debit spread, this 'near expiration day' nighmare scenario presents much less of a problem.

Instead of waiting, I'd use the cash available from selling the winning spread to buy in the short spreads. Even if it's a small cash debit to close, that's fine because paying a small debit is my goal when short credit spreads. I prefer not to go for the last nickel or two.

This expiration scenario will not occur often, but it's so inexpensive to buy the 'one strike up' debit spread that I'm convinced this 'insurance' will pay for itself over time.

Mark

 

Sure the bid/ask spread sucks but the advantage is there's also a chance for convergence gains.

 

If you want a debit spread to hedge against your credit spread, why don't you consider backspread?

 

These choices are not similar. For me, there is no comparison.

With the back spread, the major profit opportunity comes from a big move - when your extra longs go ITM. It's also fantastic black swan protection. In fact it's a HUGE BS winner. But, I need more than that.

Time is your big enemy with a backspread. If the move occurs in your direction, but either comes too late or is not large enough, you will lose even more than you would have lost with the credit spread.

The debit spread on top of a credit spread does not help much if the move is too large. But, it wins in one scenario. The market moves towards, but not through your short strike. With the DoC combo, you can close the position profitably. Something you are not likley to be able to do if just short the credit spread.

It's also a personal preference - trading within my comfort zone. I prefer to own (for example) the 1000/990 put spread than own extra 950 (or a different strike) puts.

Mark

 

mark, what you explained is exactly what happens to me on a regular basis. it is emotionally not easy to spend premium; but it gets easier with time.

rally, why can't debits with credits just be looked at as separate trades that ultimately may effect the p/l in one way or another? i was long er2 745 and short er2 685 for march. of course i had many more 685's, but i cashed out on the 745's bigtime. the 685's expired today.