SPX Credit Spread Trader

This is about the most absurd advice I have ever seen.

Mech, I know you are smart enough not to attempt to adopt this method.

Mark

 

I'm just trying to figure out what he was smoking.

 

Mark,

I am glad you are still around. I had a Nov/Oct 890/850 RUT call opened at a credit of $0.5, and I understood that I might have the biggest profit with this position (the current MTM is at a loss of $3.5)

I wish it will settle at 850, but now the delta is getting too big when it approaches the point of biggest profit, what should I do?

My put side diagonal provides no hedge against it now unless I open a new one, but I am not comfortable to open a new put diagonal at this time.

 

Hi YIP,

First a couple of comments

1) With IV so high, this has not been a good time to open diagonal spreads. Because these spreads are long vega, the time to initiate them is when you believe IV is going to rise - or at least not fall.

2) Spreads that are 40-points wide are subject to substantial loss. I always did 20- or 30- point spreads. If I remember correctly, our resident expert on this spread - Murray - preferred to pay a debit to open the position (I , like you, prefer a credit) and I believe he did 20-point (or less) spreads.

That said:

Obviously the biggest profit occurs at the point of highest risk. Thus, it really comes down to a choice. Are you willing to continue to hold this spread, and the risk? That's a question only you can answer.

If the answer is no, you can do any of the following (plus others that occur to you) with all, or part of your current position:

a) Buy Oct 850/860 call spread. This gives you opportunity to recover, but still has substantial upside risk. If the market declines, your Nov 890s will probably not be worth enough to make this position profitable (if you make this trade), but I believe its MORE IMPORTANT to protect against a big loss than it is to worry about making this trade profitable.

b) Similarly, buy Nov 880/890 spread. I don't like this at all, because the Oct problem is still bad. The 870/890 is better, but that's very expensive.

3) Buy some extra naked calls - in the area where you need the most help. Perhaps Oct 860.

4) Buy Oct 860/870 Spread in an attempt to limit the upside value of your Oct shorts to $10. Above 860 you don't lose any more (for awhile) as your Nov 890s increase in value.

5) Take the loss and give up. No one likes to do that, but if none of these suggestions appeal to you, and if you can think of no others that appeal, you are allowed to give up on this and open fresh positions in Nov. I know how much this hurts, with RUT approaching your ideal spot - but when it reaches that spot two weeks early, it's not a good thing.

6) The put side isn't doing you any good. Consider closing it early. The current credit you can collect will shrink if the market rallies. Although that credit would grow on a decline, your call side does well on that decline, so you don't need all eggs in single basket.

I've been where you are and it's never an easy choice. I prefer safety to gambling. Especially in this case because the payoff for the 40-point diagonal is so small compared with the risk.

Mark

 

Hi everybody,

I have been scrolling threw this thread and I see a lot of discussion about the spreads of the SPX options. I have been looking at the OEX options and the spreads are much smaller (also single listed on the CBOE). Is the OEX not a good alternative for SPX because the spreads are much smaller and perhaps more tradeable? (btw, I'm from Europe and trade European index options, currently almost no experience in trading US index options)

Thanks,
FT79

 

OEX is fine to trade, but if you ever sell options - even as part of a spread - then OEX is dangerous to trade. Why?

Because OEX options are American style and that means you can be assigned an exercise notice before expiration. That is not a good thing for cash settled options. Much better to trade European style, cash-settled options, such as SPX, NDX, RUT etc.

Mark

 

Mark,

With the help from the market this morning, and your advice in exit strategy, I am a lot more confident with my position now.

 

i btc Oct 850 call, and sto Nov 880 call this morning when rut touched 850 to reduce both delta and gamma.

Mark, thanks for your advice.