Got my ink in the printer and have printed out both OEX and NDX. From looking at it, they are the same chart, except they have different numbers on the side, expressing different ways of showing percentage gain. You could probably trade either one off the other signals? Did some analysis of both charts. Starting with the OPEN day of the Monday of the option month. It is certainly clear, you have to pick the turning point for the month, to place a vertical Credit Spread outside, or above or below a resistance or support horizontal line and identifying that turning point is the problem. Interestingly enough the NDX didn't really give good premiums any more than I thought it would going out. 100 points using the weekend BIG CHARTS option chains only gave you .15 cents in the spread for a 100 points away from the action. To get $1.20 in credit, the 1905 calls had to be sold. The resistance top was at 1900 thereabouts. That is VERY CLOSE and makes it imperative that one had a good turning signal in the trend. In the OEX it was a little better. The 515 strike above the 510 STRIKE which is the resistance horizontal line gave + .85 cents and if I remember rightly we are trying to get a $1.20 as a trade. To get the $1.20 you would have to sell the 510 STRIKE in CALLS as the resistance line overhead for a bear move. Since the trend has at least momentarily turned down, the 510 looks like a good bet. The prices were better in the OEX. Since the charts are the same, more or less, in the NDX and the OEX, guessing what is going to happen later this option month - 3 weeks left is kind of iffy? In order to get $1.20 it sure looks like you have to pick a trend turning point for the option month. For this month, the signals are still mixed and I would not trade yet. I generally use the BIG CHARTS computer indicators and my favorites are DMI and Volatility Fast and RSI for the weekly. For analysis purposes on a monthly basis I tried the others and selected MOMENTUM, ULTIMATE OSCILLATOR and Fast Stochastic. The idea to identify the trend change, for the whole month. Chart patterns show a FLAG forming and a breakout should be to the upside sometime. But within the month? Don't know? Would sit and wait I guess? Going back to the previous option month the trend change and the entry for a Vertical Credit Spread was more clear cut. You could follow the daily bars down with a trend line, or any of the three mentioned indicators. The momentum in this case gave the clearest signal we had changed trend about ten days into the action for the option month. One of the problems with computer indicators is that they are lagging indicators and usually the last three days will adjust themselves as each day progresses. Still you can get a signal if you are familiar with charts and daily bars. Higher lows was the signal in this case. The month before; that END OF MAY week to third Friday of June was a tricky forecasting month apparently. In the NDX if you took the first signal as a trend change ENTRY, you would have sold CALLS in a VERTICAL which would have gone bad on you, depending on what premium you had chosen at the time. It ended at Expiration slightly more than wanted. On the other hand if you had taken the second trend change signal in the month, violation of trend line, or higher low, you would have done well with Vertical PUTS. Admittedly this is only a 3 month study. Phil probably has some adjustment that he could use to get out of the first spread toward expiration week, when beginning to be threatened. Not sure how that would work, he might please explain that? In the OEX you would have won by the skin of your teeth, but in the NDX you would have got penetrated into your spread. The bear plunge before that Month, I did well and managed to get in two or three trades, forget now, but it was a nice trend, using horizontal resistance lines over the pullbacks as the bear fell. Just placing the Vertical CALL spreads above those resistance lines. Used a trend line to keep trading going down. **************************** ***************** In response to those 2 or 3 fellows on here, that insist I become familiar with GREEKS, I'm going to give it a whirl this coming week. I do know DELTA and THETA, but not familiar with GAMMA, or the other one. Nor am I familiar with how to use them? In a credit spread I know I collect premium called THETA and most of it is in the last week of the month and in particular the last two days of expiration week. My problem mentally with GREEKS, I have no reference point. The numbers for the GREEKS change hourly with the index movement. So what does that tell me? Nothng apparently? I can more forecast using the index and daily, or hourly bar charts? I'm presuming from the comments of people trading GREEKS that there is some sort of variable sliding change in the numbers that tell you, or forecast for you, what is GOING TO HAPPEN? I'd guess you would have to compare the four GREEKS one to the other as they constantly change and somewhere in that, one changing more than another would probably forecast, or tell some kind of story? From what little I've read on this FORUM, the market makers constantly adjust their positions using GREEKS, which is intriguing. Haven't a clue though, nor am I sure it is relevant to a retail trader? There are also some Delta Neutral strategies I've read about, but haven't really yet found any application in learning CREDIT SPREADS yet. They may work for other types of spread trading? Anyway, I'm going to this week, keep a running record of the changes of the four GREEKS and see what they tell me in relationship to changing index prices and movement and premiums. Maybe I can get something out of them? *********************** I might just touch on another point, as a novice in credit spread trading study, is the matter of the goal of a trader in credit spreads. People have different expectations and one person might want to earn $30,000 net profit for the year, another $50,000 and another $100,000 or $250,000. I believe Phil is in the latter category from things he has said? Myself, my goal is $100,000 net profit before income taxes. Otherwise I'm seriously going to think otherwise. Phil has often mentioned 20% is a good return on capital at the end of a year and he is trading professionally. Considering CD's in banks are returning near zero and inflation is running 6% to 7% it behooves one to find another way of getting better returns. In the Market Wizards book, the last one a friend donated to me, when he came to visit me in the Belize Alps. Linda Raschke is touted as a Market Wizard earning about 40% on capital a year. She was at that time, doing a system of long betting, with heavy drawdowns. She has since grouped with some other traders to handle other peoples money. That tells a story of itself, if you read between the lines. There are a number of systems with drawdowns as part of the system. The attraction for me in CREDIT SPREADS is if you get it right, you can, or should be able to get it down to almost 100% correct and several people are claiming they have done so from 2 years to 4 years. You never know whether to believe them, but it seems sort of possible? That's what I'm trying to find out. I don't know your goal in this? Everybody is different with different needs. Which brings up another point from back in the 1980's when I used to trade stocks. Back then the system reviewers would not credit anybody's claims that did not have provable audited accounts, for a minimum of three years. Which seems a good standard. So whatever percentage on capital you can show for a year is basically the rule of thumb, on whether a particular system, or advice is any good. I don't know what the deal is these days? I've just jumped back in the game and chosen credit spreads from the hoorah advertising them on the internet. Totally new game for me and I'm just a basic NOVICE again and been out of the trading game for more than a dozen years. To some extent the market has changed due to computer trading technology. Options are also more tradeable today from back when I used to pay big bucks in commissions and wait 20 minutes or more for a discount broker to verbally make my trade and get back to me. Brokerage commissions have dropped a lot. Speed is a lot better too. You would think you could make your profit goals in options?
A nice Sunday morning. The sun is up above the ridge of Green Parrot Valley and the day is cool and looking to be nice FALL weather. Summing up here ( summing up here is a catharsis for me, sort of clarifying what I've learned from 4 months messing with credit spreads ). It may be useful to the NEWBIES like me that look in occasionally. CREDIT SPREADS are trend following bets mostly. You place them above a overhead resistance line to the price action in a falling trend and below the support horizontal line of a climbing trend line. For the newbies, a trend line can start off with a protractor and be drawn at 30 degrees, or even 15 degrees to start and then up lifted to a 45 degree line. As long as the prices keep moving the right side of the trend line, you are good in a credit spread. Horizontal resistance and support lines are drawn whenever there is a bottom or top, or a pull back, or retracement. Bear Markets are wonderful for credit spreads, because they are rapid, and drop over a 2 or 3 week period in the monthly daily bar charts. Identifying a bear plunge is easy. Each pullback you get a new overhead horizontal resistance line to put on another credit spread. Far as I can ascertain, the turning point of a trend is the technical difficulty.This gives you in the monthly, the probable horizontal line for placing the credit spread. In a bear trend staying inside of a 45 degree line the retracements as they turn are the horizontal lines that tell you where to place your credit spread on the other side. Trend turning points can use the SWING system. This is a three bar signal system, in which one bar continues the current trend, let us say with a lower low, or higher high, then the following bar drops or rises appropriately. You get a three bar signal that shows one middle bar extending like a finger. There are of course the probability in some months of more than one trend change. As happened in the May / June option month, which had two. I'm still trying to figure that one out. I notice with Momentum you could not use the signal. In the Ultimate Oscillator you got a signal and it was confirmed with the fast stochastic. Essentially you would want all three indicators to agree. Plus your three bar signal. The trouble with computer indicators, they are lagging indicators. You can't use them in real time of the present. Good for looking at historical data patterns but not for forecasting the future, in the present day. The future bar will readjust, or change the way they look the next day, going back anywhere from three to four bars. This means you are probably going to be a little late in putting on a spread and not get the best premium price. A trend line violation is also a good confirmation. We know from the last four months of playing with credit spread trading, you can get one trend change signal and perhaps two in a month. The two trend change signals in one month is the tricky part, because probably you would lose on one of the choices. I'm working on that point. I don't have a solution yet. How much should you make from a credit spread? Phil the guru here who started this forum had the SPX pretty much figured out one time, but is now trading the NDX. The only difference I can see is the percentage change is marked on the side of the chart roughly 10 points in the NDX for each point in the OEX and the hazard of being too close to the price action whether you trade one or the other. It would seem from a brief glimpse yesterday at weekend premiums from the close on Friday, that the percentage change is the same, done by both sets of market makers, or their algorythms? Premiums should be more than .60 cents somebody said around here? The reward risk ratio is roughly ten to one, for credit spreads. Meaning you make a profit of about 10% of the money risked. It is often less than this for a reward. The offset to this, is that if you get really good at technically identifying trend turning points, or trend following, you can put on a credit spread with a good premium and be safe. Most people go as far out-the-money for safety, with smaller premiums, but if you were a good trend reader, you would be able to place your bet closer in, for higher premiums. I have not reached that point myself in confidence. As Phil has pointed out, the name of the game is getting as much premium as possible. Essentially if you are a good trend reader, the risk would be just as safe, as further out options. ( theoretically - grin! ) There are people trading DEBIT SPREADS another trend following method. They are also trading DEEP IN THE MONEY VERTICAL DEBIT SPREADS, or is it CREDIT SPREADS? Haven't looked at it properly yet to form an opinion. Will do though. There are certainly a nice bag of tricks, or spreads to trade monthlies if you want? Since you would be doing different things, you could divide your money up into three parts and do one of each type of Vertical spread. Just an idea I haven't got that far in my studies, or experience yet? ( grin!!! ) COMMENTS WELCOME!
How about diagonal spreads, selling the near and buying the far month?. Or double diagonal butterflies? Is there good software to analyze these?. One would benefit from both the trend and the decay, if right. And would suffer from the trend but benefit from the decay if wrong, breaking even/small loss/small win. Good reward/risk it seems. The disadvantages I can see are poor liquidity and large bid-ask spread. Any opinions from the option experts?.
I have Diagonal Spreads of things to learn and experiment with. Haven't quite got credit spreads down to where I'm comfortable yet and as I'm losing money, anything I spout on here you take with a grain of salt. I have been working on weekly and now monthly and for both of them it is best to trade either early in the week, or the month to get the best premiums. The difficulty is in forecasting the monthly, or weekly, HIGH or LOW expectation. I have a method, but not very accurate at all and trying to follow the market into it. I'm trying a new wrinkle this week, on the weeklies and see how it works, or if it does? In the meantime will follow the monthly and see if anything pops out of the index market action shouting EUREKA this is the trend change! Or something like that with neon lights flashing.
A number of people tell me I should learn GREEKS, so this week I'm studying the greeks. I ran across several blurbs that say do GAMMA trading. Another says weeklies are pure gamma plays. ANYBODY CARE TO EXPLAIN? ********************************** That said; I ran across a site that started to tell you about GAMMA trading a stock, not caring if it went up or down. You had to sign up to get more information, which I'm reluctant to do. Somebody must know something about it. The advertising blurb sounded a lot like doing INDEX range bound OVERLAPPING STRADDLES. Unfortunately I never got past the salesmanship BLARNEY point. I understand OVERLAPPING STRADDLES, I know nothing of GAMMA TRADING, or any sort of overlapping gamma trades. ANYBODY ENLIGHTEN ME?
From the OEX weekly trader I've spent about 4 months learning the nuances of credit speads. I'm disappointed in the result. I'm down about $6000. Fortunately this is paper money on Thinkorswim. Only one actual loss in the credit spreads in around 13 weeks. But what I've learned in CREDIT SPREADS, you cannot even take ONE LOSS. It is a no loss type strategy. My goal is $100,000 a year. Nor do credit spreads seem to be able to do that? Phil on SPX trader is gambling in margin, about a $100,000 a time, but making around 3% which is just $3000 a trade, which roughly translates into say ten successful months x $3000 = $30,000. No where near my goal and one LOSS would wipe out your margin, which is much greater. Not to say, given correct market conditions, you couldn't add a credit spread that seemed to be a sure thing once in a while. But tying up your capital for a month seems self defeating? Bear Market plunges work good for credit spreads on pull backs. I've come to the conclusion I'm wasting my time with credit spreads. Most people are only going to make about $12,000 a year, to $25,000 a year if they are lucky. The returns are just not there! *************************** CACHE LANDING on the SPX credit spread trader forum had some good advice and said to go to E Minis. Took a brief look at them yesterday. Will look some more. They are S&P Futures it says, but the E Mini is a 1/5 th contract. Meaning about $50 a point of movement. The E Mini and the S&P track the OEX and you can use the OEX to trade the S&P. I'm not too keen on open ended FUTURES trading, but will look at their options if they have them. Interestingly enough the EMINI is a wilder swing than the OEX but otherwise tracks it. The E MINI seems to lead the OEX too, which might be useful to know, but I wouldn't know at this point how to use that knowledge? The margin runs $2500 to $4500. ****************************** I did start studying the GREEKS, though I'm more used to tracking prices and index bar movement as in technical chart reading. I cannot relate the greeks to anything useful for trading a CREDIT SPREAD so far. There was a mention on GAMMA TRADING and did some searching for that. Didn't find much! What I did find said that GAMMA trading is basically trading DELTA NEUTRAL. It seemed to be doing LONG OPTIONS? When you go UP, you sell some of the options you are holding to bring your DELTA back to neutral. If the market goes down, you buy more options to add delta and bring it back to neutral. Long options have TIME DECAY eating you up, so I expect 2nd month options would be traded. Right now that takes about 8 pts in the OEX to break even and make a bit. Almost impossible to get such moves these days, though once long ago you could. It does say DELTA or GAMMA trading is to do with fast movements in changing IMPLIED VOLATility. I'm familiar with that idea, but I call it premium ballooning. When the index is moving in one direction fairly steady, you jump in and get out before it slows and stops basically. Premium ballooning depends on one directional speed of changing index values.The advice on the GAMMA DELTA trading is to hedge, or adjust the DELTA by buying or selling often when the index is moving. If you have a steady one directional move, then you do not do anything to your bet, or less often. Can't seem to figure out how to use that idea in the OEX. The index doesn't move that much. Though there are trends about once every six weeks. I'd guess if you worked a trend for the 12 or 14 days that it runs, this could work using ATM options. I'm wondering about DEBIT SPREADS? Maybe that would work this way? Have no experience with DEBIT SPREADS yet. But they are directional plays on a trend, is my understanding?
If you're sincere, I'll give you a bit while I've got some time. I'm not around here much anymore. You'll find that after you become a profitable trader, the conversations around here don't offer much value outside boredom relief on a slow trading day. Edge in options trading does exist, but not for one who doesn't understand the greeks, because the edge is in the greeks. IOW, is the market pricing in more or less volatility than they should be, according to your more accurate pricing model. Or for one reason or another, did the ATM Nov go out of whack compared to the ATM Dec options. Edge here is had in developing a model that is more accurate than the market at predicting future price action. If you don't have that more accurate model, then by default the market is pricing the options more accurately than you are, and the more complex your positions get, the greater the losses become. Granted, often times the options at a certain strike will go so far out of whack as to be completely noticeable without any sophisticated pricing model. But the point remains, that the edge must exist. The more accurate and sophisticated the model is, the more subtle the edge can be. If your doing all the math on the fly, then the mis-pricings will need to be glaringly obvious for consistent profits. If you aren't up for devoting yourself to the development of an accurate greek based model, then IMO the only choice left for you is to become a skilled trader. Generally this skill is in trading direction. Is it going up or down, when, and by how much? You can certainly do this with options, but then the greeks are just an annoyance. You'll buy ATM calls because you think the underlying will rise. It will in fact rise, but a vol collapse will actually cause the calls to decrease in value. What I'm saying is that as you are still paying no attention to the greeks, their effect on your option position is completely random and in the long run will neither hurt or help you, but rather just annoy you. So if you decide to purely trade direction, then you'll switch to futures rather than options. I'm referring mainly to the E-mini S&P. These are futures contracts listed on CME exchange and traded over Globex system which is all electronic, as opposed to the open outcry pit traded method. Subsequently, ES (s&p e-minis) has $0.25 ticks and standing orders are shown in a depth matrix. There are no greeks to worry about. You are simply trading the S&P index straight up. Long or Short. But you are levered pretty heavily. ES has a 50 multiplier, which means that if you have 1 contract and the futures increase by $1, your account will increase by $50. This is not to be confused with leverage due to low margin requirement. ES is currently trading @ 1120, but my broker doesn't require $1120 to purchase a contract. They require $1250, but some I think only require $500 initial margin. In that case you can see that not only are you getting a 50X nominal multiplier, but also 2.24X margin leverage. In effect, you are then getting 112X total leverage on your dollar. Obviously then, if you are trading a $2K account with a $500 margin requirement, you don't want to buy 4 contracts. A 10-point S&P drop would wipe you out. But if you control your leverage, and build up your directional skill then large consistent profits are attainable without a model edge. Your edge is then your ability to read the market.
Thanks for the mentoring. I started looking at the E mini yesterday and put quite a few hours around the internet looking for information. ES which is the futures, I believe? At any rate, as far as I can see I cannot trade that as a future using thinkorswim, or option house brokerage? Would you suggest an appropriate brokerage for ES futures? I do see the ES options on thinkorswim and option house. Not sure what you are trading? Futures or options? The spread between bid and ask look wide to me at .70 cents today. Could you elaborate please? I'm wondering how much the ES options would have to change to cover breakeven? Since you speak of an EDGE and the edge is only on the options and the futures are purely directional skills. I'm not clear what you meant in the original comment that made me leave credit spread trading after trying some analysis and review. Are you preferring to trade the ES options, or the futures? I've got the basics information on the E mini contract, but some of it isn't clear to me at all? How much money is actually involved in 1 contract. My reference point is in options, which are 100 per contract, whereas in the FUTURES I do not know the equivalent and presume that ES options would be the same 100 per contract. Which would you recommend as a starter - the futures or the options on futures? I really do appreciate you taking the time. Your original blurb was like a bucket of ice water thrown on the whole credit spread business, I was feeling uneasy about. I have figured out from the option chain, that the scale on the side 2.5 is OTM, whereas the 5.0 reading seems to be ATM today anyway? ( 5.20 ) I may be misreading this? After going to the 5.25, or whatever, the BID starts reading 0.00 on the option chain, which the ASK is reading .10. I believe I read something about futures finishing a different date than say the OEX? I'm trying to figure and understand it. How much does the contract value change for say .25 scale. At the current VIX and ATR I see that the change average per day is running presently .25 to .30 I could more or less figure out what would happen in the futures contract then? The options, I more or less understand. Or I can watch them change and get a value of change. There is talk of expiration? I can see this in an option month, do the futures contract also have expiration? They talk about rolling over to the next month? Bit confusing right now, until I get the different terminology worked out. What Futures Broker do you recommend? Presuming I have to have one? I think I asked that already? I'm curious when you speak of trading options using GREEKS to get a better pricing model. You mentioned the relationship between one month and the next month, At The Money. How would you use the GREEKS to clear this up? My personal preference is in position trading for a few days, rather than day trading. Do not know what you are doing? You had a short form in one comment, IOW, what does that mean? I appreciate your taking the time, to introduce me to the terminology very much. Thanks Ray
IOW = In Other Words You can trade ES through ToS last I checked, but their margin reqs and commissions aren't as good as IB and Tradestation. Anyway, I'm talking about the futures, not the options on the futures. There is edge in the futures too if the model is good. I was just telling you that the only edge in options trading is found in understanding the greeks. Edge in futures is found in more accurately predicting future price action. Don't think of futures as 100 shares. Think of them in terms of contracts and multiplier; i.e. one contract has a 50 multiplier. If you have to relate it to shares, you could think of it as one contract representing 50 shares of the cash index, but that isn't really correct. Yes, the futures do expire, but rolling is really just a matter of covering your position and re-opening it in the back month. You'll lose .50 point in doing so. But I can't imagine hold a futures position so long that I would need to roll it. Futures expire every three months. In terms of your frequency. You trade whatever you are comfortable with. Just remember that price forecasting is much like weather forecasting. Relatively easy to say what will happen 15 minutes from now. Best weather services we have still have a hard time forecasting a 10-day accurately. So it is with the markets. More time = More uncertainty.
Thank you very much for coming back CACHE LANDING. The little things are starting to come together. I didn't find futures on TOS? Maybe I'm looking wrong? I type in ES and do get some funny looking option strikes. Starting at .25 and going up to 5.0 Only four of them though for the options Of which only two seem to work? I take these to be OTM and ATM. Not at all sure what I'm seeing, or how you keep track? I had been chatting on Elite Trader Weekly OEX OPTIONS about this too. Couple of guys are sort of helpful there as well. The bits and pieces of information are sort of slowly coming together. I did some recording of the index change and the Greeks. I can't seem to get anything from them, as to forecasting a trend, or a trend change yet. Of course the market is more or less dead. As far as to increasing volatility. I have a method to give me an EDGE in that sense from more than a decade and a half ago. That was to enter the trend change BEFORE it was confirmed. The volatility is low the premium cheap and if you are right, then it balloons up. I use the DMI in position trading to EXIT. Back when I traded then, I would enter bets three times as the trend progressed. That was about as many as I could get on. The trick was to EXIT while the volatility was high and the premiums ballooned and ignore any subsequent last minute price peaks. I think other people do that with price and RSI and DMI divergences? Using Greeks might be too slow? Or just a different way of seeing the same picture? Another item I ran across today, while reading, was somebody using the SPX futures chart to forecast the OEX chart. For day trading options. I used to do that back 20 years ago and had both charts on my own web page. I've moved a lot since those times and lost my HTML for DUMMIES college book that had the code to import charts. Sad to say. Being in foreign lands and in the boondocks to boot, my getting another book copy is out of the question. I'd like to see both the SPX and the XEO chart on the same web site. It's a neat trick. Somebody has convinced me that the XEO is better than the OEX due to something about expiration settlements. Don't fully follow the technical argument, but get the general drift. My head is spinning with all the nuances one has to absorb. I'm not at all sure I'm looking at options on E Mini futures. In Option House brokerage I found what I was looking at seemed to be a stock? At least the heading was not to do with E minis? I'm guessing I would need a futures broker? I'm wondering what commissions are ? One contract! I think I need a sim program brokerage to start off experimenting. Very intriguing and I'd like to compare the Futures versus the options a bit more and see how they move relatively speaking on the E mini. To see if I can make any money. My early feeling is that the FUTURES is a better game from what you said? If Futures are leveraged, what does that make OPTIONS on futures? Good heavens the ramifications seem endless? Recording what I believe are E mini option premiums, though I'm not at all sure of that yet, to see what happens. Not much, but with market movement very slow, that is to be expected. In the meantime I put on a Vertical Credit Spread late today and will try the Iron Condor play tomorrow noon. It is not much for the risk in margin at all. Still I'm gaining experience with web based, paper money.