Just on that small point. I'm sure most people are aware, but for those that aren't, this is one of the artefacts of the IV skew. What that means is, when using the delta as a shortcut it is important to realise that it is more representative of the IMPLIED probability. On indices such as the SPX and XEO this results in the deltas of puts possibly overstating their probability and the deltas of calls possibly understating their probability. The difference is more marked the further OTM you go. Now you may very well believe that the IMPLIED probability is actually more representative of the future i.e. that there is a bearish skewness in the distribution of prices and that is your choice. I personally tend to use the average of IV for ATM options instead to give a more skew free lognormal distribution picture - itself having its own problems and shortcomings Which way is preferable? I have no idea lol. Make your own mind up. Momoney.
Firstly, lets acknowledge that the God of probability is probably (pun intended) as much a false idol as the God of TA. You may indeed worship both or neither. However, you have to make decisions based on something. Secondly, I'm pretty sure I know what you're asking but before we spawn an unnecessary debate amongst others, let's assume that the markets for SPX options are efficient and that an option's price is pretty representative of it's fair value at any given moment i.e. it is not cheap or expensive. Extrapolate for spreads. Now, to answer your question. Rightly or wrongly I simply look at it like this: For spreads with 90% chance of success I want to be able to make enough money 9 times out of 10 to cover the one time in 10 I'm going to lose. Yes, you might be able to mitigate the loss that one time in ten but I prefer to assume worst case scenarios. What this means in simple terms for example is getting a minimum 10% return on margin (11.1'% return on risk) for a 5 point spread that has 90% chance of expiring OTM. e.g. 1 lot example for 5 point spread: .50 for 5 point spread. 9 times win $50 credit 1 time lose $450 max risk. Net outcome after everything is $0 - fair enough, it was fun along the way! I personally don't go for anything less. If you can, you should obviously go for more, because in reality commissions make the picture even worse. Again, this is just what seems like common sense to me and I'm aware that others may not be as aggressive or worried about the ROI as long as they are far enough OTM. Is this possible? Yes. If you put on the spreads far enough out in time you will find spreads that meet this criteria but they disappear quickly once you are down to about 34/35 days out. Depends on the index and other variables. e.g. right now, 38 days out from December the XEO DEC 540/535 bull put is marked at .50 with just over a 90% prob of expiring OTM. This fits the criteria but you might not get filled at .50. Yesterday, it was hitting .60 with about the same probability. You won't find it so easy going on the call side for obvious reasons. Now, not wanting to incite a riot or anything but I have never been able to achieve this on the SPX after slippage and as a result, amongst (many) other reasons, I do not trade the SPX. Other people may have better luck and the situation may well have changed. I realise this is the SPX credit spread trader thread! You will most likely only find these characteristics on the narrower spreads e.g. 5 points on the XEO, 2.5 points on MNX, 1 point on QQQQ etc. and that is where commission considerations really come in. I generally will only go as narrow as 5 point spreads which is the minimum on XEO as commission is a killer to go narrower. It's important one understands all of the pros and cons of a 5 point spread vs. wider spreads. They have quite different characteristics. So make an informed decision. For me, the benefit of the ROI targets I can achieve, outweighs the cons of 5 point spreads on the XEO. Lastly, yes, the index, probabilities and prices are moving all of the time but you have to have faith that at the time you place the order that the price and probability are as accurate as you can get them...and then forget about it. If 5 minutes later the probability has increased 5% well, so be it. The passage of time has occured and the probability is now different. Prices and probabilities fluctuate a lot more the closer you get to expiration because they are that more sensitive to the movement of the index, the slope becomes steeper if you like, if they are close enough ATM to be on the slope, so if you are looking at Novembers options that is what you'll see. Good luck. Momoney.
Momoney, Your analysis for what minimum premium to collect is interesting and makes sense to me. While I'm not advocating that an iron condor be put on every month, the addition of the opposite side spread to produce an iron condor will generate more premium. There will be no additional risk (if both spreads of the IC are held to expiration since only one side can possibly be ITM at expiration). If both sides of the IC are far OTM, then the odds of getting whiplashed where both sides are threatened, during any month, forcing an adjustment on both sides are very remote (but not impossible). And, even if that happens, then by adjusting you are generally not taking the maximum loss. In general, the IC allows for capture of the 10% while going further OTM than possible with just one spread side alone (unless you're really good at timing the market, in which case, why would you be trading deep OTM credit spreads?) Using a slow moving, lumbering index like the SPX increases the odds of success (compared with stocks). However, whiplash can be a real problem if the spreads are closer to ITM when initiated, so as with everything, judgement, risk tolerance, time available to devote to monitoring, and risk management principles are required.
....well I closed out the 1240 and the 1235 short calls. 1240 were no problem to close got mid at 1.45 However the 1235 weekly was another story. There were 10 contracts on the open that went for .35 so I started with .45 and quickly raised it to .50 which sat and so did I. Part of the problem is lack of interest...only 47 in open interest. I finally left for the day and when I returned after the bell the contracts had been sold (finally!) for the day a whole 20 contracts exchanged hands.....so until there is more volume in the weekly's I won't be playing it. Kept the 1250 longs...I'll see what kind of trouble I can put myself into next
In the few trades I have done, I have found that: 1) initiating an IC does help cushion any adjustment needed if the index moves towards any of the short strikes. 2) starting out delta neutral seems to work as I tend to close when the spread doubles (so I break even). Unless there are very few days to expiration, in whch case an adjustment seems to work. 3) I have had to close or adjust XEO spreads in the IC as I did not initate them far enough OTM. The adjustments/closing limited the final credit. 4) The SPX spreads far, far OTM seem to work best. however, the spreads were at least 10 wide to get credit. So, if the index is trending open a credit spread 1) 1 std. deviation 65% so (.30 delta for short strike) in the opposite direction of the trend only. (using regression channels, ADX, MCAD seems to work to define trends) 2) with enough time (45 days) If the index is in a trading range (flat)open 1) an IC . 5 points (xeo) 25-30(spx) away from support resistance. 2) delta < .10 Thoughts- your experience - anyone????
Hello! Thanks for taking the time to answer, it was interesting to see where you´re coming from trading wise. I suppose a blowout could either bring about a mental freeze or provide a lesson-never-to-forget about risk management as it did in your case. Also your focus on having a mindset of being humble and willingness to learn is key. ================== An aside: If you or anyone would care to comment on the current state of our local non-dollar options market in Stockholm I would be most happy. (A one-time request, I promise) I trade this market (stocks and index) directionally but have stayed away from selling premium due to risk considerations. The thought of hedging with futures also seemed difficult due to whipsaws but with the "coach" strategy of partial adjustments doing credit spreads might be an option. Swedish stock market is currently also a low vol environment. OMX 30 is a dow-like index with 30 major stocks, Nokia, Ericsson et al. As you can see from enclosed spreadsheet many spreads on the index carry negative credit. Also choice of otm strikes is thin. Would any of theese spreads be worth selling? Prices are from this morning when index was at 900. Thanks/ Joe Edit: 1 USD = 8 SEK Current bid/ask prices (click english flag) http://www.omxgroup.com/stockholmsb...ue&group=Kursnoteringar&listname=OMX-optioner 6-month chart of index http://finance.yahoo.com/q/bc?s=^OMX&t=6m&l=on&z=m&q=c&c=
Rdemyan, I hear what you are saying but I'm not sure I fully agree with your assessment. With an IC, I agree there is no additional RISK but you ARE reducing your CHANCES of success. For example, an IC where each vertical individually has a chance of 90% success is actually an IC with only 80% chance of success when you place it so for my personal criteria I would want to demand a 20% return for such an IC rather than just 10%. Would you play a game at a casino where on average you had 80% chance of winning but when you did win you would win only 10% return on your stake? Lets be clear: all of these probabilities are dependent on the assumptions and flaws of the model you are using and also what goes into the model. Garbage in - gargbage out etc. so we aren't dealing with absolutes and its important not to get too caught up in the illusion of the safety of probabilities. But why put the odds of that illusion against you? I'm certainly no mathematician so my logic may be flawed. I'm aware that only one vertical can expire ITM but I'm not sure that changes the situation. I'm also acutely aware that this doesn't factor in defensive adjustment strategies or even proactive adjustment strategies, both of which you may well believe can increase your chances/return. However, I prefer to look at worst case scenarios, assume I'm going to be somehow incapacitated when the worst happens, and at least try and make sure in the long run I still come out without a loss. You ask why would one be trading OTM credit spreads? Well, the occasions I do so are when I know I'm not going to be able to trade for a period of time so that may very well be a different motivation to yourself and others and as a result may lead to entirely different criteria for selecting the spreads as detailed. Yes, the SPX is relatively slow moving but the options in general are priced accordingly. You may have more time to take evasive maneuvers, which is a valid reason for trading it, but I don't think one can live under the belief that the probabilities are neccesarily any better. We're all here to make money so what ever rocks your boat! Momoney.