Phil, thanks for showing these trades. A common characteristic of these type trades, is the extremely negative risk/reward. I know you would never let it get away from you, but in theory you are risking a loss $165,600 to make that $6900 (on the 1260/1275 bear call spread). It's not beyond belief that, for example overnight, Bin Laden is killed, or cancer is cured, or world peace is declared (okay, that is beyond belief!), or whatever and the SPX instantly zooms up 7%. This will stick you with a greater than $120K loss if you had no protection from long calls or futures. So there goes 17 times that $6900. And even a fast 3% jump would put the spread about $20K in the negative. My question is, do you monitor world futures markets and do you feel you can respond to rare events like this? Maybe this is too far-fetched, but I've been around long enough to know that anything can happen in the markets. Thanks for any thoughts you may have on responding to trading emergencies like this while you have a big position on. C
I get IV and delta from my broker, OptionsXpress. On the option chain it shows IV and delta. Most good option brokers show this info with their option chains. Phil
Your question is a common one with respect to this strategy and naturally it is a risk I cannot ignore. The risk/reward on its own may seem like a harsh risk/reward but that is the nature or most credit spreads. What makes it attractive is putting the odds in your favor to make the reward more probable. That is what I try to do with my strike selection. When the markets opened after 9/11 the market crashed about 60 points (SPX). I could most likely abosrb such a move given the placement of my strikes and only have a small loss but what if I am just 30 points away and the crash occurs. And this is where your questions is really focused since a huge wipeout could destroy a long year of profits. What is different now than in a 9/11 world is that 9/11 shut the markets down for a week. Most exchanges have established functioning back-up systems so that the markets would not shut down and continue to function. Except for a direct hits on the NY or Chicago financial market, the markets will still open and allow for an exit with a loss, but far less than the full amount. The other contingency is the use of S&P futures to short (in bad news scenario). This is one reason I do not advocate that someone use their entire capital for such a strategy. With me, if the market begins dropping like a knife, I still have capital free to use as margin to short the futures as a hedge against a major downturn. In this case scenario I am not trying to make money or even walk away with $0 loss (extremely desirable but have to be realistic). My goal is to greatly minimize my loss and walk away with minimal damage. Futures is the only way to quickly and efficiently hedge myself from the negative homerun, so to speak. I am also working with options on futures as a way to hedge a large swing move. But in case of such a large move in the other direction (down) I do have the ability to make some profit on the call side and continue to close and roll down the calls to bring in more premium. It becomes a situation of damage control more than anything and as 9/11 showed, a large swing lower is a temporary situation. SO basically, the large unexpected event is the unknown and fortunately, terrorists do not favor attacking us i the middle of the night since it does them no service for us to be all asleep and miss it. My only reliable emergency plan in such a situation is to short futures to hedge and provide a cushion so I can exit my positions with small damage and work the call sides for more premium. I also take a risk management approach in that my full account is not in this strategy. Even if I take a large hit, my account is still mainly in tact and I will simply stick with the strategy to bring in premium and earn back my losses. I have factored in the potential for loss and realize that I could have a down year when an unusual event occurs. However for the remainder of that year and the next one, I will stick with my plan and work to make back the money. This is what every money manager and trader goes through and a unique event will cause losses across the board. At least I know I will not be wiped out and will still have more gunpowder in the keg. In reality the best constnat defense against such an event is diversification and never putting all your eggs in one basket. Hope the rambling helped.. Phil
Thanks Phil. You definitely have a "real world" view of risk and loss IMHO, from a real trader - this is not something you find in most books. I may have to try this strategy again. I ran something similar on the QQQ/NDX/MNX in 2000 - 2001, but those 70% drops kind of scared me off of it! SPX is a little mellower, but there aren't too many gifts in the market. Risk always follows reward. But if you can keep ahead of the danger...$$$$! C
Today's upsruge boosted the call premiums and I decided to take on an expiration week scalp. Sold 50 JUL SPX 1230/1245 Call Spreads @ $1.00 (SPX @ 1218) Credit = $5,000 Margin = $75,000 ROM = 6.67% This is admittedly riskier than my normal positions given the distance OTM. However, with 3 days to expiration and 1220 a previous resistance point which has continued to hold, I decided the odds seem favorable to scalp some premium in the next two days. We had a good up day on Friday and so far today so a down day tomorrow or Wednesday is probably which will help suck out some premium in my calls. Theta should be much stronger if we can get one good down day this week and I intend to hold as long as 1220 resistance holds. Again, this is riskier than my usual but every once in a while I like to take some credit where the analysis seems to warrant it. Regards, Phil
Well the market had two great days in a row so I thought I would take profit on the August put side and move them up to a higher strike since we still have plenty of time to expiration. Remember my positions for August were: 115 SPX AUG 1260/1275 Call Sprds @ $0.60 115 SPX AUG 1125/1140 Put Sprds @ $1.40 I bought the put spreads at $0.65 for a net profit of $0.75 Net Credit = $8,625 Margin = $172,500 Return = 5% I will place an order for some more put spreads to go back into the Iron Condor, most likely at 1130/1145 or perhaps 1140/1155. I like taking large profits like this to bank some money and then with so much time left to expiration I can slide my strikes up. Will post an update if I get filled on new puts. Phil
Well as indicated I closed my AUG put spreads for a nice profit and then moved up to higher strikes to collect more premium. I got filled on higher strike Aug put spreads: Sold 115 AUG SPX 1140/1155 Put Spreads @ $0.60 (SPX @ 1217) Credit = $6,900 Margin = $172,500 ROM = 4% I am still using the same margin amount but now I have taken profit and moved my put spreads higher for more premium. I would have rather waited for an down day to then go into the put spreads but I am human and impatient and wanted to grab the premium when I saw it. THe distance is still 60 points OTM so I am happy with that. CURRENT POSIITONS (including above): 115 SPX AUG 1140/1155 Put Spreads @ $0.60 115 SPX AUG 1260/1275 Call Sprds @ $0.60 50 SPX JUL 1230/1245 Call Spreads @ $1.00 Phil
Phil, On your 1260/1275 call spread, with the SPX @ 1217 the loss on this position is currently about $11K, if closed out at the split @ 2.65/1.1 (-$17825 + $6900 = -$10925). Of course you already banked a nice gain from the put side, so the -$11K is no big deal, but at what point would you give up on the spread? Just rolling up and and out for another $6900 credit would still leave you pretty deep in the red. Sorry for all of the questions about losses, but how you handle these situations means success or failure with this strategy. Thanks for all the input. Regards. C
What you have to remember is that the $11k is a paper loss only with the index about 43 points OTM. THe $11k is a reflection of the bid/ask spreads and is not a true or realized loss. My exit strategy is based on the location of the underlying index with respect to my strikes. It would be too premature to roll up the call strikes when they are already quite far out of the money. It is easy to get swayed by the paper loss fluctuations but the nature of the wide bid ask spreads will show wild fluctuations. The only numbers that matter right now is the location of the index. What happens sometimes is that the short call being closer to the index will have a wild swing in teh bid ask spread while the further out long call will stay still and this makes it look like a large spread swing. After sometime it corrects itself slightly. That is why I try and ignore those wild intraday bid ask fluctations and focus on the index value. Keeps my emotions in check and my head focused on my risk management plan. Questions are fine, losing money isn't Phil
For data miners and SPX traders, here are the Expiration-to-Expiration percentage changes for SP500 for the last 10 years. The data is calculated from Close on the Friday of expiration week, so it is not quite the Friday morning "settlement" number. Should be good enough to checkout a few "what if" scenarios. SPX EXPIRATION PCNT CHANGES Start 19951020 Price: 587.46 Date: 19951117 Price: 600.07 %Change: 2.15 Date: 19951215 Price: 616.34 %Change: 2.71 Date: 19960119 Price: 611.83 %Change: -0.73 Date: 19960216 Price: 647.98 %Change: 5.91 Date: 19960315 Price: 641.43 %Change: -1.01 Date: 19960419 Price: 645.07 %Change: 0.57 Date: 19960517 Price: 668.91 %Change: 3.70 Date: 19960621 Price: 666.84 %Change: -0.31 Date: 19960719 Price: 638.73 %Change: -4.22 Date: 19960816 Price: 665.21 %Change: 4.15 Date: 19960920 Price: 687.02 %Change: 3.28 Date: 19961018 Price: 710.82 %Change: 3.46 Date: 19961115 Price: 737.62 %Change: 3.77 Date: 19961220 Price: 748.87 %Change: 1.53 Date: 19970117 Price: 776.17 %Change: 3.65 Date: 19970221 Price: 801.77 %Change: 3.30 Date: 19970321 Price: 784.10 %Change: -2.20 Date: 19970418 Price: 766.34 %Change: -2.27 Date: 19970516 Price: 829.75 %Change: 8.27 Date: 19970620 Price: 898.70 %Change: 8.31 Date: 19970718 Price: 915.30 %Change: 1.85 Date: 19970815 Price: 900.81 %Change: -1.58 Date: 19970919 Price: 950.51 %Change: 5.52 Date: 19971017 Price: 944.16 %Change: -0.67 Date: 19971121 Price: 963.09 %Change: 2.00 Date: 19971219 Price: 946.78 %Change: -1.69 Date: 19980116 Price: 961.51 %Change: 1.56 Date: 19980220 Price: 1,034.21 %Change: 7.56 Date: 19980320 Price: 1,099.16 %Change: 6.28 Date: 19980417 Price: 1,122.72 %Change: 2.14 Date: 19980515 Price: 1,108.73 %Change: -1.25 Date: 19980619 Price: 1,100.65 %Change: -0.73 Date: 19980717 Price: 1,186.75 %Change: 7.82 Date: 19980821 Price: 1,081.24 %Change: -8.89 Date: 19980918 Price: 1,020.09 %Change: -5.66 Date: 19981016 Price: 1,056.42 %Change: 3.56 Date: 19981120 Price: 1,163.55 %Change: 10.14 Date: 19981218 Price: 1,188.03 %Change: 2.10 Date: 19990115 Price: 1,243.26 %Change: 4.65 Date: 19990219 Price: 1,239.22 %Change: -0.32 Date: 19990319 Price: 1,299.29 %Change: 4.85 Date: 19990416 Price: 1,319.00 %Change: 1.52 Date: 19990521 Price: 1,330.29 %Change: 0.86 Date: 19990618 Price: 1,342.97 %Change: 0.95 Date: 19990716 Price: 1,418.78 %Change: 5.64 Date: 19990820 Price: 1,336.61 %Change: -5.79 Date: 19990917 Price: 1,335.42 %Change: -0.09 Date: 19991015 Price: 1,247.41 %Change: -6.59 Date: 19991119 Price: 1,422.00 %Change: 14.00 Date: 19991217 Price: 1,421.03 %Change: -0.07 Date: 20000121 Price: 1,441.36 %Change: 1.43 Date: 20000218 Price: 1,346.09 %Change: -6.61 Date: 20000317 Price: 1,464.47 %Change: 8.79 Date: 20000420 Price: 1,434.54 %Change: -2.04 Date: 20000519 Price: 1,406.95 %Change: -1.92 Date: 20000616 Price: 1,464.46 %Change: 4.09 Date: 20000721 Price: 1,480.19 %Change: 1.07 Date: 20000818 Price: 1,491.72 %Change: 0.78 Date: 20000915 Price: 1,465.81 %Change: -1.74 Date: 20001020 Price: 1,396.93 %Change: -4.70 Date: 20001117 Price: 1,367.72 %Change: -2.09 Date: 20001215 Price: 1,312.15 %Change: -4.06 Date: 20010119 Price: 1,342.54 %Change: 2.32 Date: 20010216 Price: 1,301.53 %Change: -3.05 Date: 20010316 Price: 1,150.50 %Change: -11.60 Date: 20010420 Price: 1,242.98 %Change: 8.04 Date: 20010518 Price: 1,291.96 %Change: 3.94 Date: 20010615 Price: 1,214.36 %Change: -6.01 Date: 20010720 Price: 1,210.85 %Change: -0.29 Date: 20010817 Price: 1,161.97 %Change: -4.04 Date: 20010921 Price: 965.80 %Change: -16.88 Date: 20011019 Price: 1,073.48 %Change: 11.15 Date: 20011116 Price: 1,138.65 %Change: 6.07 Date: 20011221 Price: 1,144.89 %Change: 0.55 Date: 20020118 Price: 1,127.58 %Change: -1.51 Date: 20020215 Price: 1,104.18 %Change: -2.08 Date: 20020315 Price: 1,166.16 %Change: 5.61 Date: 20020419 Price: 1,125.17 %Change: -3.51 Date: 20020517 Price: 1,106.59 %Change: -1.65 Date: 20020621 Price: 989.14 %Change: -10.61 Date: 20020719 Price: 847.75 %Change: -14.29 Date: 20020816 Price: 928.77 %Change: 9.56 Date: 20020920 Price: 845.39 %Change: -8.98 Date: 20021018 Price: 884.39 %Change: 4.61 Date: 20021115 Price: 909.83 %Change: 2.88 Date: 20021220 Price: 895.76 %Change: -1.55 Date: 20030117 Price: 901.78 %Change: 0.67 Date: 20030221 Price: 848.17 %Change: -5.94 Date: 20030321 Price: 895.90 %Change: 5.63 Date: 20030417 Price: 893.58 %Change: -0.26 Date: 20030516 Price: 944.30 %Change: 5.68 Date: 20030620 Price: 995.69 %Change: 5.44 Date: 20030718 Price: 993.32 %Change: -0.24 Date: 20030815 Price: 990.67 %Change: -0.27 Date: 20030919 Price: 1,036.30 %Change: 4.61 Date: 20031017 Price: 1,039.32 %Change: 0.29 Date: 20031121 Price: 1,035.28 %Change: -0.39 Date: 20031219 Price: 1,088.66 %Change: 5.16 Date: 20040116 Price: 1,139.83 %Change: 4.70 Date: 20040220 Price: 1,144.11 %Change: 0.38 Date: 20040319 Price: 1,109.78 %Change: -3.00 Date: 20040416 Price: 1,134.61 %Change: 2.24 Date: 20040521 Price: 1,093.56 %Change: -3.62 Date: 20040618 Price: 1,135.02 %Change: 3.79 Date: 20040716 Price: 1,101.39 %Change: -2.96 Date: 20040820 Price: 1,098.35 %Change: -0.28 Date: 20040917 Price: 1,128.55 %Change: 2.75 Date: 20041015 Price: 1,108.20 %Change: -1.80 Date: 20041119 Price: 1,170.34 %Change: 5.61 Date: 20041217 Price: 1,194.20 %Change: 2.04 Date: 20050121 Price: 1,167.87 %Change: -2.20 Date: 20050218 Price: 1,201.59 %Change: 2.89 Date: 20050318 Price: 1,189.65 %Change: -0.99 Date: 20050415 Price: 1,142.62 %Change: -3.95 Date: 20050520 Price: 1,189.28 %Change: 4.08 Date: 20050617 Price: 1,216.96 %Change: 2.33