Donna, Not an expert in this area, or indeed any area for that matter but I believe it was McMillan in his first edition of McMillan on options that first brought to my attention the activity of large abitrages and the effect they might have on the index during expiration week but more pertinently and less obviously (to a newbie) on the corresponding options. Times may well have changed since then (1996) and he may have updated his view in the second edition (haven't read it) but if memory serves, he used to have a strategy specifically based around movement of the index both during opex week and the following week. I may be suffering from false memory syndrome but the strategy was based around looking at open interest in either SPX or OEX options or better still getting info from a floor broker about the activity of abritrage firms so as to get an idea on whether they were planning on executing large buy or sell programs during opex week, usually Wednesday or Thursday in order to balance their books. When the futures are trading at extreme premiums or discounts to fair value, the arbitrage folks will step in and sell the more expensive and buy the cheaper using the equivalent options e.g. long synthetic SPX is long SPX call, short SPX put at same strike. Anyway, I won't bother trying to explain it here as it has probably been done much better elsewhere and is a well understood concept. My point is, and to answer your question, there may very well be an inherent bias in the trading that preceeds option expiration but not neccesarily a bearish one. Incidentally, McMillans sister strategy was to take the opposite sentiment for the week following opex. I don't know if these strategies are still viable today but you seem to be well versed in these matters so you probably know better than I. Momoney.
This is the crux of the argument. You must be sick of having to justify using SPX every 3 pages lol. It will be interesting to see if the FOTM premium remains when SPX trades on multiple exchanges.
rdemyan, Please think through my example where I increase the margin but split it across two different months --looking forward to your feedback.
I have 30 1280/1285 for $1800.00 credits. This morning I was waiting for the market to pullback and I don't see any; So I decided to buy 6 SPY 125 for $900 about 50% of the credit I got. I hope that will make me sleep more comfortably for the next two weeks at least. Coach what do you think?
MoMoney, Extractor, I was doing 15-pt wide iron flys on OEX for the last two months and adjusting (into a condor) as the market dictated. Problem was that the margin at risk increases substantially with every adjustment... so I found myself debating whether to adjust or hold...
I think the partial hedge is a good first step. So far the 1280 looks safe but we still have a lot of time left. At least if the market pushes to 1260 or higher, you will have some income to partially offset any adjustment you would need to make. Remember I also bought a bunch of 127 SPYs for my 1275/1280 calls. Phil
Reminder of current positions and partial hedges: -300 SPX DEC 1135/1140 Put Spreads @ $0.30 -300 SPX DEC 1275/1280 Call Spreads @ $0.40 + 200 SPY DEC 127 Calls @ $0.30
Andy, You may have been slightly unfortunate with movement of the index in the last couple of months! Yes, the margin at risk can increase substantially depending on your adjustment but the question I have to ask is did you end up with a worse risk/reward ratio than if you had done a FOTM credit spread - typically in the region of 10:1 or even 20:1? Looking at just the physcial amount of margin used alone is IMHO not meaningful unless used in relation to the reward. If you look at it from that point of view, then you might consider yourself being no worse off than the FOTM credit spread practitioners. Were you? I have no idea. If the index hadn't moved as much as it did, then you would be considerably better off than the FOTM credit spread practitioners due to the superior initial risk/reward. That's obviously a big IF, but is why sideways markets can make this work. As for deciding whether to adjust or hold, I find it's best to take that decision out of your hands and set a stop loss target from the beginning. As I'm sure you're aware, it's a whole different sensation letting your spreads go ITM and can take a mindset adjustment to deal with it rationally especially if your background is FOTM credit spreads. If you're from the "Kelly Criterion" school of mumbo jumbo then that can help things balooning out of control in terms of what is at risk. There's no doubt that this style of strategy requires A LOT more managment than a corresponding FOTM strategy and that's the cost of potentially greater rewards. The middle road is perhaps, as I believe you may have mentioned, in the vein of Red Option's style. I'm not intimate with their approach as I haven't subscribed before. I have subscribed to their "Mini-Basket" to see what it's all about but that hasn't started yet. Correct me if I'm wrong but their approach seems to be starting off with an IC that is not ATM but not FOTM either. Something like 2:1 risk/reward perhaps. Leveraging European exercise capabilities, they are quite happy to let the index meander through the spreads and play the probabilities that it will expire in the body. Perhaps they make the odd adjustment. This approach appeals to me strongly if you can get the right kind of fill/credit for the given probability as detailed in one of my earlier posts. Damn, I'm rambling again. Have to unlearn touch typing. Hope you have better success with this strategy in the future. Have a feeling this month could be a better one for it. Momoney.