Andy: My book was does not specifically cover SPX spreads or Iron Condors as it is focused more generally on trade adjustments and risk/trade management. As for my secrets, it is not akin to the formula for Coke. It is more specific to my risk and trade management approach and how I handle my positions. This is something that is unique for every trader and it is more important to develop that approach yourself than copy the ingredients from someone else. The approach comes mainly from experience, although learning other people's styles and reading many books does give you different perspectives. My thread gives a glimpse into how I am trading/manging these posiitons but for those that follow along, the better resource is to use the thread to inspire your own approach within your own risk tolerance guidelines. Factors such as years trading, background, education, experience, emotions, available capital, risk tolerance, stress, time management and approach to money all affect your ability to trade. The key is working within your own framework to develop the plan that best suits you. If you were starting a new business, naturally we would look to established business for guidance and advice but failure would result if we tried to copy the blue print exactly. So my "secrets" are really nothing more than the way I use my experience, risk tolerance and risk and trade managment skills to guide me in selecting strikes, credits and follow-up adjustments. If you follow along you can get a general outline of my approach and use that to formulate my own ideas. A few months ago, I met with a hedge fund manager who mainly sold put spreads on the SPX. His approach was much more conservative than me and he only focused on put spreads. Also, he used really wide spreads. I never went into a detailed discussion with him about his specific approach because I could tell his stlye and tolerance was quite distinct from mine and our processes for position selection and management were too different. But in talking in general with him it was interesting to see a different approach to the same trade. Phil
Hi Coach, I have a question using a different strategy for the spx option chains in OX, while still using the principle of trying to split the bid ask spreads. What do you think of the purchase ATM straddles of SPX? If the index moves either way the price increases in theory. So will trying to split the bid ask in the middle work in this scenario? Eg buy the middle when buying the ATM SPX straddle and then selling the middle when trying to sell for a profit when the index makes a move in either direction. Another option is to sell ATM calender spreads (ie sell far month and buy near month) for credit and buy them back cheaper when they move in either direction. I remember reading somewhere that you said one needs to predict direction when implementing calender spread positions. Am i missing something here but im thinking one doesn't have to predict direction when hoping for a move in the underlying OTM in either direction. The original sold spread then will decrease in value. I assuming the only risk here is if the underlying stays at the striking price as time erodes. Sorry if this deviates from the thread a little but am wondering if splitting the bid ask can work for these strategys. Maybe they wont work cause I would have to buy close to the ask or sell close to the bid price. Thanks
Well without getting into the particular strategies, splitting the bid/ask on the spread position simply involves splitting the bid/ask spread of each option in the spread together. So there is nothing special about credit spreads. You should also try and split the b/a spreads on SPX options as best you can whether doing credit spreads, straddles or even calendar spreads. The ability to do so is not based on the strategy but perhaps on contract size, spread size and the mood of the market makers. Phil
optioncoach, This is an excellent thread! I have a colleague who placed a vertical put credit spread with EBAY with both legs in the money. Have you ever heard of doing this? It seems to me like it is the riskiest type of transaction you could do as the short put could be called away from you at anytime. Any advice? 30 Jan (07) 42.50/50.00 Bull Put Spread @ $4.50 (Stock at $42.00) Credit = $13,500 Risk = $22,500
Does your colleague realize that he/she could have done exactly the same trade with calls and have no early assignment risk!? That is, selling a 42.5/50 put vertical is exactly the same as buying a 42.5/50 call vertical (i.e. 42.5/50 bull call spread). It has exactly the same payoff! By the way, the risk is $9,000 not $22,500. I.e. it is a 7.5-point spread so (7.5-4.5)*3,000=9,000.
In the money credit spreads are ones that are extremely bullish or bearish. The expectation in the EBAY position is that the stock will move higher by expiration and therefore doing deep in the money provides the most credit. The position described is no different than doing a $42.50/$50 bull call spread for a small debit. It will have the same risk/reward profile, depending on bid/ask spreads. The risk comes is that you are selling a deep ITM put which has a higher probability for early assignment. The person tried to counter this risk somewhat by doing JAN 07 LEAPS since options with time value premiums are less likely to be exercised early. The expectation is that if the stock moves higher in the next 6 months or so, the time value premium will still be significant to avoid early assignment and the spread will have shrunk in value, especially if the stock moves above $50. Time decay will not work for you given the long time to expiration but I think the goal is for the stock to move higher long before expiration , even before the end of this year perhaps. It certainly is a viable strategy and akin to the $42.50/$50 bull call spread. Selling deep ITM puts is not always a good idea given early assignment but using 2007 puts reduces this liklihood somewhat unless the put moves even further ITM and the time premium disappears. But my understanding is that such a trade may be more a directional position expecting a nice move in the next year so that enough time value exists making early assignment less likely, and even more less likely with a move to $50 or higher. Phil
Well after coming back from a relaxing week I decided to grab more credits and open a new position. SPX @ 1231 Sold 100 SPX AUG 1175/1185 Put Spreads @ $0.50 (.15/.85 b/a) Credit = $5,000 Risk = $100,000 Return = 5% With SPX making its move above previous resistance around 1225 or so, I decided to take the put side and add more credits. I still have the current Iron Condor: 115 SPX AUG 1140/1155 Put Spreads @ $0.60 115 SPX AUG 1260/1275 Call Spreads @ $0.60 Combining the above IC and the new position added, I have a large amount of margin open and will most likely let these ride the next 2 weeks and let time decay kick in. My call sides are not about 30 pts OTM so any further strong moves might warrant an adjustment but not yet. Phil
Phil, Regarding the 1185/1175 put spread you just put on for $0.50, if the market continues in down the bullish path it's on, then fine. However, I'm hearing an increasing amount of "expert input" that the market is overextended and cycle analysis shows some major decline in August. Have you heard/considered this?
I have not heard really the expectation of a major decline in August but I can understand why the overextended talk has begun. The market (SPX) has reached 4 year highs but overall the market is still flat to sideways in the last two years. The SPX opened 2004 at around 1100 and we are at 1231 or so (5.8% a year). I think the market has been pretty flat the last two years and overextended may apply if we go back to 2002. A major decline in August could only come from a serious negative catalyst which is hard to predict. We have had a strong runup since late April and a "correction" or pullback could occur but I doubt it will happen in a few days. With my new position 45 points out of the money, it roughly corresponds to a 450 point drop in the DOW (not accurate but good back of the envelope estimate). Even such a drop would not bring me below 1185 and the time it would take for such a drop to occur, would allow time decay to eat into the position somewhat and allow a partial profit before expiration. The SPX has not seen 1185 since May (not counting the one day touch after the London bombing which caused me to add more put spreads on the expected pull back). So we would need some really bad news to send us that far and beyond. If the drops occur then I simply stick with my plan and roll down or close depending on the strength of any drops. I first may be inclined to add SPY puts at 120 or 190 first if the 1225 support/former resistance is broken strongly. The drop would also make my calls profitable which can be closed. Since I have booked quite enough profits for July, I can comfortably roll out or close the 1175/1185 should the need arise. However, given the current earnings news and chart patterns, nothing seems to indicate a severe price drop in August apart from profit-taking/corrections after the run-up since late June. With July ending this week, I am looking forward to booking another profitable month and then as August begins I will look to Sept options once they are close to 45 days to expiration. My initial expectation is to focus mainly on September puts since I do not want to get ahead of any Fall rally and the put skews will allow me to go far OTM for Sept should we also have any pullbacks. Happy trading. Phil