AS you may or may not know the CBOE's order book is time preference only.....NOT Time/Price preference as one would expect. Orders that may at one time appear as "marketable" can soon vanish from the broker screen in the pit with no recourse. Generally speaking small time retail traders have no business trying to trade SPX options. Nothing against this thread of course but the truth is the truth. Most newbie respondents in this thread should realize this can be a good strategy ... but generally this is the wrong instrument. Further, no clue why one would trade something that is exclusively listed like the SPX options on the CBOE when one is not force to do. Most serious volume in the SPX pit is done with a personal broker who can work the order for you. This way you can get the trade done at something VERY close to fair value (or you can do the synthetic). These guys are making markets in these options but theyâre not gonna pay you to trade FWIW
We are trying to trade the SPX because of the premiums available deep OTM. What would be a more appropriate instrument to trade credit spreads that would give these OTM premiums?
I think the benefits of liquidity and volume in the SPX outweight some of the disadvantages of the wide bid/ask spread. I have never sold at the ask or bought at the bid and although I rarely get filled at the exact mid-point, i am still fine with the fills I can get. I think it is also easy to track the S&P 500 and it is less volatile than most stocks and other indexes. This strategy is by no means limited to SPX and others are discussing using it on the NDX and RUT. I like to stick with what I know which is the SPX, even with its faults. Also like the choices of SPYs, E-minis and options on futures to increase my ways to trade this. Wide bid/ask spreads are certianly a pain but the SPX is what I feel most comfortable with. No one is forced to trade the SPX and I beleive some forum posters are applying this strategy to the Nasdaq. To each their own But SPX is my index and my ATM lol. Phil
Also got filled on the following today: SPX OCT 1125/1140 bull put spread at $0.45 I tend to go further out of the money on the put side of the IC because I'm jittery about a large gap being caused by a catastrophe. On the call side you generally don't see large gap ups in the SPX and there is usually time to make a calm, rationale adjustment. On the put side the gaps can be large. However, it would appear that the SPX is becoming more immune to these catastrophes. If anything the London bombing and Hurricane Katrina (at least for now) have had a sort of slingshot upward affect. I may have to start rethinking my put side strategy.
Prems are gonna be the "relatively the same" across all markets. You will not find any arbitrage profits. Compare the same strike in SPX and the SPY and you'll see. Perhaps you may see that the SPY is a better deal at times but who knows.
Dr. ZhiVodka Here are my reasons for trading credit spreads on the SPX. 1) It is generally a slow moving index that does not gap relative to my OTM short strikes. I have a day job and cannot constantly watch the market. When I traded stock credit spreads I was constantly on edge. 2) Premiums are decent relative to the margin that needs to be put up. 3) In eight months of trading the SPX credit spreads, I only lost money once and that was because I overreacted on the London bombing plus did some stupid adjustments (my adjustment plan is now clear in my mind as a result: manage risk first, profit is second). The biggest thing is that I am not a professional and don't want to be. But I can readily supplement my day job income by trading SPX ICs and following excellent journal postings and advice from Coach. In short, so far, I'm successful and I don't have to constantly watch my positions, so why not.
Problem is that you are offering criticism with no offers of alternative. It is easy to criticize but you have not suggested alternatives or reasons why it is better than SPX. Also, no one here claimed any arbitrage. Phil
Do not assume that readers of this journal are not interested in other strategies. However, we have seen too many postings from outsiders that criticize only yet offer few alternatives and even less hard data and results. If you have alternative strategies you want to suggest, by all means do and let us know which forum or threads to follow (outside of this forum). However, readers of this journal (and you see this through the many, many postings) have come to expect hard data, hard verifiable results, good advice and winning strategies. All of this is provided in this forum thanks to Coach. I would venture to say that all of the readers of this forum have been burned by the option equivalent of snake-oil dealers. Refreshingly, we encounter none of that from Coach and this forum. Finally, Coach gets accolades because he deserves them, but the readers are by and large intelligent and skeptical. If you read my postings I ask a lot of questions and don't always agree with Coach's answer, particularly in making adjustments during opex week. But the forum allows us to explore questions and learn from each other.