What if IV were so high that the corresponding call was $15 bid? Wouldn't the arbs be willing to pay a time premium for the put? Mark
Murray, Very interesting points. I carry many small positions each month (I sell spreads for cash credits only and I also sell more call spreads on every rally and sell more put spread on every dip - until I have invested all I care to invest for that time period). To date, I have been happy to take my profits early, by closing diagonal spreads (for another cash credit). That allowed me to open new positions in the further month without waiting for expiration. Thus, it all boils down to this: Is it more profitable to open the next month early, when the credits are larger (I can go further OTM for additional safety when opening early), or to hold current positions in an attempt to collect even larger profits? Have your studies considered this alternative? Thanks Mark
I'm just now getting this concept...I suffer from lack of oxygen...So I took a look at the RUT because that is what I have been trading ICs with. On 7/14, mid-morning, RUT was at 683. I could have STO the JUL 640p for 1.45 bid, or maybe 1.55 mid-pt.; BTO the AUG 630p for 7.3 ask, or maybe 7.15 mid-pt. BTW the delta at that time on the JUL 630p was -.10. The RUT Set wound up at 681.8; the AUG 630p b/a at close yesterday was 6.9/7.3. Even STC this position at market would have returned 1.05-1.15 credit or 10.5-11.5%...for only five days. Unless I'm missing something, that's a good deal and a pretty short time period to have your money on the table. Bob
Mark: I tried the MID over a year ago and had to adjust out of a bull put so that I wound up at about breakeven for my IC. I was watching it yesterday and it seems pretty volatile relative to the SPX. Played the RUT a few times, but getting out was a nightmare. THe RUT MMs are very tight fisted. Is this your experience as well. Different question. I haven't been playing bull puts because of my concern over a black swan event. Do you put on any hedges or take any measures to provide "insurance" should a black swan hit. Thanks.
Mark, The answer lies in what the market offers you. I seem to trade opportunities when the market allows. So you answer your question... is tough. Yes.. next month out is nice for additional premium and FOTM positions... but you also have more time to be wrong in the trade. So it comes down to return on time interval... and if you're selling premium... that occurs in the last few days to expiration.... but that also is where the risk is greatest also... So... I think looking for small opportunities... whether it be in the current month... or next month is what I find best for my style. For example, we have diagonal positions on for the next two months... now.. placed them when the VIX dropped to 14. Also applied some FOTM put credit spreads when VIX was high last Monday.... ie, sold the 1115/1125 for .55 This was definitely not the time for placing the Diagonal... but this was a great time to take advantage of the Put Skew. It's all about consistency... risk management... Hope this was helpful, Murray
Bob, This example showed that you took advantage of the fast decay of front month leg as compared to the back month. The time decay grows exponentially till expiration. You have to consider the possibility that RUT went up before July expiration. You might suffer a loss say if RUT was 720 at July expiration day. (I didn't run any simulation and can't confirm this statement) So if you want to take advantage of fast decay when close to expiration, I will consider a naked write ( or credit spread if you are not comfortable with risk profile of naked positions ). Percy
Bob, Vega plays a large part of this position... and yes it can be powerful as it moves your direction or increases in VEGA. Try to figure what would have happened if the market moved and RUT closed at 690. According to my estimates.. you still would have made a small profit. This is certainly not the 'holygrail' of strategies... but certainly one for the arsenal. Enjoy, M~
Hi, I find RUT MMs reasonable. That means they (almost) always show a bid for my spreads that is 15 - 20 cents better than the natural b/a. About half the time, I get filled immediately if I offer 5 to 10 cents better than the mid-point. But - I find it more difficult to close diagonals. Perhaps the MMs natural inclination is to own gamma and that means they awould be eager to allow me to open (but not close) those diagonals. I have no black swan protection per se - unless you count being long vega (I do) as limited insurance. Mark
good question. these trades are part of a larger piece. when/if the aug expires the long sep is free. then a new calendar is rolled into for a credit. the result is a form of a diagonal backspread which has no cost basis and, in my view, a better risk graph than a vertical backspread. most if my trading is short premim and vega. these trades simply balance some of that out. if we rally to 1300 then everything else is doing well. but, on the rally if a calendar were set up for a debit it could very well lose money. for my purposes the margin is inconsequential. however, if the aug expired with sp at 1200, the seps could be worth upwards of 25 points which is over 6k. 150 percent return on margin.