Good point. Perhaps the SEP 1230 would allow more opportunities to short off the weeklies. For reference the current ask is: SPX AUG 1230 P 6.90 SPX SEP 1230 P 16.40
You are talking about put ratio backspreads which is different than credit spreads and used in different situations. I would not compare the two since their profit and loss scenarios are quite different. The credit spreads are more susceptible to delta/gamma than they are to IV changes. My strike selections are more based on market analysis, technical analysis, probabilities, returns and risk management than a trade on vols.
Yes, the call spread strikes I chose are a little agressive and that is why I did only half the amount for my limping condor. I see more risk to the downside than the upside in this market with weakening economy, inflationary fears and missle dodgeball in the mideast. The SPX high is close to 1330 but I see us having a hard time testing recent highs near 1290 or even breaking 1300 in the next 4 weeks. The wild card is the fed but I do not think we are going to get any great news that will send us higher and we will trade sideways the next few weeks anyway with oil and mideast volatility. Thus I chose the 1310 short strikes. Also if I have to adjust higher for some room and cushion, I have the ability to increase the amount of contracts do for more credit without incresaing my margin requirements (although my upside risk now increases). Therefore I can take in more credit with the adjustment and push further out of the money. I am also looking to buy some partial hedges on a downward move and we are getting it today a bit so I may move in with some partial hedges.
I think he meant AUG 1230 being the back month and the weekly AUG expiring this week being the front month. More opportunity to trade or more trading turnover i suppose.
The Reg T. margin requirement for both of the diagonals i have open combined is about $95,000 or so and my haircut is currently around $70,000. Since the haircut is not broken out in any way and also includes a few overnight futures positions I have open, I cannot tell you accurately how much the haircut truly is just for those diagonals. Oh and the reason the haircut counts both the call and put diagonal and not one side only as with an Iron Condor is that my diagonals are not with the same expiration months or width so they may be treated as 2 separate position I presume. Anyway, the daily sheets just have final daily numbers with no breakouts. Perhaps Mav can give you a specific haricut number for a position once it is on.
You could but the weeklies have pretty wide b/a spreads and not a lot of strike selection. For example, that $5.20 debit sounds pricey to me but I have not used the weeklies in many months
Murray, Thanks for sharing a wonderful document with us. I have 2 questions regarding closing a position. 1. It is true that hedging reduces your expected return. My monte carlo simulation also showed that the expected return is reduced if you have a pre-set cutloss point ( such as stock at your strike, 2x premium, 3x premium), so I tried not to hedge in the past. However, in May I faced a significant loss with OIH put options because I postponed the hedging process. I am currently facing a dilemma unable to judge what to do when the market has moved against your position. Do you use TA (support & resistance) to define your cut loss point? How do you choose your cut loss point? 2. Regarding closing early. What do you do with your diagonal spread when the front month short is close to worthless because the market moved further away from your strike? I am facing a similar situation now. I opened a modified 3-leg position (as I have posted before) on 7/5 STO OIH Aug 175 call @1.0 BTO OIH Oct 170 call @ 5.2 STO OIH Oct 175 call @ 3.9 with a net debit of 0.3 The initial plan was that when front month short expires, I STO another Sep short and the position becomes a credit position. Now the market moved further away from the strike, and bid ask for OIH Aug 175 is 0 x 0.05. I can close the position now at 0.05, but it is very obvious that Aug 175 will expire worthless. What are my choices? 1. close Aug short, and STO Sep short ( same as my plan but earlier). BYW there is no market for Sep 175 call. 2. close Aug short and it releases my margin (wait for other opportunities). The margin is very small though because it is far away from the strike. 3. wait till expire. What do you think? I want to learn from your experience of closing diagonal spreads.
Any action to reduce the risk(hedge) will also reduce your return. It is always a tradeoff. The real question, in my opinion, is calculating which costs more over the long term. Your cummulative hedge expenses or your cummulative losses if there is no hedge.
According to monte carlo simulation, it is better not to hedge in a long run. Reality always differs from simulation, and I don't have enough trade records to tell myself.