I'm doing a little ET research here even though I think I already know the answer. The question pertains specifically to whether or not you are long gamma or short gamma. I know most you guys are probably spreading them.
There has to be more than 4 trading them, lol. Spreading them has been working great when iv is high, and long gamma when low. Now that the vix is at 18 and looking to test 16's in the next couple of weeks, i would be a buyer of slightly ITM puts and calls simultaneously.
I've sold them a couple of times, but then I looked at the probabilities and the prices, and decided buying was better. Back when I did stocks mostly, if I put a collar on, the put side of it would be as close to expiry as I could get. I wanted lots and lots of gamma. Same here: if I have a position that's net sold, I'll buy a cheap weekly for that cheap hit of high positive gamma.
As a rookie here, can you please explain the simultaneous buying and selling ITM? thanks Michael I am quite familiar with credit spreads
Hey Mav, I've always enjoyed your posts, especially the provocative discussion you started with the thread-- The Perfect Option Position I'm looking at trading a few SPX weeklies to supplement my monthly activity, but haven't done so yet. The volume is improving somewhat, but it is still pretty thin on the edges (OTM calls and puts, that is). If the volume keeps improving, and they start adding more strikes, I'd definitely be interested. I'd be looking for 5 point strike increments within 50 points of the current index levels. Then, they would have my attention. One series that is definitely promising, and that I will probably trade that sort of qualifies as a weekly is the DEC5 series which is the quarterly that expires at year end. There are 10 point strikes in most of the range and the major 25 point strikes as well. The volume for this is quite a bit higher than the current weeklies. I think opening the weeklies on the Thursday before was a smart move. A lot of people roll over positions as an adjustment, and this makes it quite a bit more convenient to do that while the old weeklies still have a day left. In most cases, as long as you're not right at the money, this means a decent credit for the rollover while avoiding the SET issues on Friday morning. I have to admit that I was exposed to the SET on Nov. 19 because I had a few 1195/1200 short call spreads left on top of a few 1170 longs, and couldn't get a decent price to close them out. I don't particularly like the feeling. Fortunately, it worked out pretty well. It could easily have been nasty.
Trefoil, Your comment about high gamma made me chuckle, but I think your approach is the correct one. I have been playing current month partially against next month using the same strategy-- net credits overall, but some "protection" in the current month. It definitely helps a lot if the market moves strongly against your credit spreads. Strangely enough, it actually works better for the call side than the put side, even though the strong movements are somewhat more likely to the downside. The weeklies could add another layer to this process, or replace it with weeklies versus monthlies-- I'd probably think of it as three protection layers in stages. I'd be interested in your comments on these issues.
Interesting observations. I've never had one do anything but expire worthless so far, so I haven't yet had the experience to know that it would work better on the call side. That's definitely counterintuitive. When I did collars, the puts were always what went ITM, so that's where my experience lies with this idea. I remember being very happy I did one whose expiry was very close, as it almost immediately - in the context of a collapsing stock - went to 100 delta. After that, it was just a question of figuring out where the bottom would be and selling the puts at some point near that. That's what made me think the weeklies would be good for protecting credit spreads. But it sounds like you've had a few provide real protection against your spreads. That hasn't happened to me yet.
Thanks for your quick response. My first post talked about 1170 calls and 1195/1200 call credit spreads. The 1195/1200 spreads were the lowest level of credit spreads remaining, and fortunately the smallest group. I actually had a decent number of 1170 calls in action which expired solidly in the money on Friday. Quite a while ago, Mark Wolfinger and I had a discussion about this, and I came to the conclusion that he was right about putting a couple of calls "inside" the position so that the written call spreads were further away from the money than the ones purchased. This has proven useful on both the call and the put side over a number of months. Choosing the correct strikes for this is very important. If you choose correctly (or predict correctly!!), then what happens is that the written spreads expire worthless, or nearly so, as in the case of the 1195/1200's, and definitely so in the case of the 1225/1235 spreads, AND the bought calls expire in the money. This means gravy, plain and simple because the value of the expired long ITM SPX options of course becomes cash in your account and the credit spreads brought in cash in the first place. The caveat on this is don't be too greedy. If you get too close to the money on your credit spreads, you can get your fingers burnt fairly badly because you can't protect yourself 100% against major market moves and still collect credits. Fortunately, in my case, the 1195/1200 spreads were actually not enough to kill off all the value of the 1170's even if the market had gone past 1200. I must admit that I cut it too close for comfort this month and will be backing it off for the December expiry. If the market drops, and I think there is a good chance of that happening, I might wish I had cut it pretty close, but I'd rather be safe than sorry.
In effect (and I've been thinking about something like this) you had a strangle inside an IC? Actually, I suppose that's kinda what I did to myself, except it seems you actually deliberately look to make money on the strangle. Interesting. From a vol POV, would you think or have you noticed that putting the strangle on in times of low vol makes a difference to profitability? Seems obvious that would be the case, but sometimes obvious is wrong.