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Credit spread techniques


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Credit spread techniques

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  #1 (permalink)
Austin Tx/USA
 
 
Posts: 3 since Jul 2013
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What are you all doing to be successful on your credit spreads? Is it loss limiting techniques? Using Greeks as indicators?

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  #3 (permalink)
Portsmouth, NH
 
 
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It's management of the trade. Either closing it or rolling it when the market starts to move too much against you.

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  #4 (permalink)
Austin Tx/USA
 
 
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So lets get specific, If I do a credit call spread like on aapl 08/02/2013 475 and the 480. delta of .07 for 475 and .05 for 480. So AAPL runs up. Anything to help me get out of the way ahead of time? Roll'em till your right, what else can I do?

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  #5 (permalink)
Portsmouth, NH
 
 
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I'm assuming your strike selection is hypothetical because that spread as of yesterday was worth about 10-cents. Not much profit potential after commissions.

Anyway, right now that spread is so far OTM that there's not much worry. If the market does start to move higher, you could sell an OTM put spread to turn the position into an iron condor. Doesn't increase your $ risk, but increases the area the stock can go to hurt you. Brings in a little more credit.

You can roll out and up. Keep an eye on this type of adjustment and try to execute before it turns from a credit into a debit.

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  #6 (permalink)
Austin Tx/USA
 
 
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Granted, I guess I could also drop the short leg and hold the long leg if I think the stock is going higher within that week time frame. However is there something technically I could be watching to monitor the steam of the stock. Is it watching the Implied volatitily? Or is Historical Volatility better? Anyone charting the Greeks for indications?
thank you for the posts so far!

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  #7 (permalink)
Chicago, Illinois
 
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Correct me if I am wrong, but you want to watch IV when executing the trade moreso than while you are in it. If you have Implied Volatility high going into the trade, the options decrease in value if there is a steady rise in the stock price.

If you are planning on doing a bear call spread on AAPL, right after earnings seems like you are selling insurance when it is pretty cheap as IV is deflated right after earnings. IV levels haven't been this low for AAPL in almost a year (August 2012)

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  #8 (permalink)
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With this particular strike selection (so far OTM), and a $5-wide vertical spread in general, the implied volatility is pretty much meaningless because the vega of each strike is very similar, and in this example very small, so the spread itself has little to no exposure to implied volatility.

Implied vol also says nothing about the direction of the stock. It's a measure of the expected "range" of the stock, so it's not going to help with direction.

There's far more that goes into deciding when & how to adjust than can be explained in a message board, but I gave you one idea of watching your ability to roll the spread out in time and further OTM for a credit. That adjustment can be done for a credit typically, but when it starts to move to a debit, the market is telling you it's time to adjust.

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  #9 (permalink)
portland or
 
 
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This is a bit late but to add what to Greg said, first if you are far out of the money when you put on this trade, your roll will clearly be much closer to the money if you want to do it for a credit or break even. You could also just turn it into a butterfly by buying a debit spread cutting your risk quickly if price is close to your short for sure. This also should give you a little more flexibility to adjust further. You could also just cut the deltas by adding longs or cutting shorts but again if you started way out of the money your ability to do this and still have a credit is greatly reduced.

Lastly make sure you have a plan ahead of time and "planned capital" meaning more capital to inject in the trade to take care of adjustments. Many folks fail to take this into consideration when creating a plan. In other words you might need twice as much capital when you factor in adjustments etc. That means even though you only may need it twice a year, you have to have it 12 months of the year, ready to go.

Good luck!

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  #10 (permalink)
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I am a day trader of options. I mainly trade weekly options.

What I enjoy doing is using the overnight high and lows and the previous day high, low and close levels. Using these five levels and the relationships between them will provide a lot of insight on what should happen.

For example, lets look at $PCLN from this past Friday.

On the chart,

- the pink is the overnight high and low
- the green is the prior day high
- the red is the prior day low
- the white is the prior day high. however, the green is covering the white line since these levels are the same.

I actually day traded this Friday and observe that the overnight high provided resistance. Once $PCLN broke the overnight low I knew it was over. And, when it broke the prior day low it was really over. So, at 8:40 AM I started to scale into a position of doing this with the weekly calls that expire that day

- Selling the 1190 calls and buying the 1195 calls at 8:40 by selling 3 legs
- At 9:00 I sold 10 more legs
- At 10:40 I sold 5 more legs
- At 14:00 started a new position of selling the 1180 calls and buying the 1185 calls (3 legs)
- At 14:15 sold 5 more legs of 1180 calls and buying the 1185 calls

I let everything expire worthless meaning I didn't buy any of the legs back. If you are using thinkOrSwim, if you buy back a leg at .05 you will not get charge a ticket fee. Well, actually you will get charge a ticket fee but then you will automatically receive a credit

Here is the chart... crap, I only have 2 posts and need 5 posts so here is a link to the chart i.imgur.com/oA8a8l6.png

Some things to take away...

- At times, the overnight high and low will mark the high and/or low of the day
- If we open below the prior day close and break the over night low, it is pretty much over ( more downside )

EDIT:


Since I day trade options I don't look at the greeks. I just look at the intraday action and the price action. I keep things simple. ;-)

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  #11 (permalink)
Northern California
 
 
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RHcZL0Mfs View Post
... I let everything expire worthless meaning I didn't buy any of the legs back. If you are using thinkOrSwim, if you buy back a leg at .05 you will not get charge a ticket fee. Well, actually you will get charge a ticket fee but then you will automatically receive a credit

You have to give TOS credit for not charging commissions to close these options. It promotes good Risk Management by encouraging traders to unwind these short options that have a very poor risk/reward ratio.

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  #12 (permalink)
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RHcZL0Mfs View Post
I am a day trader of options. I mainly trade weekly options.

What I enjoy doing is using the overnight high and lows and the previous day high, low and close levels. Using these five levels and the relationships between them will provide a lot of insight on what should happen.

For example, lets look at $PCLN from this past Friday.

On the chart,

- the pink is the overnight high and low
- the green is the prior day high
- the red is the prior day low
- the white is the prior day high. however, the green is covering the white line since these levels are the same.

I actually day traded this Friday and observe that the overnight high provided resistance. Once $PCLN broke the overnight low I knew it was over. And, when it broke the prior day low it was really over. So, at 8:40 AM I started to scale into a position of doing this with the weekly calls that expire that day

- Selling the 1190 calls and buying the 1195 calls at 8:40 by selling 3 legs
- At 9:00 I sold 10 more legs
- At 10:40 I sold 5 more legs
- At 14:00 started a new position of selling the 1180 calls and buying the 1185 calls (3 legs)
- At 14:15 sold 5 more legs of 1180 calls and buying the 1185 calls

I let everything expire worthless meaning I didn't buy any of the legs back. If you are using thinkOrSwim, if you buy back a leg at .05 you will not get charge a ticket fee. Well, actually you will get charge a ticket fee but then you will automatically receive a credit

Here is the chart... crap, I only have 2 posts and need 5 posts so here is a link to the chart i.imgur.com/oA8a8l6.png

Some things to take away...

- At times, the overnight high and low will mark the high and/or low of the day
- If we open below the prior day close and break the over night low, it is pretty much over ( more downside )

EDIT:


Since I day trade options I don't look at the greeks. I just look at the intraday action and the price action. I keep things simple. ;-)

RH: Are you still trading this method? If so, how has it been treating you?

Thanks

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