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Hi all,

 

I'm going to start trading credit spreads and wanted to keep a thread about it. I'll update with pictures of charts when I enter into a position and the reasoning for the position.

 

What will I be doing? Mainly selling credit spreads on ETF's. How will I be basing my decisions? Mostly volatility based probabilities. By watching different statistics I can discern which OTM spreads will offer real nice returns for the money invested. How much return on investment will I be looking for each month? I'd say anywhere from 10-15% is ideal for me. I'm going to selling some stuff so far OTM that the probabilities really will be on my side but the premium collected isn't "huge" by daytrading means. But, it's going to be about consistent monthly income, not about making millions before lunch. I'm tired of trying that game. What I'll be doing here is what I did before I started to day trade. Will I include some day trades? Absolutely. I'll mostly day trade the QQQQ as thats where the liquidity is and it's pretty cheap monetarily.

 

So, my first order to tackle:

 

tos_charts___thinkorswim__build_966_-20071019-094005.jpg

 

Currently working at a 0.19 credit

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Sure,

 

With an option, you're holding a decaying or wasting asset...that is, when you BUY an option. So, when you sell it to someone else, they are the ones holding the bag of time decay while you reap the rewards of it. By selling them you've got a positive income so long as the market stays above the short strike of your vertical (if selling a put spread) or below the short strike (if selling a call spread) or in between them (as in an iron condor).

 

Each day will bring you more coin as long as it doesn't hit those strikes. It could be 1 penny inside and you'd still collect all your premium. My plan, though, is to be out of these trades within 4-10 days of expiration to mitigate any gamma ill effects on the trade coming in to expiration. Basically meaning as the time decay grows faster as expiration approaches, the gamma will move the delta (price the option moves per penny of underlying) faster. If I'm at expiration and price is close to a strike I dont want it to be so close to (which wouldn't happen as I've got risk measures in place to prevent that) then the position can move against me real fast. So, I'll be out of these positions before any of that can happen.

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The risk is limited, so is the reward. Basically, you risk the difference between strikes minus the premium you collect.

 

Now, to update...I've gone and placed a modified order of the one above. I'm currently working :

 

NOV 161/160/143/142 Iron Condor for credit of .21 this equates to a 22% ROI after commissions.

 

In this case there is 1 dollar between the strikes and I'm looking to collect 21 cents, so risking 79 cents. After commissions get factored in, that gives me 22% ROI. What are the risks of this actually giving me my full loss? Not much.

 

What will happen if we get a swoon next week? Well, I've got the 161/160 call spread to give me credit there, and then I'll have to adjust the put spread by rolling it out to another month/strike and get defensive on it. What are the chances of that happening based on volatility right now? About a 13% chance that this will not work out. That reads : 87% chance of success on this trade.

 

For 22% in a month with 87% chance of success, I'll take it.

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About a 13% chance that this will not work out. That reads : 87% chance of success on this trade.

 

For 22% in a month with 87% chance of success, I'll take it.

 

If you can share how you arrived at these numbers, I would love to see them. As soon as you translate it into math, I am onboard! ;)

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Well, the probabilities of expiring are loosely based on the delta of the position. There are some other measures that go into it based on volatility and such, but if you have the delta readings you're pretty much set to gauge those probabilities.

 

Say, for instance, you're selling a spread on SPY. The current delta of the 142/143 vertical is average of .15 (.14 and .16 respectively). So, making that into % terms it'd be 15%. That 15% is basically the % chance of that option expiring in the money. Since we don't want credit spreads to expire ITM and we want them worthless, this gives you an 85% chance of expiring worthless.

 

The 22% I explained earlier, and is easy to figure out. Credit/risk.

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Also, just noticed I didn't include the call spread of this IC....the call spread has a delta of about .085 averaged between the 2. Gives an 8.5% chance of expiring ITM, or 92.5% chance of expiring worthless. I basically average the 2 together (85 + 92)/2 and get 88. So, pretty good odds it'll work out in my favor. The plan is, though, to have your risk measures in place just in case something unexpected happens.

 

Benefit of IC...you pay margin on only 1 side, but collect 2 sides of premium.

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••• Update •••

 

Filled on my NOV 161/160/143/142 Iron Condor for credit of .21 this equates to a 22% ROI after commissions.

 

28 days till expiry now

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Now that you are filled Tin, that is telling us that someone out there is speculating that the market will reach either of the levels and if so, they will cash in, correct? So from their point of view, they are spending a little to hopefully make a lot, even though the odds are not in their favor?

 

Just trying to get a handle on both players here.

 

You are playing the probabilities and saying I'll collect this 'small' amount b/c the odds are really in my favor. The other person is saying I will pay this 'small' amount b/c I am paying so little for it.

 

Am I getting there?

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First part...you're right on.

 

As for the 2 strikes, yes, you need 2 as you are long 1 strike and short the other. Basically a hedge so you're not selling naked.

 

OK - how do you determine how big the spread should be between the strikes? And how does that affect the bottom line?

 

In your trade here - if price goes PAST either level, that is not good, correct?

 

And as for needing two, that's b/c the long and short basically 'cancel' each other out so that you are not selling naked? This still allows you to sell the position as you have done here, but you are not naked b/c both sides are 'covered' in some fashion?

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And in the end the Iron Condor just says - as long as price stays between my levels, profitable trade. If it reaches or approaches either level, you may need to do something as the trade did not work as planned.

 

Is that the idea and the rest is simply the mechanics?

 

If so, I could outline some possible S/R areas and you could illustrate how an iron condor would work?

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OK - how do you determine how big the spread should be between the strikes? And how does that affect the bottom line?

 

In your trade here - if price goes PAST either level, that is not good, correct?

 

And as for needing two, that's b/c the long and short basically 'cancel' each other out so that you are not selling naked? This still allows you to sell the position as you have done here, but you are not naked b/c both sides are 'covered' in some fashion?

 

I determine how big it should be by looking at the risk associated with it. Basically, I keep moving them around to see if a 2 dollar spread would work better than a 1 dollar...and right now there's a couple more positions that look TASTY.

 

If price were to go past one of those levels, I'd already be adjusted or hedged so that wouldn't matter. It would suck, yea, but I'd be safe.

 

3rd...right.

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And in the end the Iron Condor just says - as long as price stays between my levels, profitable trade. If it reaches or approaches either level, you may need to do something as the trade did not work as planned.

 

Is that the idea and the rest is simply the mechanics?

 

If so, I could outline some possible S/R areas and you could illustrate how an iron condor would work?

 

 

And yes, exactly. That's one of my main beef's with people who are obsessed with greeks. Bottom line is that at expiration, price needs to be at a certain point and you make money. Sometimes people get real wrapped up in it all, and I know it's important to take into consideration for complex strategies, but things I do aren't complex.

 

Sure, outline some S/R areas and I can show you how it'd work.

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Tin,

Thanks for sharing and bearing with me. It's been so long since I even thought about a call or put, let alone a condor that I needed some refreshing.

 

I'll see if I have some time this weekend to throw up some charts and see what you think.

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Currently working another SPY order (yay volatility)

 

158/160/141/139 IC for a .52 credit. I'd be really surprised if I get a fill on this, but wanted to put it out there just in case. It's a really nice ROI for a *kind* of riskier play with the short call being at 158. That'd basically be putting the SPX at 1580 and with what looks to be a failed break attempt in the SPX, I do feel pretty safe with it.

 

tos_charts___thinkorswim__build_966_-20071019-145201.jpg

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Love credit spreads...making money when the market's down.

 

As for how I'll adjust these spreads...when any leg of an IC is .10 or less, I'll buy it back. No sense in having a gain and letting it potentially turn into a loss for a wimpy 10 cents more.

 

If price comes down into 1.50 - 2.00 of my short strike, I'll look to close out the short strike and hold the other IF there is a lot of time left to expiration AND there seems to be more potential to that side.

 

If we are inside of 10 days (calendar days) until expiration, I'll look to close out the trade. No sense in taking an un-needed gamma exposure coming into expiry.

 

Weekends are the best, because time decay is working for you while the markets aren't even open. Gotta love that.

 

Current market situation :

 

tos_charts___thinkorswim__build_966_-20071022-112151.jpg

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chart_station_-_parallels_desktop-20071101-161225.jpg

 

Right in the middle of my sweetspot as of todays close. Very nice and am lovin' it. 2 weeks to expiry and these trades could be closed out next friday. Currently sitting at around a 10% gain on risk, looking to make up that next 10% in the next week.

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