In terms of defense, I will close the spread for a loss if either 1) the SPX crosses 1970 or 2) the spread gets to about 2.10-2.25. If the SPX drops, and the spread gets to about 20-30c anytime this week, I will also close out the spread early for a "win"."
Update: On 3/2/16 the SPX crossed 1970, and I closed out my spread at 1.95 for a 70c loss. Today, 3/14/16, the SPX closed at 2020, that means with about 4 days to expiry if I held the spread I would be close to taking a full loss.
Lesson -- the days to expiration was only 25 days. Safer spreads are typically found between 40-60 days.
It's important to realize as a trader, CAPITAL IS YOUR INVENTORY. SMALL LOSSES need to be taken in order to ensure that you can make the next trade.
Therefore, on March 7th, I re-entered a 2080/2090 credit call spread when the SPX was ~2000 for a 2.10 credit this time with about 46 days to expiration.
On March 10th, the SPX dropped intraday to 1970 and the spread went to 1.30, I didn't close it expecting theta to continue to eat into the spread. However, on Friday, 3/11, the SPX ripped 32 points to close at 2022. My spread went from 1.30-->2.90 in one day. My emotions changed quickly, and I considered closing the position but because of resistance at the 200DMA, I decided to hold on.As of the close on March 14th, my spread closed at 2.55 and the SPX closed at 2020. As every day passes, theta will eat into my credit call spread (a good thing- position is theta positive). My current break-even for tomorrow (3/15) is if the SPX gets to 2010, then my spread will get back to ~2.10.
In terms of defense, I will close the spread for a loss if either 1) the SPX crosses 2045 or 2) the spread gets to about 3.40-3.60. If the SPX drops, and the spread gets to about 20-30c anytime, I will also close out the spread early for a "win".
Again, play defense and set stop limits!!
I'm not sure why you think a 40 - 60 day spread is "safer" I've always been taught that time is the enemy when selling credit spreads - keep the time window as small as possible. I agree with you that the market is overvalued, but just because it is doesn't mean that it will go down.
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ReplyDeleteIt's "safer" in the sense it allows for calculated adjustments and they are less "stress", which leads to better decisions.
ReplyDeleteFurther, there is less gamma risk considering the longer time duration.
In addition, the further out of the money the spread is, the more layers of resistance there is between SPX and 2080.
Spreads that are 7-20 days are binary.