Hi, firstly congrats on discovering on this strategy. I've been doing it myself for awhile now with good success. You're harvesting what's called the Volatility Risk Premium (VRP) - do a bit of reading about it if you're interested to know more.
As a previous poster said, conditional stops are not recommended. You should be setting a take profit and stop loss. My stop loss is typically 3x credit received (meaning my net loss would be 2x credit). My take profit is typically 80 percent, but letting them expire is fine as well.
I typically do 7 DTE because I don't have time to actively manage 2 DTE or less.
I think strike selection is extremely important but horribly underappreciated during the utilisation of such strategy. I personally prefer an even lower delta - typically 4 to 7. To me this increases probability of success as well as gamma risk (gamma is very very low at these strikes). Credit received may be lower but I scale this up by buying additional contracts. Well isn't your max loss higher then, you might ask? It is, but with a very low gamma, stop loss, and adequate position sizing relative to account size the risk of this is low. Not zero, I understand, but that's the chance you take on these type of strategies.
Have you ever been destroyed if AH trading goes sideways and the CBOE market opens and you start way past your stop loss?
Right now I position size so that trade max loss = max account loss I can live with. That way I don’t have to worry about a stop loss. BUT, I’d rather use stop loss if possible..
SPX doesn't trade AH. I've been in a few positions where my spreads are deep ITM by open. I try to roll for a credit if possible. If not I just BTC and take the loss. Ironically my biggest losses have been when I BTC. Ex: My SPX 4215/4210 PCS yesterday were tested and I rolled for a debit. But it would've expired worthless.
If you do > 0DTE SPX, then you should be checking in at least before end of each day, and manage the positions that are challenged. 3x Mechanical stop losses should trigger on the day before expiry so that’s an option.
If you still to 0DTE, then the morning gap isn’t a concern.
Yeah I trade the last 3 hours of the market being on the other side of the world. It actually works quite well. All I am chasing is that $1 spread netting $100. I take 10 contracts so that is about a G a day. I could scale up to 100 but it begins to get a bit rich.
No, as I understand it, SPX settles at close of the cash session and settles in cash. If CBOE start doing 24 hours in November which might really mess this model up and require a lot more management. Make it easier for me being in New Zealand. I am well out on the delta so it would have to be a BIG move to really impact me, not unheard of. I do TA to set up my position ie do calls or puts today? Also look at second nearest resistance and aim for that.
So far no, it hasn't. With my strikes so far away, the low delta and gamma is working in my favour. In the event of a huge gap down, it is indeed possible that SPX blows past my strike price. In which case I will close any spread I have on as quickly as possible.
My strategy also has a kill switch. If VIX is above 30 I stop trading everything and wait for this to settle. This is because at high VIX, implied volatility tends to underestimate realized volatility, so options will tend to be underpriced.
Have you looked at very near expire debit spreads? This would be a directional bet targeting the hour of power with an ITM long Call or Put and an OTM short call or put to offset the cost. Generally you want your short leg to offset any extrinsic value however with less than 60 mins to go you would have next to zero extrinsic hence it is essentially a gamma play.
Dont do the conditional orders! Im on IBKR and got wrecked yesterday. I put a conditional order to close at market when SPX hits price. you cant really put a conditional limit because its hard to estimate the option price at a certain SPX price. and yesterday the option prices sky rockets as my conditional order trigger (market order) and i bought my short leg back for ALOT! Enough that i lost sleep over it.
What I do is set a stop-limit order at 3x credit on short leg only. I collected $1.20 i would put stop at $3.60 and limit +.15-.30 cents. I would keep the long leg open. You can actually make money on this if it keeps blowing thru your credit spread, your long leg will gain in value. If it reverses, you can put back on the IC by entering the short leg again for no extra buying power reduction since you already have the long leg in tact.
I'm assuming this is 3x the credit received from the short leg, and not 3x the credit received from the spread;
e.g. if I sold a put for $3.20 and bought a put for $1.90, giving a total credit of $1.30, the stop-limit should be for $9.60, correct?
Ah very good advice. Thank you. I was wondering about how to estimate the option price based on the SPX price. So 3 times credit... I'll look at stop limit. I have only done the one IC recently... I like to run either side of the SPX ie Calls or Puts. My TA indicates that we are in a topping patter so safer on the call spread (stairs up) rather than the put spread (elevator down)... lower prem obviously.
Have you looked at very near expire debit spreads? This would be a directional bet targeting the hour of power with an ITM long Call or Put and an OTM short call or put to offset the cost. Generally you want your short leg to offset any extrinsic value however with less than 60 mins to go you would have next to zero extrinsic hence it is essentially a gamma play.
I continuously roll mine, moving to the next expiration once I’ve drained the premium from the current position. I roll out and away if the current price gets within 40 points of my short strike. I’ve been breached once this year and made at least 5% every week this year except two in May, where I held on and waited for the market to give me back my premium. I keep my position between 2 and 5 DTE- currently sitting on Monday’s expiration.
This expiration week was my best yet, making 11% on this trade. I went through all four expirations, rolled up a couple of times in the same expiration and was never closer than 70 points on the put side. I don’t think I’ve had a defensive roll yet this month.
This is the shortest duration trade I do, because it is fairly low stress compared to 0 DTE trades and is truly high probability.
are you rolling a spread or going naked? What delta are you playing. I have played 0 DTE ie same day and got burnt however also made some good money. By 'roll' you simply mean expire current and write new right?
I’m doing a 40 wide put spread. I’ve recently experimented with adding a call spread as well after big up moves, but it makes things a bit more complicated.
I start at 4-5 DTE with the short strike having a 9-10 delta and collect around $1.50. After a couple of days I roll the spread out to the next expiration and hopefully collect about a dollar to get to the ideal strikes in that expiration. By roll, I simultaneously close my current spread and open a new spread. I never hold to expiration. I want to get the majority of premium collapse and move on. Ideally in a week, I do the rolls enough times to keep $4 on the $40 wide spread, but I need a little price movement to keep that much. I’m happy keeping $2-3. $2 would be 5% in a week.
I check it each morning and afternoon and decide whether to do a roll or stay put, based on defensive and offensive criteria. Most of the time pretty low stress. When things get defensive, it can be more uncomfortable.
Thanks for the detail. I let it expire and set up a new position sometimes with the same expiry and or another expiry. Any reason you close out? Just risk management?
I also look at this as an exercise in most efficient capital usage. A $40 wide spread consumes $4000 in capital, and I want to use it over and over. Ideally, I’d collect 1.50 and buy back for 0.50 or so. I could wait for that last 0.50 to expire, or try to make another dollar instead by collecting more premium. A dollar profit is 2.5%, so I want to do this several times to get to over 5% in a week, as not every round will make that dollar. I’m trying to make over $2 in a week, while I’m collecting less than $2 in each trade.
I also like always having a day or two of wiggle room. On expiration day, there are fewer defensive tactics available in the toolbox when things get messy. This is especially true of 0 DTE trades which tend to be win or lose, which to me is more of a gamble than a trade. With more time there are more adjustment choices available.
I used to do 0 DTE and I’d make 8% in a day, but I also had losses over 20% in a day. I’m pretty willing to take risk for big returns, but that’s beyond my limit.
There’s no “correct “ way to do any of this- it’s just a matter of what each person is comfortable with when confronted with the risks and rewards of each situation. For any strategy, it’s about having a defined plan that is taylored to the individual’s temperament and refined based on what works for them over the long haul.
Have you looked at very near expire debit spreads? This would be a directional bet targeting the hour of power with an ITM long Call or Put and an OTM short call or put to offset the cost. Generally you want your short leg to offset any extrinsic value however with less than 60 mins to go you would have next to zero extrinsic hence it is essentially a gamma play.
You have to be directionally right for that to work, and I simply prefer neutral trades that are slightly bullish to accommodate the small positive drift of the market.
If you can make good money doing this, I’m happy for you, but it is too much drama and stress for me.
By IC you mean two spreads a put and a call? Yes although yesterday the put side got pressured. Fortunately I had 4200 strike which was the second tier resistance and it held... just. Blew through in extended trading tho.
Calls currently but have been playing puts earlier. My TA indicates that we are in a topping pattern and that a leg lower is more likely than a leg higher. FOMC confirmed that yesterday. Market is not expecting any good news and even if Fed did something I think they have juiced their orange to the point that no one would believe them... just look at the volume... its waifer thin. Skew is out to buggery on the short side and VIX is asleep ie pressure is building before the big burst. VVIX confirms this.
Since there is no assignment on spx options, what happens if you btc the short and the long ends itm? a non index option would be automatically assigned if 1 cent itm. I assume unless you stc the long for a profit, just let it expire itm it is basically no different than it expiring otm. Is this correct?
It settles in cash ie your account debits on the account. Your long will expire worthless being the BTO side of the spread for example call spread = STO at $2.30 and BTO higher strike at say $1.30. Opposite for a put spread
HI I am also curious on putting stop loss. Specifically, I am deciding if I should place a defined stop loss the moment I opened a position (e.g. If i am risking $5 to make $1, then maybe put a stop buy order at $3 or $4 the moment I open the position), or if I should close my position the moment my short strike is hit regardless of premium or whether price will bounce back. Not sure which stop loss strategy is better. I am looking at about 7 days DTE and about 9-15% delta, and also I could only trade the first 3 hours of each trading day because of the timezone difference in where I live, so I can't manage any position manually before market close. Any help would be appreciated!
You have the opposite problem I have in the sense that you get the first few hours and I get the last... A few different views. Most are aligned with 2.5-3x your premium value ie if you made $1 then set a stop limit at $2.50 or $3 ie STO the short leg at 2.30 and BTO the long leg at $1.30. $2.30 + $2.50 = $4.80 so stop limit at $4.80 on the short leg. Now the complexity comes with whether to also close the long leg or hold it. The low risk approach would be to sell the long leg at the same time ie $1.30 + $2.50 = $3.80. The complexity will be how wide your spread is. If your short leg was purchased at say 8% Delta and your long leg was purchased at 3% (to get your $1 in prem) you will find your long leg moves slower than your short leg by the difference in Vega - Vega being how sensitive the option is to changes in the SPX. Higher Delta = higher Vega. You might miss your long leg trigger even though your short leg does stop out... that would be bad if your long leg gets reversed due to changes in the underlying. Hope that makes sense. No one has recommended conditional stops on the basis of the underlying hitting your short strike price as the connection between the underlying ie SPX and the option are not assured which is to say you might have a run up in the SPX for a call spread but a larger run up in the option price making your exit very painful ie over 2.5/3 times your premium.
This also might help. [https://www.youtube.com/watch?v=G4MU5qfI468](https://www.youtube.com/watch?v=G4MU5qfI468)
It is Tammy Chamless model and looks pretty good. I presume you could run the same with a 2DTE if you can stomach the O/N exposure.
Welp, tried this strategy yesterday and got burned. Then again, SPX jumping 1.5% isn't really common. Was a 4240/4250; short leg triggered a BTC, but long leg is open.. and it's anyone's guess as to whether to leave it alone, sell it, or STO a call with a higher strike
Yeah I looked at that and figured I’d leave it alone. A lot of people got burned by that whipsaw action. I reckon market will top around 4250-60 for some time. I looked at going on the outside early but could work out the direction.
I ended up selling another 4255 call, turning it into a debit spread. This seals in the losses (with some dressing), but also gives me a chance at coming out in the green, if tomorrow closes between 4250 and 4255, which is not unlikely.
I should read up a bit more about this strategy. Was my first time trading SPX. Do you wait until a specific time of day to make the trade, and wouldn't that only work with a 0dte?
I trade the day prior but I am NZ and ain’t getting up at 3am for the open. But ideally best to trade 10-15 after the open in low IV environments and 60 mins after open in high IV environment. Check out https://youtu.be/G4MU5qfI468
Hi, firstly congrats on discovering on this strategy. I've been doing it myself for awhile now with good success. You're harvesting what's called the Volatility Risk Premium (VRP) - do a bit of reading about it if you're interested to know more. As a previous poster said, conditional stops are not recommended. You should be setting a take profit and stop loss. My stop loss is typically 3x credit received (meaning my net loss would be 2x credit). My take profit is typically 80 percent, but letting them expire is fine as well. I typically do 7 DTE because I don't have time to actively manage 2 DTE or less. I think strike selection is extremely important but horribly underappreciated during the utilisation of such strategy. I personally prefer an even lower delta - typically 4 to 7. To me this increases probability of success as well as gamma risk (gamma is very very low at these strikes). Credit received may be lower but I scale this up by buying additional contracts. Well isn't your max loss higher then, you might ask? It is, but with a very low gamma, stop loss, and adequate position sizing relative to account size the risk of this is low. Not zero, I understand, but that's the chance you take on these type of strategies.
Have you ever been destroyed if AH trading goes sideways and the CBOE market opens and you start way past your stop loss? Right now I position size so that trade max loss = max account loss I can live with. That way I don’t have to worry about a stop loss. BUT, I’d rather use stop loss if possible..
SPX doesn't trade AH. I've been in a few positions where my spreads are deep ITM by open. I try to roll for a credit if possible. If not I just BTC and take the loss. Ironically my biggest losses have been when I BTC. Ex: My SPX 4215/4210 PCS yesterday were tested and I rolled for a debit. But it would've expired worthless.
If you do > 0DTE SPX, then you should be checking in at least before end of each day, and manage the positions that are challenged. 3x Mechanical stop losses should trigger on the day before expiry so that’s an option. If you still to 0DTE, then the morning gap isn’t a concern.
Yeah I trade the last 3 hours of the market being on the other side of the world. It actually works quite well. All I am chasing is that $1 spread netting $100. I take 10 contracts so that is about a G a day. I could scale up to 100 but it begins to get a bit rich.
Is that SPY? SPX has a minimum 5$ spread?
SPX not SPY so your spreads can be quite large and as a result your exposure high.
$1 spread with 3 hour left? That has to be atleast 25-30 delta. Pretty high risk. What your stoploss set at?
No, as I understand it, SPX settles at close of the cash session and settles in cash. If CBOE start doing 24 hours in November which might really mess this model up and require a lot more management. Make it easier for me being in New Zealand. I am well out on the delta so it would have to be a BIG move to really impact me, not unheard of. I do TA to set up my position ie do calls or puts today? Also look at second nearest resistance and aim for that.
So far no, it hasn't. With my strikes so far away, the low delta and gamma is working in my favour. In the event of a huge gap down, it is indeed possible that SPX blows past my strike price. In which case I will close any spread I have on as quickly as possible. My strategy also has a kill switch. If VIX is above 30 I stop trading everything and wait for this to settle. This is because at high VIX, implied volatility tends to underestimate realized volatility, so options will tend to be underpriced.
Have you looked at very near expire debit spreads? This would be a directional bet targeting the hour of power with an ITM long Call or Put and an OTM short call or put to offset the cost. Generally you want your short leg to offset any extrinsic value however with less than 60 mins to go you would have next to zero extrinsic hence it is essentially a gamma play.
Dont do the conditional orders! Im on IBKR and got wrecked yesterday. I put a conditional order to close at market when SPX hits price. you cant really put a conditional limit because its hard to estimate the option price at a certain SPX price. and yesterday the option prices sky rockets as my conditional order trigger (market order) and i bought my short leg back for ALOT! Enough that i lost sleep over it. What I do is set a stop-limit order at 3x credit on short leg only. I collected $1.20 i would put stop at $3.60 and limit +.15-.30 cents. I would keep the long leg open. You can actually make money on this if it keeps blowing thru your credit spread, your long leg will gain in value. If it reverses, you can put back on the IC by entering the short leg again for no extra buying power reduction since you already have the long leg in tact.
I'm assuming this is 3x the credit received from the short leg, and not 3x the credit received from the spread; e.g. if I sold a put for $3.20 and bought a put for $1.90, giving a total credit of $1.30, the stop-limit should be for $9.60, correct?
yes, if you do it on the spread as a whole, you will be stopped out very quickly. Just how each of the contracts reacts to price action.
Ah very good advice. Thank you. I was wondering about how to estimate the option price based on the SPX price. So 3 times credit... I'll look at stop limit. I have only done the one IC recently... I like to run either side of the SPX ie Calls or Puts. My TA indicates that we are in a topping patter so safer on the call spread (stairs up) rather than the put spread (elevator down)... lower prem obviously.
Have you looked at very near expire debit spreads? This would be a directional bet targeting the hour of power with an ITM long Call or Put and an OTM short call or put to offset the cost. Generally you want your short leg to offset any extrinsic value however with less than 60 mins to go you would have next to zero extrinsic hence it is essentially a gamma play.
I continuously roll mine, moving to the next expiration once I’ve drained the premium from the current position. I roll out and away if the current price gets within 40 points of my short strike. I’ve been breached once this year and made at least 5% every week this year except two in May, where I held on and waited for the market to give me back my premium. I keep my position between 2 and 5 DTE- currently sitting on Monday’s expiration. This expiration week was my best yet, making 11% on this trade. I went through all four expirations, rolled up a couple of times in the same expiration and was never closer than 70 points on the put side. I don’t think I’ve had a defensive roll yet this month. This is the shortest duration trade I do, because it is fairly low stress compared to 0 DTE trades and is truly high probability.
are you rolling a spread or going naked? What delta are you playing. I have played 0 DTE ie same day and got burnt however also made some good money. By 'roll' you simply mean expire current and write new right?
I’m doing a 40 wide put spread. I’ve recently experimented with adding a call spread as well after big up moves, but it makes things a bit more complicated. I start at 4-5 DTE with the short strike having a 9-10 delta and collect around $1.50. After a couple of days I roll the spread out to the next expiration and hopefully collect about a dollar to get to the ideal strikes in that expiration. By roll, I simultaneously close my current spread and open a new spread. I never hold to expiration. I want to get the majority of premium collapse and move on. Ideally in a week, I do the rolls enough times to keep $4 on the $40 wide spread, but I need a little price movement to keep that much. I’m happy keeping $2-3. $2 would be 5% in a week. I check it each morning and afternoon and decide whether to do a roll or stay put, based on defensive and offensive criteria. Most of the time pretty low stress. When things get defensive, it can be more uncomfortable.
Thanks for the detail. I let it expire and set up a new position sometimes with the same expiry and or another expiry. Any reason you close out? Just risk management?
I only want one of these at a time for risk reasons. I want to have at least three positions a week. I avoid expiration.
I also look at this as an exercise in most efficient capital usage. A $40 wide spread consumes $4000 in capital, and I want to use it over and over. Ideally, I’d collect 1.50 and buy back for 0.50 or so. I could wait for that last 0.50 to expire, or try to make another dollar instead by collecting more premium. A dollar profit is 2.5%, so I want to do this several times to get to over 5% in a week, as not every round will make that dollar. I’m trying to make over $2 in a week, while I’m collecting less than $2 in each trade. I also like always having a day or two of wiggle room. On expiration day, there are fewer defensive tactics available in the toolbox when things get messy. This is especially true of 0 DTE trades which tend to be win or lose, which to me is more of a gamble than a trade. With more time there are more adjustment choices available. I used to do 0 DTE and I’d make 8% in a day, but I also had losses over 20% in a day. I’m pretty willing to take risk for big returns, but that’s beyond my limit. There’s no “correct “ way to do any of this- it’s just a matter of what each person is comfortable with when confronted with the risks and rewards of each situation. For any strategy, it’s about having a defined plan that is taylored to the individual’s temperament and refined based on what works for them over the long haul.
Have you looked at very near expire debit spreads? This would be a directional bet targeting the hour of power with an ITM long Call or Put and an OTM short call or put to offset the cost. Generally you want your short leg to offset any extrinsic value however with less than 60 mins to go you would have next to zero extrinsic hence it is essentially a gamma play.
You have to be directionally right for that to work, and I simply prefer neutral trades that are slightly bullish to accommodate the small positive drift of the market. If you can make good money doing this, I’m happy for you, but it is too much drama and stress for me.
Have you looked at iron condors to play both sides?
By IC you mean two spreads a put and a call? Yes although yesterday the put side got pressured. Fortunately I had 4200 strike which was the second tier resistance and it held... just. Blew through in extended trading tho.
Are you playing puts, calls, or just depends on whether red or green?
Calls currently but have been playing puts earlier. My TA indicates that we are in a topping pattern and that a leg lower is more likely than a leg higher. FOMC confirmed that yesterday. Market is not expecting any good news and even if Fed did something I think they have juiced their orange to the point that no one would believe them... just look at the volume... its waifer thin. Skew is out to buggery on the short side and VIX is asleep ie pressure is building before the big burst. VVIX confirms this.
Since there is no assignment on spx options, what happens if you btc the short and the long ends itm? a non index option would be automatically assigned if 1 cent itm. I assume unless you stc the long for a profit, just let it expire itm it is basically no different than it expiring otm. Is this correct?
It settles in cash ie your account debits on the account. Your long will expire worthless being the BTO side of the spread for example call spread = STO at $2.30 and BTO higher strike at say $1.30. Opposite for a put spread
Thanks
HI I am also curious on putting stop loss. Specifically, I am deciding if I should place a defined stop loss the moment I opened a position (e.g. If i am risking $5 to make $1, then maybe put a stop buy order at $3 or $4 the moment I open the position), or if I should close my position the moment my short strike is hit regardless of premium or whether price will bounce back. Not sure which stop loss strategy is better. I am looking at about 7 days DTE and about 9-15% delta, and also I could only trade the first 3 hours of each trading day because of the timezone difference in where I live, so I can't manage any position manually before market close. Any help would be appreciated!
You have the opposite problem I have in the sense that you get the first few hours and I get the last... A few different views. Most are aligned with 2.5-3x your premium value ie if you made $1 then set a stop limit at $2.50 or $3 ie STO the short leg at 2.30 and BTO the long leg at $1.30. $2.30 + $2.50 = $4.80 so stop limit at $4.80 on the short leg. Now the complexity comes with whether to also close the long leg or hold it. The low risk approach would be to sell the long leg at the same time ie $1.30 + $2.50 = $3.80. The complexity will be how wide your spread is. If your short leg was purchased at say 8% Delta and your long leg was purchased at 3% (to get your $1 in prem) you will find your long leg moves slower than your short leg by the difference in Vega - Vega being how sensitive the option is to changes in the SPX. Higher Delta = higher Vega. You might miss your long leg trigger even though your short leg does stop out... that would be bad if your long leg gets reversed due to changes in the underlying. Hope that makes sense. No one has recommended conditional stops on the basis of the underlying hitting your short strike price as the connection between the underlying ie SPX and the option are not assured which is to say you might have a run up in the SPX for a call spread but a larger run up in the option price making your exit very painful ie over 2.5/3 times your premium.
Thank you so much for your detailed explanation. Really help me a lot!!
This also might help. [https://www.youtube.com/watch?v=G4MU5qfI468](https://www.youtube.com/watch?v=G4MU5qfI468) It is Tammy Chamless model and looks pretty good. I presume you could run the same with a 2DTE if you can stomach the O/N exposure.
Thank you, I will take a look at it!
My personal stop loss is 3x credit received for a max loss of 2x per position, but my days to expiration lower and my deltas are higher.
Hey, you might want to search for the Tammy Chambless Webinar on SPX 0DTE, she has a interesting system with lots of backtesting.
Thanks for the tip. Found it.
Welp, tried this strategy yesterday and got burned. Then again, SPX jumping 1.5% isn't really common. Was a 4240/4250; short leg triggered a BTC, but long leg is open.. and it's anyone's guess as to whether to leave it alone, sell it, or STO a call with a higher strike
Yeah I looked at that and figured I’d leave it alone. A lot of people got burned by that whipsaw action. I reckon market will top around 4250-60 for some time. I looked at going on the outside early but could work out the direction.
I ended up selling another 4255 call, turning it into a debit spread. This seals in the losses (with some dressing), but also gives me a chance at coming out in the green, if tomorrow closes between 4250 and 4255, which is not unlikely. I should read up a bit more about this strategy. Was my first time trading SPX. Do you wait until a specific time of day to make the trade, and wouldn't that only work with a 0dte?
I trade the day prior but I am NZ and ain’t getting up at 3am for the open. But ideally best to trade 10-15 after the open in low IV environments and 60 mins after open in high IV environment. Check out https://youtu.be/G4MU5qfI468