SPX credit plays

[TraderC]

I've been unable to pull the trigger with credit spreads because coming from a stocks/credit play background, I'm have a difficult time adjusting to the mindset of higher-probability/limited gain potential vs not-as-high-probability/unlimited gain potential, so the idea of having a 12:1 risk:reward ratio is a real mental mindblock. It's like I'd hate to roll the 1 on a 12-sided die.

In any case, I'm proposing the following credit trades:
Bull Put SPX May 11
Short 1470, Long 1445

Bull Put SPX May 17
Short 1460, Long 1410

Am I on the right track?

OP: What do you use to analyze your spreads? I'm using the freebie OptionsOracle and I can't beat the price as it does a decent job.

[optionpundit]

Trader C,

Firstly I would like to understand your thougt process why did you choose these strikes? Personally i don't like the trade below, the risk is not worth the reward at all. May be if you could share what is that you would like to achieve with this, I may share my thoughts.

Profitable trading.

[TraderC]

OP: The short strike I chose a level where there seems to be congestion or support. The long strike I chose at a level to limit the downside. I have more trouble trying to justify the long strike because too high a strike, you'd make less profit and too low, you'd increase risk. So when the maximum risk is calculated, I try to get around $3-4k per spread with the selection of the long strike, which is a catastrophic event calculation. According to the option analysis software, it says that the SPX has like a 12% (I don't remember exactly offhand) chance of the trade being unprofitable at expiration. I guessit that's based on historical price movement or some formula, again not accounting for unexpected events.

What makes me uncomfortable is that any short-term bull put spread upon first glance has some incredible R-R ratio that is untakeable (10:1 or greater).  With proper management, that ratio should be a great deal less.

The book that had me thinking about these kinds of trades is: Lee Lowell's "Get Rich With Options: Four Winning Strategies Straight from the Exchange Floor (Agora Series)"

I've put these trades in my sim account to see how they would go instead of risking real money.

[optionpundit]

Trader-C,

Though I strongly encourage to paper trade first, but "paper trading" is only effective if you think it "real". What do I mean? The same trade that you placed for paper, will you do this with real money? if no, i think you need to search your rationale, why? and Hopefully you can find an answer if this trade is really worth getting into.

I think the trade you have placed is not a good one, you may try paper trading as this will give good understanding how it behaves, but still. If you are loooking for credit spread/kinda Iron condor, I strongly recommend to check out followings:
Part-1: http://www.optionpundit.net/iron-condor/what-is-an-iron-condor01
Part-2: http://www.optionpundit.net/iron-condor/what-is-an-iron-condor-part-2

Let's keep the discussion flowing

[TraderC]

The paper trade I had set up didn't execute. The spreads were wide and I couldn't get filled at a reasonable price. I had a similar trade based on support/resistance last month on SPX and that worked out well as the market ran up. The rationale is to enter a bull put spread when the market is unlikely to reach a certain price level within a given time and to enter a time when the market propels forward. The market took a dive today, so the trade was a no-go after the fact.

Generally, I'm trying to enter a bull put spread within 2-4 weeks to expiration to capitalize on theta decay.

I'll need to read about the iron condors. It would be the next step in adding combining a bull put with a bear call spread.

For example I've dug up on the spot:
SPX Sell: 1600 Call / 1375 Put  (7/07)
SPX Buy: 1625 Call / 1350 Put (7/07)

When I graph this, I get an 11% chance of SPX moving to breakeven on the downside and a 15% chance of SPX moving to breakeven on the upside.
Max profit: $145 Max Loss: $2355
Not a pretty R:R, but 2x better than a straight bull put. ($70/$2430)

I can't seem to find a good condor for SPX 6/07.

I'll have to look at RUT like you because the SPX options don't seem to work out as well numerically.

[outta_rut]

I always seem to have better luck getting better fills wit RUT vs. SPX.  If a trade is going against me and I NEED a trade, i'd always rather be in RUT than SPX.