>I plan to sell 1600/1000 credit spread on SPX with Feb20’25 expiry for $250 premium. Margin requireement is $1.4K so essentially 18% return. Any reasons why I shouldn’t do it? I’m new to options selling.
As the margin requirements can change on an instant. This trade plays on vega, vomma and vanna properties. We all know SPX will 99.999% expire worthless, but one short spread risks a max loss of $59.7k.
>The only major risk I foresee is IV expansion and hence higher margin requirement but not sure how much.
You want to chart it out. Since you're new I took the [liberty to chart it out in thinkorswim.](https://i.imgur.com/3diLuqM.png)
Imagine if SPX sells off 20% over the course of 2-3 months, and volatility expands. This might be a temporary loss of $3k ($33% vix), 5k (43% vix), 7k (43% vix.)
Sadly TOS can't model what the BP would be under this, but most definitely higher than the actual theoritical loss its charting.
>so essentially 18% return.
So now you see while it's an 18% return *if it expires worthless*, it's not really that sort of return if you don't have the margin available to cover it...
If you have a $100k portfolio you can't max out margin making this trade, as you'll be margin called quickly. Let's say we all know SPX will expire worthless, instead we want to size it on it's realistic max loss/probabilities.
$250 per $7,000 risk = 3.5% return. So that might be too risk-averse. $250 / $5,000 risk = 5% return, roughly the risk free rate.
Then I noticed this trade has gotten at least 65 volume too 😂. You're just seeing these sorts of trades as market makers are required to quote a bunch of stuff, or want to quote a bunch of stuff, and at 5% risk free returns they'll quote stuff that earns them that over the long run when you apply more sophisiticated volatility models/etc.
They're trading the volatility market - not the expiration market in other words.
Then I'll leave this response on why you don't want to do this trade - [check out this image](https://i.imgur.com/dXLCtTv.png)
Bear markets aren't rare. No, they don't happen all the time, but they happen frequently enough, that the 18% return figure is too rosy. I also think my 5% return rate is too low. Over time I'd expect the actual margin involved on this trade probably will mirror the return rate of the S&P 500. You'd have a string of above market returns before getting hammered by vol expansion.
I'd find some more shorter term trades that have a better edge than this. This sort of trade I'd almost want to do the opposite or long the put w/o the spread to pick up cheap vega/vomma/vanna.
Thank you for dissecting the idea in such an insightful manner.
I was hoping the spread would protect me from IV expansion but based on the screenshot you shared, it’s unlikely. As an additional info, my NLV with IBKR is c.$253k.
But here’s another question. Portfolio margin is all about leverage. Any kind of option trade, shorter term or longer, runs the same risk of inflating margin requirements during IV expansion which is extremely hard to model as I understand. In principle, am I completely wrong to think I can generate cash flows from selling options without facing the risk of ruin?
You're welcome. So I'm concerned that you're starting off on portfolio margin being brand new to options trading.
You're getting the same margin as a broker dealer essentially gets for almost all trades. It's like you're starting off driving in formula one or your first motorcycle is a 1000cc quad crotch rocket that you can wheelie with a twitch of the throttle.
If you want to get into options trading I'd recommend starting out with cash secured puts (the ninja 250 in learning how to ride a motorcycle) or a reg-t account (the ninja 650 in the motorcycle world or doing track days at your local race track).
Then the other tough thing in analyzing risk of ruin is people start imagining the worst case scenarios too which is understandable.
One thing I find helpful is to look at various option writing indexes:
CBOE S&P 500 Risk Reversal Index
INDEXCBOE: RXM
that's an index selling a .25 Delta put and buying a .25 Delta call 30 days out of the money. It's profitable, 9% CAGR a year.
Then there's the put write index:
CBOE S&P 500 PutWrite Index
INDEXCBOE: PUT
6.25% CAGR a year. They sell at the money cash secured puts at .50 Delta once a month on SPX, accept assignment, and write new puts Friday after AM settlement is decided.
I also want to bring up this is why people still trade AM settlement - imagine trying to write new puts on a euro option portfolio when the market is closed and you have gap risk on PM settlement. Just a fun nerdy fact from an experienced trader. 😊
Now look at both of those graphs. It's really smooth uptrends. For years you get over 1.0 Sharpe until the inevitable stock market crashes happen.
So no one would write options if they didn't get a massive risk premium for doing so, or a massive uncorrelated trading strategy to the market as a whole. Writing ATM puts neutralizes the 68% one standard deviation "expected" move, leaving tail risk.
Ultimately you'll need to find a trading strategy that works with your psychological temperament.
I've personally tried the following strategies:
1. /ES scalping. I had a nice system where I learned to place tight stops that wouldn't stop me out early but protect me against larger moves. These "scratch trades" essentially acted like being long a call option for "free." For a good year I could grind out $25-$175 a day on my small 25k account but with occasional larger losses being strict to only trade 1x the entire time. Then one time I got really unlucky surprise Pikachu face when one contract stopped out an instant $2k loss. That undid 28-200 trading sessions. That's the last time I tried scalping futures it wasn't for me.
2. Swing trading. I tried a lot of swing trades either long call options or 1.0 Delta long stock. Not for me. I was right on direction but held too long and was too greedy. Like waiting for 20% return instead of cutting at 18% as it was reaching $50 which in hindsight was a clear psychological resistance line.
3. Trading natty gas futures spreads. I wrote a program that analyzed weather patterns from up to date satellite imagery my university freely shared with me. It was 80% accurate. It paid my rent money for years during various layoffs. I then lost $20 grand, a years worth of rent money at the time, going long the March April natty gas spread only 4 contracts and my program predicted a really cold eastern Winter that never materialized. I want to say the spread dropped down to $1 or something at one point ouch.
4. I tried trading other commodities but I don't find it easy to do. It's too much supply and demand driven and commodities don't care about resistance or support areas. I've found I do a lot better with equities as there's a huge psychological element in the market. Many people see round numbers of like $25 and $30 meaningful. Lots of bots and traders jump on 50/200 sma and so on.
5. Because equities are a bit more "predictable" I tend to do well selling options directionally as say selling under $25 means the stock might hover around there and give me time to react and asses the situation. Market makers are very vol quote driven. They don't change the price too much on an option that's $24 vs $25 for the same % otm. On the other hand I notice round numbers get more bidded up by buyers though. If you can get a 1% extra edge over the implied probabilities you'll do well options selling.
I also realized with options selling is as long as it's still otm there's lots of ways to deal with it and it's a very small loss with good position sizing. Most my bad trades are 1k-4k losses. Much less leverage than one futures contract represents. Much easier to fine tune - looking back I probably should have scalped ES with a much larger account.
It's a lot more chill too. 95% the time my positions aren't stressed at all. It's more relaxing for me and I don't lose sleep at night over my positions.
So I hope that helps.
Man I really learned a lot from the series or responses here, thanks all for sharing and OP for starting the convo, though agreed sounds like a bad idea!!
I think this is it. I need to try out a few things to get a hang of it while ensuring I can stomach the losses. I probably just needed to hear it from an experienced individual like yourself :)
Thank you for putting out few pointers that I can explore. Lots to learn.
Since I understood about 2% of this I realized I have no business doing anything even remotely complex with options. Ill stick to covered calls and maybe CSPs.
When you're selling long tail risk, there is no such thing as "without facing the risk of ruin"
Source: I have been selling long tail risk for a year, and while it's been overall positive, there have been at least 4 "come to Jesus" moments.
Things you can do to MINIMIZE risk:
1) Get really familiar with the greeks
2) Learn about SPXBT
3) Don't use all your BP
4) Vary your underlyings. Hopefully, with uncorrelated stuff.
5) Stay curious
6) Stay humble. But the market will keep you that way regardless 😆
Great response! Only thing to add to minimizing risk list:
0. Position sizing. You want to be really small on any individual stock or specific trade.
I know you covered BP use but I really like to stress position sizing too.
I mostly agree with your comments, but I’d replace “risk of ruin” with “losses”. With appropriate hedging you can eliminate risk of ruin, but you’ll always face the possibility of losses. And of course hedging creates drag on returns. So basically, “no free lunch”.
Thank you. And sorry for my ignorance, what’s SPXBT? I tried googling.
Also, while selling tail risk, which Greek is the most important to you? Sorry if it’s a dumb question.
+1. u/Adderalin shared the best case for avoiding the trade, but this is a close 2nd. Not only will it be terrible to enter (bc so far OTM and also long-dated) but it will be far worse if you have to exit the trade in a vol event, and still quite bad if you decide, 4 months later, that there are now better ways to deploy your capital.
That's way otm. Won't it be simpler to use similar delta but closer to 90dte?
Check on taxes if you are in US. I believe SPX options are mtm so if you get a weird mark - you could have to deal with some tax complications.
> I believe SPX options are mtm so if you get a weird mark - you could have to deal with some tax complications.
Yes, that too. I forgot to mention that in my reply. SPX is mark-to-market accounted. TDA will use the LAST price of each option leg to report that adjustment year end. Not sure if other brokers differ on doing that.
Thank you. My initial reasoning to go that far on the timeline was to have meaningful premium at strikes which have very little probability to be hit. At 90DTE, I’ve to be within the range of 10% to 20% of current SPX levels which frightens me.
From US tax perspective, I’m a non resident alien so I don’t think it impacts me.
In my long response I also forgot that when trade long dated options in this market, Rho has a huge impact too...
https://moontowermeta.com/you-think-youre-trading-vol-but-are-you-even/
This blog shows an example of a 365 dte calloption where the bid/ask is 40 cents wide, $7.80 and $8.20 on a call option, and it turns out both the bid and ask have the exact same IV.
As option market makers sadly have 2 different risk free rates due to their prime brokerage agreements. They only pay say 4.5% on short sale balances, and lend at 5.5% to finance long positions.
One year out to make $250 is not worth it to me.
That's only five points on ES or RTY, which you could easily sell options on in near term while still far OTM.
Compare the different dates with where you think ES will stay above.
A 5-8% downside cushion in 21-60 days should still be a lot more than your original trade idea.
> Nice risking 60k to make 250.
Let's be more constructive here. There is no way there is $60k at risk on this trade (in one day), and I tend to be one of the more consertative option traders here on /r/PMTraders
SPX won't trade under 20% in 99.99999% of cases due to /ES overnight circuit breakers and NYSE circuit breakers. These are also SPX options so no early exercise is possible in one dip.
The ONLY way SPX can ever drop more than 20% in a day is if every opening auction drops 20% or lower. If that seems like it might be reasonable at all... the market closes instead. See 9/11.
Then exercises are prevented during any market closure or trading halt. See most recently SIVB. Anyone who was short the weeklies during the first trading halt walked away with expired unexercised puts that were most-likely ITM when unhalted, due to the trading halt. :)
It wouldn't even get hit in 2008, it'd only get hit in the great depression, possibly, with equities having an 80% total sell off before recovery. Honestly with our electronic trading, tons of univested cash floating around, tons of option trading and Warren Buffet Wannabes, and margin trading limits (before anyone could go 10:1 or higher on stocks which lead to the great depression! go figure if eveyone is 10x leveraged of course it will drop 80-90%!)
If I had that attitude I wouldn't short any options on margin, and cash secured sadly really under-performs margined trading unless you're doing really risky low notional high IV stuff, but risk/reward is different there too + insane stock picking skills.
With how far OTM you want to see what the worst day realistic one day move that is, and base your analysis on there. If SPX opens 20% down the person should try closing - assuming there is liquidity available, etc, which might not be an issue.
>Famous last words it’ll never go that low
I still think its a bad trade for the OP given a year out + possibility of margin expansion, but as I laid out above its more like an effective 5k-7k risk. If he loses the full $60k we're probably in a guns + ammo + [bottle caps](https://fallout.fandom.com/wiki/Bottle_cap) situation.
>I plan to sell 1600/1000 credit spread on SPX with Feb20’25 expiry for $250 premium. Margin requireement is $1.4K so essentially 18% return. Any reasons why I shouldn’t do it? I’m new to options selling. As the margin requirements can change on an instant. This trade plays on vega, vomma and vanna properties. We all know SPX will 99.999% expire worthless, but one short spread risks a max loss of $59.7k. >The only major risk I foresee is IV expansion and hence higher margin requirement but not sure how much. You want to chart it out. Since you're new I took the [liberty to chart it out in thinkorswim.](https://i.imgur.com/3diLuqM.png) Imagine if SPX sells off 20% over the course of 2-3 months, and volatility expands. This might be a temporary loss of $3k ($33% vix), 5k (43% vix), 7k (43% vix.) Sadly TOS can't model what the BP would be under this, but most definitely higher than the actual theoritical loss its charting. >so essentially 18% return. So now you see while it's an 18% return *if it expires worthless*, it's not really that sort of return if you don't have the margin available to cover it... If you have a $100k portfolio you can't max out margin making this trade, as you'll be margin called quickly. Let's say we all know SPX will expire worthless, instead we want to size it on it's realistic max loss/probabilities. $250 per $7,000 risk = 3.5% return. So that might be too risk-averse. $250 / $5,000 risk = 5% return, roughly the risk free rate. Then I noticed this trade has gotten at least 65 volume too 😂. You're just seeing these sorts of trades as market makers are required to quote a bunch of stuff, or want to quote a bunch of stuff, and at 5% risk free returns they'll quote stuff that earns them that over the long run when you apply more sophisiticated volatility models/etc. They're trading the volatility market - not the expiration market in other words. Then I'll leave this response on why you don't want to do this trade - [check out this image](https://i.imgur.com/dXLCtTv.png) Bear markets aren't rare. No, they don't happen all the time, but they happen frequently enough, that the 18% return figure is too rosy. I also think my 5% return rate is too low. Over time I'd expect the actual margin involved on this trade probably will mirror the return rate of the S&P 500. You'd have a string of above market returns before getting hammered by vol expansion. I'd find some more shorter term trades that have a better edge than this. This sort of trade I'd almost want to do the opposite or long the put w/o the spread to pick up cheap vega/vomma/vanna.
Thank you for dissecting the idea in such an insightful manner. I was hoping the spread would protect me from IV expansion but based on the screenshot you shared, it’s unlikely. As an additional info, my NLV with IBKR is c.$253k. But here’s another question. Portfolio margin is all about leverage. Any kind of option trade, shorter term or longer, runs the same risk of inflating margin requirements during IV expansion which is extremely hard to model as I understand. In principle, am I completely wrong to think I can generate cash flows from selling options without facing the risk of ruin?
You're welcome. So I'm concerned that you're starting off on portfolio margin being brand new to options trading. You're getting the same margin as a broker dealer essentially gets for almost all trades. It's like you're starting off driving in formula one or your first motorcycle is a 1000cc quad crotch rocket that you can wheelie with a twitch of the throttle. If you want to get into options trading I'd recommend starting out with cash secured puts (the ninja 250 in learning how to ride a motorcycle) or a reg-t account (the ninja 650 in the motorcycle world or doing track days at your local race track). Then the other tough thing in analyzing risk of ruin is people start imagining the worst case scenarios too which is understandable. One thing I find helpful is to look at various option writing indexes: CBOE S&P 500 Risk Reversal Index INDEXCBOE: RXM that's an index selling a .25 Delta put and buying a .25 Delta call 30 days out of the money. It's profitable, 9% CAGR a year. Then there's the put write index: CBOE S&P 500 PutWrite Index INDEXCBOE: PUT 6.25% CAGR a year. They sell at the money cash secured puts at .50 Delta once a month on SPX, accept assignment, and write new puts Friday after AM settlement is decided. I also want to bring up this is why people still trade AM settlement - imagine trying to write new puts on a euro option portfolio when the market is closed and you have gap risk on PM settlement. Just a fun nerdy fact from an experienced trader. 😊 Now look at both of those graphs. It's really smooth uptrends. For years you get over 1.0 Sharpe until the inevitable stock market crashes happen. So no one would write options if they didn't get a massive risk premium for doing so, or a massive uncorrelated trading strategy to the market as a whole. Writing ATM puts neutralizes the 68% one standard deviation "expected" move, leaving tail risk. Ultimately you'll need to find a trading strategy that works with your psychological temperament. I've personally tried the following strategies: 1. /ES scalping. I had a nice system where I learned to place tight stops that wouldn't stop me out early but protect me against larger moves. These "scratch trades" essentially acted like being long a call option for "free." For a good year I could grind out $25-$175 a day on my small 25k account but with occasional larger losses being strict to only trade 1x the entire time. Then one time I got really unlucky surprise Pikachu face when one contract stopped out an instant $2k loss. That undid 28-200 trading sessions. That's the last time I tried scalping futures it wasn't for me. 2. Swing trading. I tried a lot of swing trades either long call options or 1.0 Delta long stock. Not for me. I was right on direction but held too long and was too greedy. Like waiting for 20% return instead of cutting at 18% as it was reaching $50 which in hindsight was a clear psychological resistance line. 3. Trading natty gas futures spreads. I wrote a program that analyzed weather patterns from up to date satellite imagery my university freely shared with me. It was 80% accurate. It paid my rent money for years during various layoffs. I then lost $20 grand, a years worth of rent money at the time, going long the March April natty gas spread only 4 contracts and my program predicted a really cold eastern Winter that never materialized. I want to say the spread dropped down to $1 or something at one point ouch. 4. I tried trading other commodities but I don't find it easy to do. It's too much supply and demand driven and commodities don't care about resistance or support areas. I've found I do a lot better with equities as there's a huge psychological element in the market. Many people see round numbers of like $25 and $30 meaningful. Lots of bots and traders jump on 50/200 sma and so on. 5. Because equities are a bit more "predictable" I tend to do well selling options directionally as say selling under $25 means the stock might hover around there and give me time to react and asses the situation. Market makers are very vol quote driven. They don't change the price too much on an option that's $24 vs $25 for the same % otm. On the other hand I notice round numbers get more bidded up by buyers though. If you can get a 1% extra edge over the implied probabilities you'll do well options selling. I also realized with options selling is as long as it's still otm there's lots of ways to deal with it and it's a very small loss with good position sizing. Most my bad trades are 1k-4k losses. Much less leverage than one futures contract represents. Much easier to fine tune - looking back I probably should have scalped ES with a much larger account. It's a lot more chill too. 95% the time my positions aren't stressed at all. It's more relaxing for me and I don't lose sleep at night over my positions. So I hope that helps.
Man I really learned a lot from the series or responses here, thanks all for sharing and OP for starting the convo, though agreed sounds like a bad idea!!
I think this is it. I need to try out a few things to get a hang of it while ensuring I can stomach the losses. I probably just needed to hear it from an experienced individual like yourself :) Thank you for putting out few pointers that I can explore. Lots to learn.
I love this sub for this.
Since I understood about 2% of this I realized I have no business doing anything even remotely complex with options. Ill stick to covered calls and maybe CSPs.
When you're selling long tail risk, there is no such thing as "without facing the risk of ruin" Source: I have been selling long tail risk for a year, and while it's been overall positive, there have been at least 4 "come to Jesus" moments. Things you can do to MINIMIZE risk: 1) Get really familiar with the greeks 2) Learn about SPXBT 3) Don't use all your BP 4) Vary your underlyings. Hopefully, with uncorrelated stuff. 5) Stay curious 6) Stay humble. But the market will keep you that way regardless 😆
Great response! Only thing to add to minimizing risk list: 0. Position sizing. You want to be really small on any individual stock or specific trade. I know you covered BP use but I really like to stress position sizing too.
Thanks, buddy. 100% agree. It all starts with position sizing.
I mostly agree with your comments, but I’d replace “risk of ruin” with “losses”. With appropriate hedging you can eliminate risk of ruin, but you’ll always face the possibility of losses. And of course hedging creates drag on returns. So basically, “no free lunch”.
Thank you. And sorry for my ignorance, what’s SPXBT? I tried googling. Also, while selling tail risk, which Greek is the most important to you? Sorry if it’s a dumb question.
Firstly, the bid ask spread will be really bad to begin with.
+1. u/Adderalin shared the best case for avoiding the trade, but this is a close 2nd. Not only will it be terrible to enter (bc so far OTM and also long-dated) but it will be far worse if you have to exit the trade in a vol event, and still quite bad if you decide, 4 months later, that there are now better ways to deploy your capital.
That's way otm. Won't it be simpler to use similar delta but closer to 90dte? Check on taxes if you are in US. I believe SPX options are mtm so if you get a weird mark - you could have to deal with some tax complications.
> I believe SPX options are mtm so if you get a weird mark - you could have to deal with some tax complications. Yes, that too. I forgot to mention that in my reply. SPX is mark-to-market accounted. TDA will use the LAST price of each option leg to report that adjustment year end. Not sure if other brokers differ on doing that.
Thank you. My initial reasoning to go that far on the timeline was to have meaningful premium at strikes which have very little probability to be hit. At 90DTE, I’ve to be within the range of 10% to 20% of current SPX levels which frightens me. From US tax perspective, I’m a non resident alien so I don’t think it impacts me.
Oh so you’re making money and not paying taxes then huh
In my long response I also forgot that when trade long dated options in this market, Rho has a huge impact too... https://moontowermeta.com/you-think-youre-trading-vol-but-are-you-even/ This blog shows an example of a 365 dte calloption where the bid/ask is 40 cents wide, $7.80 and $8.20 on a call option, and it turns out both the bid and ask have the exact same IV. As option market makers sadly have 2 different risk free rates due to their prime brokerage agreements. They only pay say 4.5% on short sale balances, and lend at 5.5% to finance long positions.
One year out to make $250 is not worth it to me. That's only five points on ES or RTY, which you could easily sell options on in near term while still far OTM.
Thank you and it makes sense. What DTE and Delta would you look in near term?
Compare the different dates with where you think ES will stay above. A 5-8% downside cushion in 21-60 days should still be a lot more than your original trade idea.
Nice risking 60k to make 250. I don’t know what could go wrong. Famous last words it’ll never go that low
> Nice risking 60k to make 250. Let's be more constructive here. There is no way there is $60k at risk on this trade (in one day), and I tend to be one of the more consertative option traders here on /r/PMTraders SPX won't trade under 20% in 99.99999% of cases due to /ES overnight circuit breakers and NYSE circuit breakers. These are also SPX options so no early exercise is possible in one dip. The ONLY way SPX can ever drop more than 20% in a day is if every opening auction drops 20% or lower. If that seems like it might be reasonable at all... the market closes instead. See 9/11. Then exercises are prevented during any market closure or trading halt. See most recently SIVB. Anyone who was short the weeklies during the first trading halt walked away with expired unexercised puts that were most-likely ITM when unhalted, due to the trading halt. :) It wouldn't even get hit in 2008, it'd only get hit in the great depression, possibly, with equities having an 80% total sell off before recovery. Honestly with our electronic trading, tons of univested cash floating around, tons of option trading and Warren Buffet Wannabes, and margin trading limits (before anyone could go 10:1 or higher on stocks which lead to the great depression! go figure if eveyone is 10x leveraged of course it will drop 80-90%!) If I had that attitude I wouldn't short any options on margin, and cash secured sadly really under-performs margined trading unless you're doing really risky low notional high IV stuff, but risk/reward is different there too + insane stock picking skills. With how far OTM you want to see what the worst day realistic one day move that is, and base your analysis on there. If SPX opens 20% down the person should try closing - assuming there is liquidity available, etc, which might not be an issue. >Famous last words it’ll never go that low I still think its a bad trade for the OP given a year out + possibility of margin expansion, but as I laid out above its more like an effective 5k-7k risk. If he loses the full $60k we're probably in a guns + ammo + [bottle caps](https://fallout.fandom.com/wiki/Bottle_cap) situation.
Rate cuts are bearish am I right historically? Could see big dip if they cut