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ES Spread


Hey guys I just got filled on my monthly ES spread that I sell each and every month to bring in cash from a "bet" where the ES wont go vs. where I think it will go in a short time period.

I sold the July 1210 PUT and bought the July 1200 PUT for a net credit of $0.60 per contract or:

20 contracts x $0.60 credit per contract x 50 multiplier = $600 (minus trading costs)

So for the next 58 days I'm in a bet that the ES will go up, sideways, or down just not all the way down to 1210 in 58 days. I've got the probabilities on my side that the ES won't drop approx 13.5% in 58 days. After those 58 days they expire worthless and I keep the money.

Anyone else doing these vertical credit spreads on anything?


I kinda remember this play from my option days, called a collar or strangle or maybe even a butterfly? What are the commissions on that trade?
forgot the per contract cost at IB but for these 20 contracts it was $72.50. So I took in $527.50 and my maintenance margin is $2800.

Thats 18.82% return on the money in margin over the 2 month time period.
And your risk if it drops below 1200 is that you will lose 20 contracts X 10 points for 200 points at $100 per point for a total loss of $20,000 right? If it settles at 1205 (for example) your loss will be half at $10,000. Are my calculations correct?
The at risk is 20 contracts x $10 spread (1210/1200) x 50 = $10,000 max loss

But to hold the trade open the margin requirement is say up to $3000 in this case. So you are risking $10,000 to make $300, why do that, well because the odds are so skewed in your favor when you are 15% away from the current price in the market. What are the odds the ES will drop 15% in 1 month...very very low. Thats what this is all about singles and doubles month after month.

Now you dont have to put up the whole $10K to keep the trade open only roughly 30% of that so $300/$3000=10% return on the money in margin. How ever you want to look at it from a money at risk standpoint. Either way the odds are so in your favor that this spread will expire worthless and you keep the premium.
I like the idea and this is certainly a strategy that I'd consider but I'd have to sit down and run the numbers first to make sure that the risk was skewed sufficiently in your favor. The other question that I have is that if the market dropped say 13% what would it cost for you to close the position before it started turning into a loss? Could you get out at break even after a 10 to 13% fall in the market? If the answer is yes then this type of trade is then far more attractive because the times that the market goes up you keep the full position but when it goes down and starts moving close to the loss area you get out. The question is what the far put is worth compared to the put that's about to move into the money. I know that the highest time-value premium is paid for options that are at-the-money so when you start getting closer to the near put you're going to be paying more of a premium to get out of that one that you would receive for the far put.
You can close to position if your getting nervous as expiration draws near. It has not happened to me but I imagine you would reverse the order and buy it back then resell the spread for the next month to negate the bid-ask spread loss in the current month.

You may not make any money that month but your out of the position and not facing a max loss situation, with another position 15% OTM for another month or two.
I think that would make more sense than realize the full loss because once the market drops say 10% your risk of realizing the full loss increases dramatically.