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Trading Credit Spreads with AYC

Ayc is one of our Senior Traders who specializes in credit spread trading. Below, you'll find her valuable tips, observations, strategies, and insights on this subject.


When I play put-credit spreads (pcs) and call-credit spreads (ccs) - I pick my level very carefully (at the end of day only the short strike level matters) - in addition to Conner's gamma/pin levels - there are several tips I can share on selecting strikes.

  1. Is it going to be a green day or red day - I use the prior closing day as my short strike - in continuous daily uptrend/downtrend this is a great strategy - SPX is making higher lows (uptrend)/lower highs (downtrend).

  2. Prior day low/high - overnight low/overnight high (check /es) - intraday low/high (this is tricky because you don't know whether SPX would drop to lower low or make higher high - so price action based).

  3. Large breakdown candles and breakup candles - for example /es 1 hour breakup candle or breakdown candle  - you can easily pick out these candles zooming out.

  4. Key levels like 4200, 4300, 4400 - depending how price behaves around these levels - for example - SPX broke above 4200 with force and never looked back - so play 4200 pcs multi day expiration (0dte/1dte/2dte/3dte - stagger them so as SPX moves up intraday - the day of breakout - all the staggered 4200 pcs will make $ - only 2 ways spreads make $ - price moves away from your short strike - delta - or short strike is so out of the money only theta left - spread is profiting from time) - if SPX chops around a key level then I'll be cautious about this strategy - another example - SPX never touched 4100 during the multi-week selloff (it reversed before tagging) - so 4100 is a strong support - play 4100 pcs - when a key level is broken above/below SPX generally would stay above/below for a few days - just check the daily chart you'll see what I mean.

  5. When SPX is trading close to the Flip - I use the Flip as my pcs/ccs levels - so we are above Flip 4285 and in gamma positive so I will sell 4285 pcs.

  6. Daily implied high/low, weekly implied high/low - implied range doesn't always work (1 standard deviation) - SPX always breaks the implied level at least once per week - I have tracked it.

  7. Usually if I have conviction about a level - depending on when the level is violated - for example say I play 4365 ccs - which is a great level - implied high/vp/overbought - and SPX pushed up to 10-15pts in the money - if it's 11am and there's potential more room to run - I'd admit defeat and roll - ideally - you should roll before price even hit the short strike because you can roll for credit. If it's 3pm - I'd just wait - market can do 3 things - selloff from high 4373 - break to new high >4375 or close near the high - watch 15sec or 1minute price action to analyze short term price action. 3:50pm is when MOC comes out so the market usually moves - not always - If I'm deep in the money with my spreads then I know my level is bad - I would never let it go to maximum loss.


What I have learned since I solely focused on trading SPX spread in Oct 2021:

I have 2 rules only when trading:

  1. Don't counter trend—trade with trend.

  2. When SPX is green, I cannot be red—this is a rehash of rule 1. So basically I have 1 rule—don't counter trend.

At the beginning of the day—usually 7 am—when Conner publishes key metrics, I mark all the levels on my chart: overnight high/overnight low (transcribed from /ES), prior day high/low, prior day closing, Conner's pins/SPX/SPY flips/SPX/SPY 0 gamma, implied high/low, max call/put (this is after 9 am and changes throughout the day), gamma levels 00/25/50/75. Then I assess premarket sentiment—usually I check /ES and VIX around 6 am—gap up/gap down—what's driving the premarket gaps—red sectors vs green sectors (mainly 4 sectors tech/banks/healthcare/consumer cyclicals out of 11 SPY sectors)—Q's vs RUT vs DOW—VIX green or red—2yr/10yr/30yr rates—DXY. I learned this premarket assessment since I joined this Discord in summer 2022.

When market opens until 10 am/10:30 am—I watch internals: VIX/tick/add/vold—to assess whether market is broad-based bullish/bearish or mixed—and then I ask myself the probability of a trend day or range day—usually if prior few days are trending days—consolidation is a high possibility—otherwise, trend continues—could be a 50+pt trend or just 20+pt trend—this is easily assessed by watching VIX/internals/sector rotation/DXY/yields. At this point, I can already identify the levels I want to play spreads—I load the spreads onto TOS/Fidelity depending on which account I'm trading—then I watch price action and premium. If it looks like a beginning of a trend day—up or down—then I would play spreads using yesterday's closing—for example—if it seems like a downtrending day—say yesterday's closing price—say 5102—I would play CCS5105CCS or 5100CCS—vice versa for an uptrending day—SPX likes to trend for days or weeks—I'd play upside during positive gamma & downside during negative gamma—this is a simplified guideline for myself—when there's a daily trend change/gamma regime change—price will trade very close to flip—so I use flip for my spread play. As price action develops during midday—by watching VIX—internals—sector rotation—tech/banks/healthcare/consumer cyclicals—then I can confirm or negate my bias—trending day vs. range day—I try not to form any bias prior to market open and not guessing what type of market reaction from any data release CPI/FOMC, etc.—I prefer to trade the reaction after data release—price action trumps everything else—in the past I would form all types of scenarios in my head and plans to trade them—I found it to be a waste of my mental energy & it clogged my brain so now I just trade the chart in front of me—there’s no need to hypothesize anything—market is random.

There are 3 types of spreads that I trade:

  1. Sell very high probability very far OTM spreads just to utilize my margin—I only use less than 20% of my account balance—premium collected is very little for this high probability trade—this is how I build a small account—usually short strike selection is far out beyond implied high/low & beyond my assessment of how far up/down market can go—so large gap up/downs are great for this because I can use the gap up/down % move and add my own calculation of potential % move—very rare market moves +-2% daily—and I'm glad I didn't start trading until late 2020 after black swan/COVID.

  2. Play certain levels so that price does not violate my short strike—usually one of Conner's pins or gamma levels or prior day support/resistance or premarket high/low—that price shall move away from my short strike—I usually determined these levels I want to play around 9:30 am/10 am and I just need to pick a good entry to maximize premium collected—I "babysit" this type of play throughout the day pending price action—if I play the wrong side of the market—meaning my assessment of market direction is wrong—I would actively manage this type of play—which produces a painful day for me—I'm a sore loser I don't like to take losses—or I'm too competitive I need every trade to be a winner—so this is something I need to work on.

  3. Play is ATM or ITM spreads—I use this for trending days when market has momentum—up or down—this is directional play—playing delta—high risk high reward—for example—if I have high conviction SPX can bounce/drop 10-20 pt from current price—this is tye type of spread I would put on—it's heart-pumping type of trading—so I don't do it every day—market condition doesn't allow this type of trading often—in general I'm a lazy trader so I like to put on a trade and just manage it—so trading credit spread fits my style. IMO credit spread is the only type of strategy that can make $ in all market conditions—for both delta/theta play—whether market moves 10 pt or 100pt—no momentum needed—if you get the direction right—delta is in your favor—even if you don't get the direction right as long as price doesn't violate your short strike—you can still make $—obviously I make more $ on trending days—uptrending/downtrending—because market has momentum & I can be more aggressive putting on large sizes—on choppy days—I still do well but I scale back my position and I need to be more precise on my entry and take quicker profit—so the most important skill for me is accurately assess the market sentiment throughout the day—since credit spread risk/reward is the opposite of bf—I now think about risk all the time—the probability of my short strike/level being violated.

The most difficult type of price action—when I incur large losses—is pump and dump type—or gap & crap—green to red days—80-100pt drop from intraday high to low—which occurred often in 2022 and we have been having in the last 2 weeks—since my pet peeve is being short squeezed I tend to play more PCS then CCS—so pump & dump is difficult for PCS play—so I need to pivot & actively manage my position—if I have high conviction SPX will close below my short strike PCS—then I turn the position into iron butterfly and play ITM CCS and stagger large CCS positions both same-day expiration and 1-3dte—for the losing PCS trade I either roll it down/out or take a loss (very rare)—during negative gamma I would roll out 2-4 weeks because of downtrending continuation—someone told me "market drop is finite but upside is infinite"—I never forget that—during positive gamma I would roll 1-5 days out—CCS hedge is usually done right before PCS short strike is violated as I gauge price action so I still can receive high CCS premium—the worst thing to do is to "being hopeful" that price will reverse and close above my PCS short strike—this is highly possible during positive gamma but in negative gamma not a chance—because SPX likes to close at the lows—I learned my lesson in 2022—so if I'm wrong I pivot & just aggressively manage the position.


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