Megane.. selling puts spread with VIX at multi year lows is not very good strategy even with a win/loss % > 70% which this one has... your R/R is simply not there.I've done backtests on put speads selling that wins 80% of the time with a neg expectation. PM me for deets and I might be able to dig up that backtest that goes back till '08 .
Oh, I trade a lot of credit spreads myself. Not at the moment (on to diagonals for now). One thing I've found, is there's a substantial risk of over diversification on these. That is, you'll be subject to the machinations of the market without picking up the volatility you could trading directly on individual stocks. Which might not make much sense, but let me approach from the other side. I use SPX, SPY, or QQQ to hedge credit spread strategies. I play closer to the price action than you are, but the point is the same. Since I trade individual stocks (CSCO, DAL, MU, JPM, AAPL, and PM might be an ordinary round of spreads for me, for example), I'm concerned about the move of a given size--mine is usually 0.75% - 1.5% on the weeklies. So, I'm looking for ordinary technical movements within these individual stocks, and concerned with a market-wide move against me (and to a lesser extent, in my favor...but I digress). On what I show above, I would probably hedge MU and CSCO with a QQQ debit spread that covers a fraction of my losses (~60-70% is my norm) if there's a big market move against my positions; and the others with SPX or SPY. My relatively cheap debit spread (because we're looking at high liquidity, low volatility index/ETF options) will go ITM and recover most of my losses if there's a big systemic or sector move and my credit spreads go ITM. So you're still holding the bag when the big move in the market comes, but you're leaving premium on the table you could pick up by reducing the diversity of your strategy. You take on the "news risk" (that a single stock will gap down against your position) but hedging out much of the market/sector risk. The diversity of the positions together will effectively hedge against the "news risk", while a debit spread can hedge the market/sector risk. Another big one here is compounding and keeping the risk constant over time. We all know the story that a stock that goes up 10% and then goes down 10% (or down then up) will leave you with 99% of your starting value--if the moves are 50%, it leaves you with 75%. Options magnify that risk considerably. You absolute risk is somewhere in the neighborhood of 4.75 per contract ($5 spread less premium). So you're picking up 5% or 6%, while a 90-100% draw down is a very real possibility. If you compound you're just waiting around to lose everything you made and everything you started with. If you didn't compound, you'd need about 2 years of running this strategy effectively just to cover the eventual Big One. The point is, your gains from years ago (and your principle) will be offset by the Big One loss whether you compound or not. Personally, I only compound a fraction of my gains per period (1 week in my case for weeklies, 1 month in your case) so that risk is stepped up slowly over time. I look to take about 30% in premium (of the spread) in a given week, looking to retain 20% of the spread (and aim for about 8% of the total spreads per week). If all goes well, I'll have about 80% of my principle in gains after 10 weeks without compounding. At that point, I start to step up my principle by a given percentage so that in the next 10 weeks, I'll have about half the original principle rolled back into it (functionally, I do this with 4% per week subject to a max of half the previous week's gain; and the lesser of 8% of principle or 100% of previous week's losses). But my figures are based on a lower absolute risk, higher statistical risk, and shorter periods. If I were doing monthlies as far OTM as you're doing, you're looking for ~3.5% (I think...didn't crunch the numbers) per month. If you stepped this one up similarly, you'd be looking at compounding to keep risk appropriate over time, using my rules, you'd be looking at 1.5% of gains per month or up to 3.5% if losses. I'm not trying to suggest you should do it this way or not, but that's the pitfalls I see to your strategy based on my experience. I just think these are two good seeds to plant and let grow. The market will NOT be kind to you with this strategy when we get the Big One, and this strategy will do you no good if you haven't kept some of the profits it's generated.
OP: beerntrading writes of position *management* to address risk, and much less of entry (to address that risk) -- this is what experience sounds like. There is an old saying, that "bad traders can lose money on a great trade, and good traders can make money from a bad trade"... The implication being that your entries matter a lot less than what you do with the position once you hold it. Your particular set-up favors many, many positions far out of the money, expecting (hoping!) that they die without costly, market-necessitated moves -- beerntrading notes there are "pitfalls" with that. FWIW, I *happen* to have pushed closer and closer to the market, using less and less capital, expecting more and more movement ("management," or hell, *participation*) on my part. This has stemmed from watching 14-16 VIX just a few years ago descend to 6.9[!!] VXST recently, while the market has stair-stepped higher, and hiccuped 100-200 pts down every 15-20 weeks. Having fewer, more adroit positions *really* helps the quality of sleep at night........ Jus' chiming in..... (FWIW, I am 25% written right now, and count that as "over-exposed" -- I'm shopping for positions to buy back right now...)
Please don't forget that we are in a bull market for the last 9 years, so obviously bull credit spreads on indexes would perform very well most of the time during the bull market.
What broker/platform do you use? How do you pick which stocks/indices and strikes to use? A lot of people really like ThinkorSwim from TD Ameritrade, although I'm not sure if that is available in Canada.
TOS has a good platform, but their commissions are pretty high - unless you do thousands of contracts per month and can negotiate a good rate. I can recommend Interactive Brokers, very good commissions and execution.
Like @Kim Klaiman points out... we've been in a bull market for a long time... with dropping implied vols, both working in favour of a short put spread. Aside from the mentioned 10% drop in Amazon... how will you cope with a smaller drop + increase in vols? How is your trade management? Do you use full margin or do you keep money aside? A 50k loss... how does that affect you, can you cover that? How about half that?
Great info from you guys, really appreciated. I will take more time to answer you individually later this week. For now, a little update on my trades. I reversed (not sure this the right way to say it ?) my EDU trade yesterday and took my profit: $646.00 Yesterday I did another Bull Put Spread on EDU for Oct 17 65/60 for 0.37/shares X 30 contracts for a possible gain of 1110$. This morning EDU was spiking so I decided to take my profit right away instead of waiting for another 60 days. Profit: 360$ in 1 day !
More trades.... Yesterday I did the followings: RUT Sept 17 1230/1225 for 0.22 X 35 contracts for a possible profit of $770 SPX Sept 17 2260/2255 for 0.20 X 35 contracts for a possible profit of $700
Super informative, I learned a lot in the text. Thank you so much for sharing your knowledge and experiences. Megane