Options strategy feedback: SPY options / vertical spreads

Discussion in 'Options' started by ashkelon, Nov 13, 2019.

  1. ashkelon



    First time poster. Been trading for about a year and a half. Finally seem to have a strategy I like that is profitable. Would like feedback from experienced traders or others who trade a similar way.

    On M, W, F, I calculate the day's expected move based on the implied volatility of the expiring option. I sell an out of the money spread (bear call or bull put) at or near the extremes after 30-45mins after opening, looking for rangebound movement and the spread to expire worthless, thus keeping the credit.

    To manage this, once I take the initial trade, I either: 1. look to scalp naked options in the opposite direction if the initial trade is working, e.g. price action reverses back to VWAP. On a good entry, I'll hold this opposing naked option til close to hedge the spread in case it moves strongly outside its range; 2. add to the position by buying a naked option in the same direction if price action goes significantly against me (~ .20 move or more); or 3. I sell the opposing spread at what seems to be the other extreme of the day for an effective iron condor.

    On Tues and thurs, I only scalp reversals back to the VWAP.

    I figure about 2/3 of trading days will trade in a range (saw this calculated before, about 66% of SPY days will be 1sigma moves). For the other 1/3, either the range is too small, ie not volatile enough, or too large, ie >2 sigma move, and too risky. Especially for this last scenario, must be careful. But often this would be manageable by scalping back towards vwap to try to hedge losses or break even.

    Have traded this strategy the last 6 weeks. 158 trades. My win % is about 70%; I have had a few relatively big drawdowns, but overall, I am up about 125% in these six weeks on my trading capital ($200-->$515). I am trading very small, now up to 3 contracts for the initial trade. Hope to gradually scale this up as I grow the account.

    Any thoughts and feedback? Thanks in advance
  2. Heck, if it's working for you keep on keeping on. Not sure how much it will affect your strategy, but IV has dropped about 50% since the start of Oct.


    Will you do as well if it climbs (and it usually climbs fast)? Of course, if you are just doing verts I guess IV changes won't be much of a bother?

    If you can get to the point where you are just risking profits (make sure you know your total risk), just let 'er rip! And as always keep an eye out for SPY ex-div. Early assignment of short legs might be a hassle depending on what you got going (if you are close or ITM). :cool:

    Hopefully some of the option pros here can give you some good ideas.
    Last edited: Nov 13, 2019
    ironchef likes this.
  3. ashkelon


    Actually, high IV is better, as I can sell the spreads at higher prices and can go further OTM for same price. I've noticed that as the IV has drastically decreased in the last five weeks or so, I've had to go closer to ITM spreads and take higher risk of my legs being bought out early by my broker when close to ITM, which is a real pain because price action usually reverses by end of day and can make a green trade go red.

    Actually, I've started to experiment with other instruments that have higher IV, like $QQQ or $AAPL that have good liquidity and minimal bid/ask spreads, but the downside is having to monitor multiple charts at the same time.

    What is not good for me, though, is when, whether high or low IV, price action strongly exceeds the expected move, without significant pullbacks/corrections. E.g. on some trade-war news or other news and there is a strong directional move all day long. In these cases it would be best not to trade, but of course it's impossible to tell in advance when this is going to happen.
    MACD likes this.
  4. ashkelon


    Here's a screenshot of a more typical 'ideal' trading day last week. Trading with about $200 capital, profit of $32, net. Trade.2019-11-04M.5 trades (4-1). +32.PNG
  5. qlai


    May I ask you, if you had access to enough capital, would you simply day trade the underlying?
  6. ashkelon


    If I had enough capital, I think I would scalp the underlying if the conditions where right. But I think I would continue trading vertical spreads along with "hedging" with options, as this is generally less risky than the scalping I do.
    qlai likes this.
  7. ashkelon


    Apologies if my first post was not that easy to understand, I may not be using all of the technically correct lingo, being self-taught from various sources.

    My strategy attempts to incorporate statistical analysis (1 sigma expected move based on options IV for the day) and technical analysis (moving averages, patterns, high and low of day, support/resistance) to find the tops and bottoms of the day, and intra-day reversals. On the high/lows of the day, I try to take a vertical spread at the best price. Ie at what seems to be the HOD I will sell an OTM call and buy a further OTM call and collect the credit; and do the opposite for the LOD. In between these extremes, I try to scalp the major moves (+/- .40 in SPY), against my vertical spread, if possible. Has anyone else had experience with this kind of trading?
  8. qlai


    Your first description was clear as well. I've attended a chat room where the guy day traded weeklies but only on long side and only single legs. I am the last person to give you advice on options, but fwitw, I think you will have losses which will wipe out multiple days/weeks of your wins so often that you will not be able to continue, much less scale it meaningfully. Let's see what the big boys say.
  9. Just sort of a devil's advocate on your strategy. Often enough, especially when everyone, their brother, their nutty uncle Vic, their crazy aunt Karen, etc are selling index options, IV will be pushed down and not be close to actual (historic) vol. You are trying to predict future vol using IV and of course it is just based on current option prices. For example in the graph above 30 day realized for Sep is way lower than average IV. You need IV to be large enough to push your wings out to match actual vol.

    But still, if it is working have at it. Just don't fly too close to the sun and think you can bet your kid's college fund! :)
    Last edited: Nov 14, 2019
    MACD likes this.
  10. Oops I meant 30 D HV is much Higher than avg IV, for Sept...
    #10     Nov 14, 2019