SPX Historical Spread Plays

Gentlemen, it’s gratifying to see so many folks contributing to this discussion about the strategy I posted. I’ve waited until the November expiry to respond in the interest of consolidating them into one reply. Unfortunately, many of the postings have concentrated on the validity of my describing the monthly changes in the SPX as an anomaly, rather than the efficacy of the strategy itself. I’ve referred to that as a ‘tempest in a teapot’ and I’d like to put it to rest. As a former English major at Bucknell University, I think that I’m qualified to recognize an anomaly when I see one but, for the linguistically challenged, may I note that the O.E.D. defines an anomaly as ’a person or thing that is different from what is usual’. The fact that the monthly components of the SPX in the last decade have risen at better than a 6 to 4 rate when the index itself has been down 15% fits that definition. I will retract that description if anyone can show me another decade when the condition occurred. Agree with me or not, the important feature of this pattern is that a bullish technique works over time, even in a period of overall market weakness.

Re the strategy itself, yesterday’s expiry marks the 74th time in the last 119 cycles that the month to month settlement has risen, or at a 62% rate. Since a five point bull put spread could have been done at an average of 2.20 credit (2,80 exposure), a flat bet each month was a modestly profitable strategy. (Note: the November settlement was 1195.73 and a December 1190/1195 credit put spread was done for 2.40). A modified martingale money management scheme (described in an earlier post) enhanced that dramatically, with very little additional capital required. Further, four of the forty five down cycles lost fewer than five points, two of them yielding a small profit, improving the overall ROI. For those interested, I’ll be more than happy to e-mail the spreadsheet detailing the investment record for the decade and the trading rules. Just e-mail me at wastingassets@comcast.net.

Whilst I’ve had success using this technique for the last couple of years, it won’t be utilized by many folks for several reasons. First, it has the “not invented here’ stigma that has proven to be the death knell for many useful tools in disciplines of all kinds. Second, it isn’t ‘sexy’ enough for some traders looking for algorithmic or esoteric strategies. Third, it’s boring, lacking intra-cycle action, since only one trade is made each month. Some posters have suggested adding protective stops, OTM options, etc. and they may well be productive and add to the ROI.

Good trading to one and all.

 

Hi Folks,

Well, the bullish put vertical spread strategy clicked again in the December contracts. That marked the 75th winning month out of 120 cycles encompassing the last decade, a success percentage of 62.5. We entered a new spread at the 1235/1240 strikes in the January contracts, buying the 1235 and selling the 1240 puts for a credit of 2.30 and a 2.70 margin requirement.

Good trading to all.

 

Having performed some monthly analysis I imagine the losing periods are 1. in down market (obvious) and 2. after two winning months in a row (less concrete). how is that trend filter coming along?

 

Hi EliteThink,

Thanks for the posting. I'm not doing any filtering. Several other posters have mentioned a desire to find ways to enhance the strategy, but I'm quite content to chug along just as I have described for the foreseeable future. Employing a KISS strategy, as it were. The natural human inclination is to 'tweak" techniques that work (I've done it myself, many times lol), but I've found that attempting to modify the basic strategy by adding defensive puts and the like is counterproductive in most cases. As the saying goes, "if it ain't broke, don't fix it". As I have posted before, I'll be happy to send any requestor a 10 year spreadsheet history of the strategy and the money management rules that have been successful for me. Just e-mail me at info@wastingassets.net.

Good trading to all in 2011.

 

Hi Folks,

Well, the bullish put vertical spread strategy clicked again in the January contracts. That marked the 76th winning month out of the last 121 cycles, encompassing the last decade plus one month, a success percentage of 62.8. We entered a new spread at the 1280/1285 strikes in the January contracts last Friday, buying the 1280 and selling the 1285 puts for a credit of 2.30 and a 2.70 margin requirement.

Good trading to all

 

February?

 

What would be the effect of using a bull calendar spread instead? Anybody?

 

Hi Howard,

OOOPS. Yes I meant February for the new spread. Just senility setting in I guess. Thanks for noticing.

 

Hi Folks,

Well, the bullish put vertical spread strategy clicked again in the February contracts. That marked the 77th winning month out of the last 122 cycles, encompassing the last decade plus two months, a success percentage of 63.1. We entered a new spread at the 1335/1340 strikes in the March contracts near the 2:30 PM low, buying the 1335 and selling the 1340 puts for a credit of 2.20 and a 2.80 margin requirement.

Good trading to all

 

Can you give an example of your position, say the one that just expired? Thanks Michael