Don't forget that options are priced based on their probability of expiring in the money. So there is no strategy that would perform better in all market conditions. Also, as you depart from ATM the slippage gets larger. Talking about adjustments: a strategy favored by some savvy options traders is to open an ATM iron condor, then adjust it everytime one wing gets ATM by opening another iron condor right there, and so on. Maybe a similar thing might work for credit spreads. And don't forget that every credit spread is synthetically equivalent to a debit spread.
I guess it comes down to how many times one can adjust before all profits are gone. The one thing that is really tough about ATM spreads is the very high probability of the underlying being close to the short strike at expiry. This makes for a lot more stress. It's unfortunate to close out early because the short strike still has a significant amount of value, but the underlying then has a chance for a last minute rally. So when determining r/r on an ATM credit spread one also has to theorize at what price he/she will exit the position. If the strategy calls for exiting almost every position early, the supposed favorable r/r of ATM positions becomes much less favorable. Maybe I'll spend some additional time weighing the effects of this type of strategy to see how much the additional stress might be worth under various circumstances.
Any experience on whether you might be able to get a better fill on one vs. the other? Have you ever entered a OCO order for the two equivalent positions to see which was filled first?
The expectancy should be about the same for all the strikes: prob_win * win_amount - prob_loss * loss amount Selling ATM has a higher probability to need adjustment, but the premium you take is larger. You may need to adjust more often ATM, but slippage and fills are better. Everything is a trade-off that eventually leads to negative expectancy due to slippage and commissions. To make money you have to apply the right strategy, including strike and expiration selection, for the underlying price and your options IV forecast. Don't waste your time searching for the best strategy that fits all forecasts. It doesn't exist. Also, don't ignore slippage and commissions, they'll eat into your profits.
In general arbitrage keeps synthetics equivalent, but it's a good practice to keep an eye on them. OCO works fine: you set a limit order to lock-in profits, and a stop order to avoid large losses. I don't use orders to catch the better synthetic, and if you try to do it you risk to get filled both ways before OCO takes effect, because the two OCO prices are reached at about the same time.
So, in general, what is your prefered strategy for each of the different IV conditions (low, average, high)? I agree that there isn't a one size fits all strategy out there. But I will admit that I do like OTM credit spreads because they are lower maintenance (lower commiss. etc..) and don't require as much diversification. Of course I like ATM positions for the premiums and the possibility for faster growth but they require a much more involved strategy.
Over time I tried many strategies. Probably the best returns I had on one strike ITM naked puts (I was not aware of the risk I was taking). The worst performance I had with OTM backspreads. With diagonals I had good results but with large drawdowns. Currently I focus on 1 strike ITM front month long call / puts, and when IV is moderately high I favor verticals (1 strike OTM short leg). When IV is in a low percentile I favor long calls / puts. When it is average I use verticals. I generally avoid high IV because it means a high probability of a large price swing.
I had much the same experience with backspreads. I grew to hate those very quickly. I've never tried naked puts and doubt that I ever will. But all in all, it sounds like we favor many of the same positions. As I said in one of my first posts on this journal, I think account allocation has a lot to do with success.
By the way, I prefer debit spreads to credit spreads because the credit spreads factor in an interest rate higher than the one I'm payed by my broker for my cash. It adds up.