Tracking and Developing my SPY credit spread strategy
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Thread: Tracking and Developing my SPY credit spread strategy

  1. #1
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    Tracking and Developing my SPY credit spread strategy

    I've been tinkering for a while now with-a-rules based strategy for writing credit spreads on SPY that includes a trend following overlay and some elements of the martingale system. I'm at the point where I'm ready to paper trade it live for a while, and thought it would be fun to post in here. I'll be tracking everything in excel, probably making my first "transaction" in a week or so. In this first post I'll simply describe the approach and rules. In later posts I'll get into some of my reasoning behind it. This will probably come off as more complicated than it actually is but here we go:

    *Options are always written four weeks out.
    *Short options are closed at 5% of the original premium or on the day of expiration, whichever comes first.
    *Uptrend is defined as the price of SPY being higher than its 6 month (or 200 day) Simple Moving Average
    *Downtrend is defined as the price of SPY being lower than its 6 month (or 200 day) Simple Moving Average

    First: Check the price of SPY to determine if it is in an uptrend or downtrend as per the rules above:
    1) Uptrend: short ATM puts and buy same number of puts with a strike 5% below SPY’s current price.
    2) Downtrend: short puts at a strike 1% below SPY’s current price and buy same number of puts with a strike 5% below SPY’s current price.

    Expiration day:
    If closing at a profit, repeat process.
    If closing at a loss for the first time: Repeat process but ensure the net premium is greater than the previous loss, increasing the number of contracts if necessary.
    If closing at a second (or third etc) consecutive loss:
    1) Uptrend: repeat usual process ensuring the net premium is greater than the cumulative losses, increasing the number of contracts if necessary.
    2) Downtrend: Stop trading until the uptrend resumes (then follow Uptrend process).

    Basically your initial position sizing relative to the capital you’re willing to commit will dictate the maximum draw down vs reward.

    For tracking purposes I will assume an account balance of $100,000 US (although I will probably do this mostly "naked" if/when I do it live, I still like to have a notional amount of capital I'm willing to put at risk to keep me in check).

    I will assume worst possible price for fills (bid on short puts, ask on long puts) and factor in commissions of $9.95 + $1.25 per contract.

    Last edited by Nerd Investor; 2017-03-10 at 10:57 AM.

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    My next (and possibly last) decision is the frequency with which I should write the options. To clarify, the holding period is always 4 weeks out, but I can break up the position and write more frequently if I want.

    For example, if my target position is 8 contracts. I can do 8 contracts at once and wait four weeks. Or I can write 2 contracts per week (still writing each one four weeks out) to stagger my positions, or something in between 4 contacts every 2 weeks. I am leaning towards writing weekly. The main downside would be the extra commissions (about an extra $30 per month in all), but the benefit would be potential lower volatility and draw-downs.

  3. #3
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    First paper trade just made:

    2 Short April 7th puts - 237.50 strike
    2 Long April 7th puts - 225.50 strike
    Net premium (including commissions) = $405.10
    Realized profit (loss) to date = nil

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  5. #4
    Senior Member humble_pie's Avatar
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    nice setup. Best wishes for success on the paper, then on to the real thing
    ''A narrow place can hold a thousand friends" - old Syrian proverb

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    Senior Member humble_pie's Avatar
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    wondering if you could make a couple style changes though. Would appreciate.

    1) could you please quote the options at the price you paid or received, net of commissions. This is the standard practice. The reasoning is that broker fees vary so wildly, so it's only by quoting the net that readers can compare;

    as best i can recall, atrpdocbiz was quoting the net figure he paid or received per contract (actually it's per share or per unit), plus he also posted total costs & proceeds. These latter figures included commissions (i think)

    2) would you be able to include the SPY itself at the moment you placed your trades.

    thankx much

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    ''A narrow place can hold a thousand friends" - old Syrian proverb

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    Quote Originally Posted by humble_pie View Post
    wondering if you could make a couple style changes though. Would appreciate.

    1) could you please quote the options at the price you paid or received, net of commissions. This is the standard practice. The reasoning is that broker fees vary so wildly, so it's only by quoting the net that readers can compare;

    as best i can recall, atrpdocbiz was quoting the net figure he paid or received per contract (actually it's per share or per unit), plus he also posted total costs & proceeds. These latter figures included commissions (i think)

    2) would you be able to include the SPY itself at the moment you placed your trades.

    thankx much

    .
    OK, let me take a crack at it. Tell me if this includes everything your looking for:

    March 13th trade:
    SPY price 237.57
    2 Short April 7th puts - 237.50 strike: price per contract = 2.53, premium received = $505.55
    2 Long April 7th puts - 225.50 strike: price per contract = 0.50, premium received = $100.45
    Net premium received = $405.10
    Realized profit (loss) to date = $nil

  8. #7
    Senior Member humble_pie's Avatar
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    Quote Originally Posted by Nerd Investor View Post
    OK, let me take a crack at it. Tell me if this includes everything your looking for:

    March 13th trade:
    SPY price 237.57
    2 Short April 7th puts - 237.50 strike: price per contract = 2.53, premium received = $505.55
    2 Long April 7th puts - 225.50 strike: price per contract = 0.50, premium received = $100.45
    Net premium received = $405.10
    Realized profit (loss) to date = $nil


    och laddie thankx for the updates

    tis now a thing of beauty & a joy forever

    Edit: i should delete that forever, this looks like a massively bullish spread, basically you have $10 at risk, or $2000? bon courage
    Last edited by humble_pie; 2017-03-14 at 08:31 PM.
    ''A narrow place can hold a thousand friends" - old Syrian proverb

  9. #8
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    Quote Originally Posted by humble_pie View Post
    och laddie thankx for the updates

    tis now a thing of beauty & a joy forever

    Edit: i should delete that forever, this looks like a massively bullish spread, basically you have $10 at risk, or $2000? bon courage
    Correct, total capital in play/max loss would be $2,000.

    In a uptrend (according to the SMA rule) going back to 1994, SPY has closed the month down 5% or more about 4.5% of the time. It closed down greater than 2% less than 18% of the time.
    In a downtrend (again according to the SMA rule) it closed the month down 5% or more about 25% of the time.

  10. #9
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    Might it be better to do the paper trading with Interactive Brokers' platform? I found that this was good for realistic paper trading, taking into account bid/ask spreads but also market depth (how many contracts are available at the bid and offer)

  11. #10
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    Whatever happened to The_Tosser, the rude gentleman with the rude user ID who bragged about his option trading and then suddenly disappeared?
    http://canadianmoneyforum.com/showth...ucture-Spreads


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