# Tracking and Developing my SPY credit spread strategy



## Nerd Investor (Nov 3, 2015)

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.


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## Nerd Investor (Nov 3, 2015)

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.


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## Nerd Investor (Nov 3, 2015)

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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## humble_pie (Jun 7, 2009)

nice setup. Best wishes for success on the paper, then on to the real thing


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## humble_pie (Jun 7, 2009)

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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## Nerd Investor (Nov 3, 2015)

humble_pie said:


> 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;
> 
> ...


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*


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## humble_pie (Jun 7, 2009)

Nerd Investor said:


> OK, let me take a crack at it. Tell me if this includes everything your looking for:
> 
> March 13th trade:
> SPY price 237.57
> ...




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_


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## Nerd Investor (Nov 3, 2015)

humble_pie said:


> 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.


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## james4beach (Nov 15, 2012)

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)


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## james4beach (Nov 15, 2012)

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/showt...-you-buying-Volatility-Term-Structure-Spreads


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## Argonaut (Dec 7, 2010)

That's a pretty risky strategy. S&P only needs to go down 1% from your entry point to where you start losing money. I guess prices of options have really gone down since the volatility has been so low. If I'm risking $2000 to make $400 I'd want to be near 100% sure of the probabilities going my way. At-the-money put sales aren't really that. Best of luck to you though!


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## Nerd Investor (Nov 3, 2015)

Argonaut said:


> That's a pretty risky strategy. S&P only needs to go down 1% from your entry point to where you start losing money. I guess prices of options have really gone down since the volatility has been so low. If I'm risking $2000 to make $400 I'd want to be near 100% sure of the probabilities going my way. At-the-money put sales aren't really that. Best of luck to you though!


A 1% drop would more or less be break-even, so yes, below 1% is where you'd start to lose money. Unfortunately not near 100% going my way but when the trend is positive SPY closed the month up nearly 70% of the time (since 1994).


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## Nerd Investor (Nov 3, 2015)

james4beach said:


> 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)


Hmmm that might be a good idea, do you have to register with them to do it? Although that would be more practical, I think it might be more realistic (ie: paint a truer picture) to test with my current broker. I suspect Interactive Brokers has lower commissions, better margin and probably spread orders as well. For professional reasons I'm unfortunately not able to hold an account with them. 

I do have the proper information for bid/ask spread and market depth with my current broker. This is basically never a concern with SPY, especially if your trading within a month out. Tons of liquidity and tight spreads. Even so I'm "filling" at the worst possible price (bid on the short puts, ask on the long puts).


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## Nerd Investor (Nov 3, 2015)

Man, volatility is _super_ low right now. Today's trade: 

March 20th trade:
SPY price 236.97 
2 Short April 13th puts - 237.00 strike: price per contract = 1.85, premium received = $369.55
2 Long April 13th puts - 225.00 strike: price per contract = 0.36, premium paid = $72.45
Net premium received = $297.10
Realized profit (loss) to date = $nil


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## Nerd Investor (Nov 3, 2015)

March 27th trade:

SPY price 232.49
2 Short April 21 puts - 232.50 strike: price per contract = 2.71, premium received = $541.55
2 Long April 21 puts - 220.50 strike: price per contract = 0.66, premium paid = $132.45
Net premium received = $409.10
Realized profit (loss) to date = $nil


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## Nerd Investor (Nov 3, 2015)

April 3rd trade:

SPY price 234.68
2 Short April 28 puts - 234.50 strike: price per contract = 2.35, premium received = $469.55
2 Long April 28 puts - 222.50 strike: price per contract = 0.55, premium paid = $110.45
Net premium received = $359.10
Realized profit (loss) to date = $nil


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## Nerd Investor (Nov 3, 2015)

April 7th trade to close:

SPY price 234.71
Buy to close 2 April 7th puts with 237.50 strike: price per contract = $2.89, cost to close = $578.45
Net loss on transaction = $173.35.


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## Nerd Investor (Nov 3, 2015)

April 7th trade:

SPY price 234.93
2 Short May 5 puts - 235 strike: price per contract = 2.68, premium received = $535.55
2 Long May 5 puts - 223 strike: price per contract = 0.69, premium paid = $138.45
Net premium received = $397.10
Realized profit (loss) to date = $ (173.35)


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## Nerd Investor (Nov 3, 2015)

April 13th trade to close: 

SPY price 234.34
Buy to close 2 April 13th puts with 237 strike: price per contract = $2.76, cost to close $552.45
Net loss on transaction = $255.35.


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## Nerd Investor (Nov 3, 2015)

April 13th trade:

SPY price 234.33
2 Short May 12 puts - 234 strike: price per contract = 3.06, premium received = $611.55
2 Long May 5 puts - 22.50 strike: price per contract = 1.03, premium paid = $206.45
Net premium received = $405.10
Realized profit (loss) to date = $ (428.70)


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## Nerd Investor (Nov 3, 2015)

April 21st trade to close: 

SPY price 235.03
Buy to close 2 April 21st puts with 232.50 strike: price per contract = $0.09, cost to close $18.45
Net income on transaction = $390.65.


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## Nerd Investor (Nov 3, 2015)

April 21st trade:

SPY price 235.03
2 Short May 19 puts - 235 strike: price per contract = 2.76, premium received = $551.55
2 Long May 19 puts - 223 strike: price per contract = 0.80, premium paid = $160.45
Net premium received = $391.10
Realized profit (loss) to date = $ (38.05)


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## Nerd Investor (Nov 3, 2015)

April 28st trade to close: 

SPY price 238.28
Buy to close 2 April 28th puts with 234.50 strike: price per contract = $0.07, cost to close $14.45
Net income on transaction = $344.65.


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## Nerd Investor (Nov 3, 2015)

April 28th trade:

SPY price 238.28
2 Short May 26 puts - 238 strike: price per contract = 1.91, premium received = $381.55
2 Long May 26 puts - 226 strike: price per contract = 0.42, premium paid = $84.45
Net premium received = $297.10
Realized profit (loss) to date = $306.60


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## Nerd Investor (Nov 3, 2015)

I'm shelving this one for now. While I believe the strategy is sounds, I think you'd have to add some minimum implied volatility requirement because the premiums right now are god awful. 
Just not a great use of capital.


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