I am frequently emailed by readers with questions regarding specific trades, my trading methodology, etc. In the past couple of weeks, I have received several emails regarding the weekly credit spread strategy that I have employed. It became apparent to me that the level of interest and confusion about how I trade this strategy warrants a post of its own. This dovetails into another project that I have been working on for the past several weeks — putting together a detailed trading plan for all of my trading strategies.
The short strike is located 1. The options are then held until expiration. First, the SPX options are European style and cannot be exercised prior to expiration. The options also settle to cash, so there is no risk of assignment.
There are two durations which I utilize when trading short-term SPX credit put spreads: There are a number of advantages with the Single-Week vs. When trading the Single-Week strategy, the plan calls for making an adjustment trade if the short strike is in danger of being violated. In backtesting, the adjustment trade was made once the short strike exceeded the 20 delta level.
If the adjustment is made with 3 or more days remaining, the same expiration date is used. If there are less than 3 days remaining to expiration, the trade is rolled down and out to the following week.
This is due to the high number of days recently with institutional selling distribution days. I discontinue the Single-Week trades when there are six or more distribution days within the past 30 trading days.
Days where the red volume bars exceed the day moving average indicate heavy institutional selling. When there are a high number of distribution days, I feel more comfortable being able to locate the short strikes farther away from the current price.
The only way to do that and still retain premium is to increase the days to expiration. This can be very disconcerting. In fact, the only time that I lost money trading the Single-Week strategy was as a result of not following my trading plan. BTW, I never saw this article in my feed. I only discovered it when I went to your Facebook site. If so, does that change depending on days to expiration? Thanks for your questions. Regarding your first question, in backtesting the strategy for over 10 years, a second adjustment was not required.
As days to expiration increases, I like to get more credit. Aram, thanks a lot for sharing your trading experience! Do you still trade this strategy? Regarding your concerns with heavy institutional selling — if you see heavy selling days do you think it makes sense to switch to call credit spreads for those periods? As a result, there is very little premium in the trade right now. The small premium does not justify the risk. I try to avoid call credit spreads in the indexes.
You have to be directionally correct to make it work. If the trade goes against you, its almost impossible to adjust on the call side because the implied volatility decreases further. When you sell puts in the indexes, if you are wrong and need to adjust, implied volatility will have increased and it works to your advantage.
You posted the 1st post in this thread in mid-June and you were right with your inst. I see Sep and Oct call cr. Yes, the best time to sell call credit spreads is obviously when the market is over-bought. The hard part is determining when it is overbought. I would say that it is overbought right now, but it keeps going up. Aram, I started trading credit spreads a few weeks ago. I generally trade based on price action for that week and use MACD for my direction.
Sometimes, I use stocks that gap-up just after earnings. Since, I am bullish on the equities, I am going by these strikes. So, I had to leave it for assignment. This has happened around four times in the past four weeks.
Question is, Are there any impacts to leave it for assignment other than the debit? Ravi, the only issue I see with leaving it for assignment is that depending on your broker, there may be assignment fees. You will need to check with your broker regarding this. How do you compute the standard deviation? I am doing 5-point wide spreads. I use the trading platform to actually calculate the standard deviation of any specific option.
This will be displayed on the trading platform. Fantastic article Aram; thanks so much for sharing! Given that this article is 2 years old, would you change your approach at all? Thanks for your comments. Yes, I have changed my approach a bit, but simply because the market dynamics require it.
With volatility so low right now in SPX and the market at or near all-time highs, weekly credit spreads do not offer enough reward for the amount of risk involved.
At some point this environment is going to change and we are going to see volatility return to the SPX, but for now, I am keeping my distance. To answer your second question, you could definitely sell more contracts with a smaller width of the strikes, however it does not generate as much premium as you are showing. After commissions, it does not make sense to sell the 5-pt wide spread. Regardless, I would not take this trade right now.
In this article, you mention adjustments for the single-week trades when the short strike is being threatened. Create Monthly Income Fund.
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Please get the advice of a competent financial advisor before investing money in any financial instrument. Aram, Thank you for the work and research you have put into this strategy! I have a couple of questions: Thanks for the great work! I hope that makes sense! And thanks for becoming a PRO member!More...