Selling vertical puts and calls on SPX/SPXPM

[Vin]

1)  March 18th Vertical calls.    Planning to sell vertical calls on  "SPXPM" for March 18th 2070/2075 for $.30 credit.  Risking 10K for total $600 Profit. Any thoughts appreciated.

[Vin]

Sold vertical calls on  "SPXPM" for March 18th 2070/2075 for $.30 credit.  Risking 10K for total $600 Profit.    

Where ever a good opportunity arises we can discuss selling vertical calls/puts in this forum.

[Kim]

As for all weekly trades, the risk is pretty high due to high negative gamma. In this case, SPX is overbought and overstretched, so the probability is pretty good. But in general, those are risky trades. 

 

Why You Should Not Ignore Negative Gamma article explains why I don't like to open or hold trades close to expiration. I guess matter of personal choice.

 

This is pretty similar to what those guys are doing - http://www.5percentperweek.com/customer/customerMain.php?section=tradePage&step=viewClosedTrades. As you can see (scroll down to see the latest trades), they get 4-6% most weeks, but few times a year they have 50-90% loss, due to high negative gamma.

[Vin]

Thanks for the info, its very useful. The only reason I opened this trade is as u mentioned SPX is overbought and overstretched and there is a good option to roll to higher spreads marching towards all time high.  I don't want to open these trades every week. Only when there is good opportunity and if its worth taking the risk.

[Ordos]

This is pretty similar to what those guys are doing - http://www.5percentperweek.com/customer/customerMain.php?section=tradePage&step=viewClosedTrades. As you can see (scroll down to see the latest trades), they get 4-6% most weeks, but few times a year they have 50-90% loss, due to high negative gamma.

 

Was curious, so I had a look at their returns. Have calculated the following (without compounding):

2009 Avg return	445.17%
2010 Avg return	119.21%
2011 Avg return	83.28%
2012 Avg return	83.28%
2013 Avg return	89.81%
2014 Avg return	-58.66%
2015 Avg return	0.50%
2016 Avg return	-67.32%
	
Average total	99.32%

Not sure what to make of it really. Seems easy to replicate, but I wonder how such a strategy performs long(er) term, as we've been in a bull market for a while now (and since their inception). The drawdown on 2014 is too heavy though. I wonder what happened there, 2014 was uptrending and so it should've been pretty profitable too. I guess the volatility just wasn't high enough to compensate for the risk as it was in 2009.

Edited March 12, 2016 by Ordos

[luxmon]

This is a very risky strategy to depend on for income. You will win 90% of the time but the 10% of the time the trade will be challenged and impossible to manage. It will cause immense psychological challenge. You'll ask: do I buy the spread back for > $2, sweat it out hoping market retreats, adjust by buying a call (and triple the capital), etc. Trust me, the weekly options in the indexes are typically priced correctly and offer little edge to the trader for positive expectancy. There are exceptions when skew gets out of whack but you need to track it to identify when and use butterflies to get the edge.

[Kim]

Was curious, so I had a look at their returns. Have calculated the following (without compounding):

2009 Avg return	445.17%
2010 Avg return	119.21%
2011 Avg return	83.28%
2012 Avg return	83.28%
2013 Avg return	89.81%
2014 Avg return	-58.66%
2015 Avg return	0.50%
2016 Avg return	-67.32%
	
Average total	99.32%

Not sure what to make of it really. Seems easy to replicate, but I wonder how such a strategy performs long(er) term, as we've been in a bull market for a while now (and since their inception). The drawdown on 2014 is too heavy though. I wonder what happened there, 2014 was uptrending and so it should've been pretty profitable too. I guess the volatility just wasn't high enough to compensate for the risk as it was in 2009.

Uptrending markets are actually pretty bad for selling premium since IV is low and premiums are low, so you have to go really close to the money with weekly options. And if I understand correctly, they sell credit spreads not ICs most of the weeks. So you need to be really good with direction. btw, based on the reviews http://www.stockgumshoe.com/reviews/5-percent-per-week/, their reporting is also not accurate.

 

My point was not to "review" a competing service, but to show how risky the strategy can be. Plus the whole point of any trading system is to compound gains - and if you compound, then ten 5% winners are NOT equal to one 50% loser. Not to mention 70-90% losers.

[Ordos]

Kim, luxmon:

 

Appreciate the comments. Just to be clear: I wasn't suggesting this is a viable strategy, but I'm the sortof of fellow who likes to ask 'what if' questions, and I figured others might like to see the above results.