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Friday, August 1, 2014

August 2014, SPX Bull Put spread

Today, with just two weeks to expiration I entered a 1815/1820 SPX Credit Put Spread:

Sell 4 SPX August 1820 Put @3.30
Buy 4 SPX August 1815 Put @3.00

Credit Received: 0.30 ($120 in 4 contracts per leg)
Max Risk: 4.70 ($1880 in 4 contracts per leg)
Days to Expiration: 14
Break Even Point: 1820.30 (5.45% below current price of 1925 for SPX)

I normally don't enter this type of trade with just 14 days to expiration. But in this case I made an exception as I already have two Put spread positions with September options: the 1815/1820 Put side of the 1815/1820/2065/2070 SPX Iron Condor, and the 980/990 Put credit spread on RUT. Adding a third Credit Put spread position (vs only one Call Spread) in September would make me uncomfortable. At the same time I look at October, and think it's a bit far for me. So, I went with the August options. Not a problem though. I like this position a lot specially because of how the market is looking according to the 3 things I usually follow:

Stochastics: 12
McClellan: -279 (It was below -300 when I entered the trade in the morning)
Number of stocks above 20 DMA: 21%

So, with all the starts clearly aligned, it is hard for me to ignore history. The market may continue going down in the medium term, but for this trade all I care about is the next 2 weeks, and in the short term we're likely to see a rebound.

Here's a chart after market close today for future reference:
(Click on image to enlarge)

In spite of the decent sell off the last two days, current positions are looking good:
August SPX 1815/1820 Bull Put Spread $120 credit
August RUT 1050/1060/1260/1270 Iron Condor $300 credit
September RUT 980/990 Bull Put Spread $120 credit
September SPX 1815/1820/2065/2070 Iron Condor $340 credit


Check out 2014 Track Record


Related Articles:
Weekend Portfolio Analysis (August 9, 2014)
Position expires for max profit on August 15, 2014


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8 comments:

  1. I like your position for August. I should have done the same but I am going to see what happens next week before deciding if I want to sell more credit put spreads. I think a bounce might be due next week, but who knows. My positions are looking good at the moment. A bit bruised because of IWM going down the last few days, but still far away that I don't have to adjust.

    ReplyDelete
    Replies
    1. Would you adjust Put spreads based on a 40 deltas ?
      Take into account that in the case of Puts,because volatility expands, the 40 delta may be reached and your strikes still be 20 or 30 points away (in large indexes) or 2 - 3 points away when using ETFs
      For this reason I've been thinking of adjusting the Puts later than I do now at the 30 deltas mark. But it would be interesting to know your opinion.

      Regards,
      LT

      Delete
    2. Yes Henrik. I tend to wait a bit longer to adjust than you. 40 delta is a good rule of thumb but I would like to take it on a case by case basis. For example, if I have allocated a big size to a position, I might adjust half of the position early and see what happens with the other half. It is hard to say what I will do without the proper context of the market, my position size and many other factors.

      Delete
  2. Hi LT....I'm putting on my "devils advocate" hat here...cue ominous music!

    As per discussions by Michael Patton of this video https://www.youtube.com/watch?v=VPQ237-dHxQ it appears that an old poker player like me would not be putting money on this SPX bull put spread.

    I estimate using the VIX at 17.03 your probabilities of expiring OTM are around 90%...so EV Win is approx $0.27 (90%*$0.30) and EV Loss is approx -$0.47 (10%*-$4.70)...which means over the long run the Expected Value is to lose $20 per spread ($0.27-$4.70)...

    As old Michael says in the comment section of that video link, the mathematically correct move is to actually do the opposite....

    As an interesting aside, my monte carlo simulator has the odds of an intra-day touch of 1815 on the SPX at 16% sometime between now and 14 days....but then the trader in me does tend to agree with you that we will most likely get a bounce soon.

    Cheers, Motu
    Way down here in New Zealand

    ReplyDelete
  3. Motu,
    That is a very valid concern of yours and I'm glad you brought it up because that is something I have analyzed endlessly.

    A simple way to do your same analysis, an arrive at the same conclusion is to just divide the credit received (0.30) by the difference in the strikes (5.00). That gives me 6%
    To be fair, this trade should have a 100 - 6 = 94% probability of success based on the risk/reward ratio that I'm playing. However it didn't have a 94% probability of success, it only had a 90% which is a little lower.

    This means, as you correctly guessed that I should have received more credit for a position like this one (0.50).

    However, and this is the interesting part, you will NEVER, get a 90% probability credit put spread in SPX for 0.50 credit. Never. 0.30 is the number the broker gives you over and over again. 0.60 for ten point wide spreads which is the same thing.

    This doesn't only happen with credit put spreads on SPX. It also happens with call spreads and Iron Condors.

    Which means, if we were going to strictly make our decisions based on your model, Credit spread traders wouldn't exist.

    However, I think in the end, the issue is more complex than that. Because the real probability of making money is not based on just one trade which you leave unattended. I adjust positions earlier (taking more losses than what the model suggests, although smaller losses); I deploy new capital farther out of the money and playing more contracts when one position is threatened etc. So, its a whole strategy and not just one position. I don't know, but after three years doing it, I think it works.

    Thanks for the comment.
    LT

    ReplyDelete
    Replies
    1. Fair enough...I'm taking my "Devil's Advocate" hat off now ;-)

      Meanwhile, not wanting to give you more work and stuff to research, but this is an interesting article I reckon: http://seekingalpha.com/article/311882-2-ways-to-use-the-great-reverse-iron-condor-option-strategy

      Cheers, Motu

      Delete
  4. I echo the view of Motu that "the trader in me does tend to agree with you that we will most likely get a bounce soon".

    But we never know.

    There is not much to consider if it goes according to plan. What to consider will be what if it didn't goes according to plan? With 14 days to expiration, you will have little or no room to do adjustment in the same month. If you adjust to further month, you end up with what you didn't want to originally - uncomfortable of too many put credit spread in September.

    Regards,
    Tony

    ReplyDelete
  5. Thanks for the comment Tony.

    I laid out a plan in the weekend portfolio analysis yesterday on how I would adjust my trades if the market keeps moving against me. In reality I wouldn't be severely hurt unless the market keeps a sustained move of say 10% down in two weeks. Which would be a serious correction. Other than that, if the market just goes down 2% - 4% in the next two wees, yes I will probably have to adjust one of the credit spreads but the adjustment will be so comfortable (so far out due to the higher volatility) that I wouldn't be too concerned. Again, nothing is bullet proof and a major correction would impact me negatively, that's for sure. But it would have to be something exceptional that hurts my trades and their potential adjustments further down as well.

    Cheers,
    LT

    ReplyDelete