Practice Trades Cal 1.11A

Look back at the previous two practice trades (guidelines here unless otherwise stated). Both start out with negative skew, but Cal 1.10A requires a bullish bias (-0.65 delta) to profit. To be fair, I should also look at Cal 1.11 with a bullish bias.

Cal 1.11A begins 5/11/20 (67 DTE) with SPX 2934 and 3060 puts -$168 (-2.6%). MR is $6,418 (two contracts), TD 2, IV 22.0%, horizontal skew -0.2%, NPD 8.8, and NPV 262.

With TD starting at 2, a different management plan may be advised as trade begins very close to an adjustment point. ML may also need tweaking since it can arrive sooner with directional bias. I haven’t been monitoring data on this (and don’t intend to), but the ONE model currently shows T+0 100 points above downside ML and only 20 points from downside expiration breakeven (BE). I would guess these numbers to be less than a NTM time spread with TD starting much higher.

Whatever management thresholds I choose, no right answer(s) may exist because any will have its pros and cons. Even more difficult is determining something consistent between historical backtesting and future live trades.

Getting back to the current Cal 1.11A, MDD is -$1,188 (-18.5%) on 2 DIT: just a stone’s throw away from ML. This is a case in point, although the quick loss does come on the heels of back-to-back 1+ SD down days: a rarity.

Exit trade 52 DTE for profit of $802 (12.5%). SPX up 0.42 SD with IV up 5.9% over the 15 days. Horizontal skew has decreased to -1.2%, which is not good for getting into the trade but can be very good while in the trade. TD = 5 at PT.

A study of MFE would be interesting to determine whether any sort of PT is optimal. 1.11A goes on to gain $1,662 (25.9%) at 43 DTE before slipping back to +$642 (10%) with TD 5 the next trading day after that. PnL dips the next trading day (39 DTE) to 7.7% (TD 5) before soaring to +45.7% three trading days later at 36 DTE on a 4.6 SD downmove (see price chart here).

I would be interested to collect MFE data in a Python program (as mentioned in the third paragraph here).

Bottom line for today: like Cal 1.10, a bullish bias in this negatively skewed Cal 1.11 ends up profitable as well.