Simple SPX Put Credit Spread Strategy (Part 1)

Today I am going to discuss a relatively simple S&P 500 (SPX) put credit spread strategy.

The goal here is to enhance my routine with more discipline. I already check the market around the same time every trading day and usually execute something [may or may not be a good thing]. I track my balances and margin requirements daily. I track bond purchases and the greeks (related to this post but something seems different lately that has rendered some of these triggers less important—potentially a separate discussion altogether): theta, delta, gamma, and vega.

As discussed in the third paragraph here, after repeated episodes of catastrophic loss I want to do something different. A simple strategy will suffice until I do more research to develop that next step.

The strategy is as follows:

• When market is down at 3:50 PM ET, sell an AM-settled SPX put spread 45-60 DTE.
• Sell the farthest OTM 25-point put strike that is 10-delta or higher and buy to cover 25 points below.
• Enter GTC order to close the spread at 50% of the initial credit received after factoring in all fees.
• Stop-loss will be 3x initial credit (for a net loss of 2x initial credit or roughly 4x the average winner).

I think the biggest challenge facing the strategy is closing at stop-loss. I would not use a GTC (or OCO) closing order because quirky option quotes happen and I’d hate to get taken out when the market is proceeding with normalcy and no hint of turbulence. One approach I could use is:

1. Walk the option chain NTM by 25-point strikes to identify first closing spread for at least 2x opening credit.
2. Subtract difference between identified short strike and positional short strike.
3. Subtract (2) from current SPX price.
4. Set an “equal to or below” price alert on SPX for (3).
5. Upon receiving alert, go into the trading platform and monitor the position with live quotes.
6. Close spread with limit order should it reach 3x initial credit.

Whether to close with a market or limit order is debatable and some experimentation may be worthwhile. SPX options are generally liquid enough to use market orders with good execution. I still think a limit order leaving ample room for slippage (e.g. $0.10 – $0.25) is preferable especially because of the occasional fluke quote mentioned above. “Experimentation” means limit order close enough times to make for a valid sample size, which could take months or years. Losses don’t typically occur often with this strategy and they generally cluster around periods of heightened market volatility.

I will continue next time.