Simple SPX Put Credit Spread Strategy (Part 3)

Today I want to wrap up discussion of the simple (I hope!) put credit spread strategy whose guidelines are provided here.

Continuing the discussion of strategy tweaks, instead of entering on a down day I could just enter every first (or second, third, fourth, or last) trading day of the week. My concern is missing a trade and throwing off the once/week to better define total risk. Historically, down days occur 45-47% of the time so I’m almost guaranteed to have one down day every trading week. And if I don’t then why not just take two the following week? I can’t think of a good reason unless entering on down days does not really provide a volatility advantage (in which case why do it?). It certainly can provide a volatility advantage (farther OTM can mean larger margin of safety unless volatility continues to increase) so I might as well.

A more extreme consideration would be to enter after consecutive down days. This should most certainly provide some volatility advantage at the cost of fewer occurrences. Historically, the chance of a down day is 46% with chance of a consecutive down day a bit less. Conservatively, then, I could estimate 0.44 * 0.34 * 100% * 99 pairs = 14.8 instances every 100 trading days. Also keep in mind that down days tend to cluster during periods of high probability. I could have some intervals of 100 trading days where consecutive down days happen only 7-10 times versus others where they may happen 30 or more times. The risk is having fewer trades on during market environments almost certain to produce winners while maxing out risk during market environments more likely to produce losers.

Since it’s tough to predict these things (especially given past performance is no guarantee of future results), maybe I employ Occam’s razor and enter on trading day #1 (or #2 or #3 or #4 or last) of every week. Another potential benefit to this is spreading out entry points as opposed to having a slew of trades on consecutive days that could lead to more short contracts at the same strikes. The latter is a concern because I’d hate to have lots of contracts at one strike that will all close at stop-loss as opposed to put spreads 25-50 points apart, for example, where only one or two might be stopped out.

Besides “trade every X days and always have Y trades open” to eliminate variability in exposure from “on a down day” or “at swing lows,” etc. (most of which I just discussed above), the strategy may be tweaked in several other ways such as:

• Selling other short deltas (e.g. instead of 10, look for 16, 20, 30, etc.).
• Varying the spread width (e.g. 10, 50, 75, or 100 points).
• Taking profits at different percentage of net credit (e.g. 25%, 80%, 90%).
• Using different stop-loss (e.g. 2x net credit, 4x net credit, etc.).

I could go on deliberating but for the most part, it’s a simple strategy and rather than overthinking just proceed with one contract/week to see what happens. That’s my plan going forward and once I have some closed trades under my belt, I can analyze how it’s going or look closer at any single trade.