In my experience selling bear call credit spreads is just as problematic as selling bull put credit spreads. The skew means that to get the same money on a bear call spread that you would get for a bull put spread you must use strikes closer to the spot price. Selling any sort of credit spread generally means that you make a little money, make a little money, make a little money, and then BLOW UP.
Account Destruction.
- Thread starter PurpleOne
- Start date
In my experience selling bear call credit spreads is just as problematic as selling bull put credit spreads. The skew means that to get the same money on a bear call spread that you would get for a bull put spread you must use strikes closer to the spot price. Selling any sort of credit spread generally means that you make a little money, make a little money, make a little money, and then BLOW UP.
You blow up only and only if you don't have stop loss and you over leverage.
Selling calls on indexes is safer than selling puts for 2 reasons:
1- IV surges if the index plunges, inflating the premiums which hurts your position. IV decreases (call IV increases, but moderately) if index goes up so you have time to roll up, or scale down.
2- It is much less common to see a sudden surge on an index than a sudden plunge. Look at the historical data on RUT or NDX or SPX, and you'll that the slope of the decreases is much steeper than the slope of the increases in the price.
Selling calls on indexes is safer than selling puts for 2 reasons:
1- IV surges if the index plunges, inflating the premiums which hurts your position. IV decreases (call IV increases, but moderately) if index goes up so you have time to roll up, or scale down.
2- It is much less common to see a sudden surge on an index than a sudden plunge. Look at the historical data on RUT or NDX or SPX, and you'll that the slope of the decreases is much steeper than the slope of the increases in the price.
You have just found the #1 problem with most strategies. They do not work in all market conditions. I would not say to stop all together though. I see that you have two choices to continue trading. First is to learn a new strategy that can work in the current market (use a paper account while learning). The other option is to wait until the market is conducive to your trading style then start trading again. You apparently have a strategy that works...now you need to learn WHEN it works and when it doesn't.
The other thing I would point out is that you should have realized that the market had changed and your strategy was not working LONG before you lost that much of your capital. Next time when you notice that the strategy is no longer working, stop and figure out why much sooner.
As long as the SMA on the spy is trending down, sell call credit spreads on each overbought signal (ex %R >90%; CCI >100), don't commit too much capital on each trade (20% percent of margin max), set a stop loss on your short leg as soon as you sell it.
You can also buy puts using the same setup but you must in this case be correct on the direction immediately and hope the IV does not decrease.
You can also buy puts using the same setup but you must in this case be correct on the direction immediately and hope the IV does not decrease.
That's what got him into trouble in the first place, he was selling premium when volatility was very high. Sell high, buy higher.
3 month chart of the overall market
Not a good time to be a seller of options.
@ForexForex; it may sound counter intuitive, but high volatility provide more security to call writers.
The reason is when IV is up that means that the trend is downwards (VIX very rarely goes up on bull market) and that you can write further otm calls due to inflated option premiums, so this decreases the chances of being ATM on expiration, also the high vola increases the frequency of overbought signals in comparison to a flat market, so you can get in and out more frequently reducing exposure to the market.
But we must be aware that the call spread is not always the best choice in bear market, some times just buying puts is more rewarding if the bid/ask gap is too wide incurring double slippage if you choose spreads. I noticed some times some mispricings on options favoring puts over calls.
It is important to be flexible.
I use optionsVue, and choose my trade bases on expected return/worst case return ratio, if the long put has better ratio than the call credit spread, then I choose the long put, if not I prefer the credit spread for its Theta, stability and flexibility (buy back the loosing short leg and let the long leg run, switch to condor...).
The reason is when IV is up that means that the trend is downwards (VIX very rarely goes up on bull market) and that you can write further otm calls due to inflated option premiums, so this decreases the chances of being ATM on expiration, also the high vola increases the frequency of overbought signals in comparison to a flat market, so you can get in and out more frequently reducing exposure to the market.
But we must be aware that the call spread is not always the best choice in bear market, some times just buying puts is more rewarding if the bid/ask gap is too wide incurring double slippage if you choose spreads. I noticed some times some mispricings on options favoring puts over calls.
It is important to be flexible.
I use optionsVue, and choose my trade bases on expected return/worst case return ratio, if the long put has better ratio than the call credit spread, then I choose the long put, if not I prefer the credit spread for its Theta, stability and flexibility (buy back the loosing short leg and let the long leg run, switch to condor...).