Am I missing something on my vertical credit spread success?

[fraser]

I've been trading weekly vertical credit spreads (mostly puts) off and on for a couple of years. The twist is that I focus almost exclusively on trading them during earnings announcements, essentially offering earnings insurance if you will. In the first iteration I sold far OTM naked puts. Wildly profitable, but 2 or 3 losses near each other caused me to pause (thanks YELP). The more recent incarnation involves selling put credit spreads. I do both fundamental and some technical analysis on companies and pretty much stick to those companies with little earnings volatility, which has been doing pretty well - 23 out of the last 24 (not HPE though) were winning trades with a typical downside of only 1:9 (some higher, some lower ratios). This is not unusual. I've done as many as 28 in a row (live trades), so I'm pretty comfortable with the business risk on this strategy. Still, there is exposure to a market sell-off or a systematic risk. This brings me to my first question:
1) Wouldn't selling OTM bear call spreads offset much of the risk of a market sell-off? Any rules of thumb on how many call to put vertical spreads to sell? Any other mechanism that would work to balance a weekly portfolio of credit put spreads?

2) Next, I'd like to trade non-earnings vertical spreads as well, again only weekly options though. I've read the various articles and frankly I see a lot of tools, but I'd like to get some specific feedback on which technical analysis tools to use and apply to sort out likely candidates for vertical spreads in between earnings. Any suggestions that have proven themselves with live trades would be helpful.

I did see that with TOS spread hacker, it is easy to sort out high probability credit spread wins, but again, what additional tools/measurements should be applied (aside from fundamental analysis) to narrow the scope to the more successful trades.

Thanks in advance.

 

[ET180]

1) Sounds like you might be describing an iron condor or iron fly.
2) Check out TastyTrade. They have strategies for this. My only criticism of them is that they don't seem to get into technical or fundamentals of the underlying at all. They seem to just short anything with high IV rank (where volatility is higher than typical in history). I've said before, selling options is not a trading strategy in itself. It's not an edge. It's only a tool. If it was easy and always profitable, everyone would be doing it.

 

[Mo06]

"I've said before, selling options is not a trading strategy in itself. It's not an edge. It's only a tool. If it was easy and always profitable, everyone would be doing it."

Yup - ask Victor Niederhoffer....

 

[fraser]

1) Sounds like you might be describing an iron condor or iron fly.
2) Check out TastyTrade. They have strategies for this. My only criticism of them is that they don't seem to get into technical or fundamentals of the underlying at all. They seem to just short anything with high IV rank (where volatility is higher than typical in history). I've said before, selling options is not a trading strategy in itself. It's not an edge. It's only a tool. If it was easy and always profitable, everyone would be doing it.

Thanks for the response. I meant selling vertical call spreads on other stocks, not iron condors. That way you can choose better underlyings for the call spreads. I only sell put spreads on companies I like for fundamentals.

Not sure what you mean by selling options are not "an edge". I guess you mean you still have to choose appropriate underlyings for the spread trades, which I think is relatively easier for the given returns. No guarantee for sure. I'd like to offset my put spreads by competently picking underlyings for bear call spreads, which is what I'm looking for.

I'm just fine with everyone not doing it. Not everyone likes selling put spreads into earnings

 

[Stymie]

I like the idea that you chose to do vertical spreads so that you don't get margin calls. It's a good idea not to have stop loss orders in the market. When you sell vertical spreads, you will have a high probability of success but small if any profits after execution and commission fees over time.

If you start selling call verticals, the vol skew works against you and the probability of success is less with the same outcome of little profitability. ( Vol Skew - IV is lower OTM for calls)

The only way to alter the outcome is to modify the amount of capital at risk and time. This is no different from playing poker. The odds are against you over a large number of occurrences without adjusting these two variables.

 

[fraser]

So, any suggestions of which tools/software to use to better identify vertical call spread candidates (RSI (? days), 20 vs 50 EMA, MACD, etc.) ? Obviously TOS does a nice job at narrowing the list, but I was hoping to be a bit more precise.

The point of selling the call verticals was to offset the systematic/market risk of having put spreads while not just being out money to do it (eg with puts on SPX or calls on VIX). If you use a low commission broker like IB or one or two others, then commissions really aren't an issue. I don't usually trade spreads less than .1 or so, therefore there is plenty for commissions.

 

[ET180]

I only sell put spreads on companies I like for fundamentals.

That's a good idea.

Not sure what you mean by selling options are not "an edge". I guess you mean you still have to choose appropriate underlyings for the spread trades, which I think is relatively easier for the given returns.

The underlying and timing is always what matters the most. Options are just a way of limiting risk in exchange for profit potential or they can be used as a method of adding leverage.

So, any suggestions of which tools/software to use to better identify vertical call spread candidates (RSI (? days), 20 vs 50 EMA, MACD, etc.) ? Obviously TOS does a nice job at narrowing the list, but I was hoping to be a bit more precise.

Magic 8-balls, Fibonacci numbers, tides, weather patterns...many ways, some more predictive than others. If someone had an edge for predicting price, they probably won't give it away on here.

 

[fraser]

That's a good idea.



The underlying and timing is always what matters the most. Options are just a way of limiting risk in exchange for profit potential or they can be used as a method of adding leverage.



Magic 8-balls, Fibonacci numbers, tides, weather patterns...many ways, some more predictive than others. If someone had an edge for predicting price, they probably won't give it away on here.

I am looking more for lack of upside volatility indicators, not price prediction. It is easy to say with some confidence that a stock will not decrease or increase by 5% this week. I can be 90-95% confident even during earnings given the right stocks. I'm looking for better indicators that might say not more than a 2% change this week during non-earning periods, or some other cash neutral or positive way of hedging. No magic 8 ball needed . I was hoping there might be someone with some experience trading bear call spreads that would be able to point me in the right direction.

I don't agree that options are only used for limiting risk in exchange for profit potential. That is the most basic use of options, but that is essentially buying share price insurance, and almost everyone overpays for that insurance (fear is a big motivator). That is why I like selling put spreads instead .

 

[Stymie]

I am looking more for lack of upside volatility indicators, not price prediction.

I don't agree that options are only used for limiting risk in exchange for profit potential. That is the most basic use of options, but that is essentially buying share price insurance, and almost everyone overpays for that insurance (fear is a big motivator). That is why I like selling put spreads instead .

You can apply the same concept for calls as puts. There will be a time when the calls have a vol skew like puts. This tends to happen when the stock is flying up and people are scared that it will keep going up. We see this in stocks and some indices during a bull market. HK Index had a huge vol skew to the calls when it jumped from 24,000 - 28,000 and the vol skew was a good indicator to start selling call verticals and the credit was rich due to the skew - like puts normally.

 

[mushinseeker]

Fraser, the way to choose better underlyings for your calls spreads is the same way you choose underlyings for outright positions. If you want to put on long call spreads, look for names that you think will go higher using standard technical analysis-- do the reverse for short call spreads ie find bearish looking charts....just have an idea what vol regime your name is in so you dont get smacked too hard if you are wrong. Check out the "case study" page on my site below for examples.