SPX Historical Spread Plays

O

optionsmaven

Hi folks,

For those of you who trade spreads on the SPX, I have developed a decent bull spread strategy based on historical data going back nearly 10 years. In the 119 monthly cycles since January 2001, the SPX has risen 74 times from settlement to settlement, or in 63% of the periods. This despite the fact that the index has LOST a total of 200 points, or 15% in market value during that period. In other words, the monthly bias is up, no matter what the overall pattern is. Since a straight bull put spread in the front month SPX options with the short strike the nearest to the settlement price at each expiry will yield a credit of 2.00 to 2.50, the risk/reward ratio is quite favourable. Any type of a modest martingale money management strategy provides excellent returns, even in years of large overall losses, such as 2002 and 2008. I'll be happy to respond to any questions concerning this strategy.
 
The settlement to settlement move may be what it is, but it is pretty hard to capture it, since the settlement price isn't known until around 12pm on expiration Friday, so by the time you get around to selling that call vertical the SPX and option prices may be a whole lot different from the settlement price.

So my first thought is that it would be extremely hard to capitalize on that statistic.
 
MTE, You're correct about the exact price of the settlement not being available early in the trading session, but veteran traders at sharp options houses (I trade at thinkorswim) compute by 9:45 Eastern Time what the settlement will be, within a few cents. In any event, it really doesn't matter that much, because the up months are ordinarily double digits higher, so any strike near the settlement will work.
 
I'm also with thinkorswim. Where do you find these "calculations" or rather values?

Also, I presume that when you say 2-2.5 premium you mean on a 5-point spread, right!?

But then again, even if you know the approx. settlement price by 9:45 it doesn't automatically mean that the SPX would be trading around those levels, which means that you may or may not get those 2-2.5 for the spread that is close to the settlement price.

Have you looked at the difference between the settlement price and the SPX levels at the official (and unofficial) release?

Finally, have you actually backtested this using real option prices?

On a side note, it's not the double-digit up months that worry me, but those pesky down ones!
 
Whew, so many questions, lol. Guess it means you're really interested. First, I get the settlement info from the guy I trade with there. I trade for a group, so we do a substantial amount of biz with thinkorswim. Second, it's on a 5 point spread. Third, don't get hung up on the exact credit, if it's going to be a winner, a dime here or there is meaningless. Fourth, the boys get it very close. They're all ex OEX pit guys. Fifth, I haven't back tested it with real option prices, but I've traded it for the last two years, and the 2.00/2.50 credit is actually often lower than what we get. Lastly, it's comforting to know that the loss in the down months is limited to the difference of the credit and 5.00. Actually, with a week to go in a down month, you can usually bail for some number less than 5.00.
 
About 15 years ago a former neighbor who was a broker at a boutique :) firm asked me about trading options on the SPX. It's not that I knew so much about options but that his office group of 3-4 brokers knew so little. Someone had tipped them to a monthly expiration pattern on the SPX that had something like a 90% success rate over the previous 5 years. He E-mailed me the data and asked me to see if one could have made decent money with it. I did and it was profitable.

So first thing the next new month, they put a chunk of their book into long options and wouldn't you know it, the first thing that month, the pattern doesn't repeat. Same thing the next 2 months. I lost track of it but needless to say, they burned a lot of bridges.

What does this have to do with you? Probably nothing. But the lesson for me was that patterns come and go. One needs more than that and some option knowledge to succeed. Money management is essential and probably even a bit of timing luck. If you don't have deep enough pockets to withstand some initial drawdowns, stay out of the deep end of the pool :)
 
Yeah, I am interested because I do trade verticals and ICs on SPX among other indices and I have done some testing on these settle to settle moves myself, so I know what it's like to go from these statistics to the actual trading...hence my questions.

The dime here or there may be meaningless when you look at a single month, but these dimes do add up over time and can improve or worsen your longer term performance.
 
SpindrO,

That's a very cautionary tale, and the moral of it to me is, money management is the key to success. Even though I have only traded this strategy for two years, I did check it out for the last ten. To me, the most significant feature of it is that almost two thirds of the time it's a winner, that in the period covered the market was actually DOWN 15% and includes the worst bear phase in my trading life, which goes back to the sixties. Please also bear in mind that any technique that I post does not constitute a recommendation. They are the fruits of my labour and have worked for me, so I'm just sharing them in the hopes that the ideas will assist other forum participants.
 
On a similar note to spindr0, I have backtested a pattern that worked for over 30 years, then came 2009 and as of now the strategy is around break even (incl. all the costs) after two years.
 
Quote from optionsmaven:

Hi folks,

For those of you who trade spreads on the SPX, I have developed a decent bull spread strategy based on historical data going back nearly 10 years. In the 119 monthly cycles since January 2001, the SPX has risen 74 times from settlement to settlement, or in 63% of the periods. This despite the fact that the index has LOST a total of 200 points, or 15% in market value during that period. In other words, the monthly bias is up, no matter what the overall pattern is. Since a straight bull put spread in the front month SPX options with the short strike the nearest to the settlement price at each expiry will yield a credit of 2.00 to 2.50, the risk/reward ratio is quite favourable. Any type of a modest martingale money management strategy provides excellent returns, even in years of large overall losses, such as 2002 and 2008. I'll be happy to respond to any questions concerning this strategy.
More...
Thanks for bringing this up. A rough calc shows winners are approx: 63 X 2.5 = 157.5 pts. And losers: 37 X -5 = -185. I know that losers aren't always 5 pts, but winners aren't always 2.5 pts either. Could you tell us how much your average winner is, vs your average loser?


The martingale component concerns me a little. We all know how quickly these can get out of hand.Looking quickly at monthly SPX changes, there are a few four-month periods of losses. So you do up to a 4 stage martingale if you hit a losing month?

Thanks for the input.
 
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