Gentlemen, itâs gratifying to see so many folks contributing to this discussion about the strategy I posted. Iâve waited until the November expiry to respond in the interest of consolidating them into one reply. Unfortunately, many of the postings have concentrated on the validity of my describing the monthly changes in the SPX as an anomaly, rather than the efficacy of the strategy itself. Iâve referred to that as a âtempest in a teapotâ and Iâd like to put it to rest. As a former English major at Bucknell University, I think that Iâm qualified to recognize an anomaly when I see one but, for the linguistically challenged, may I note that the O.E.D. defines an anomaly as âa person or thing that is different from what is usualâ. The fact that the monthly components of the SPX in the last decade have risen at better than a 6 to 4 rate when the index itself has been down 15% fits that definition. I will retract that description if anyone can show me another decade when the condition occurred. Agree with me or not, the important feature of this pattern is that a bullish technique works over time, even in a period of overall market weakness.
Re the strategy itself, yesterdayâs expiry marks the 74th time in the last 119 cycles that the month to month settlement has risen, or at a 62% rate. Since a five point bull put spread could have been done at an average of 2.20 credit (2,80 exposure), a flat bet each month was a modestly profitable strategy. (Note: the November settlement was 1195.73 and a December 1190/1195 credit put spread was done for 2.40). A modified martingale money management scheme (described in an earlier post) enhanced that dramatically, with very little additional capital required. Further, four of the forty five down cycles lost fewer than five points, two of them yielding a small profit, improving the overall ROI. For those interested, Iâll be more than happy to e-mail the spreadsheet detailing the investment record for the decade and the trading rules. Just e-mail me at wastingassets@comcast.net.
Whilst Iâve had success using this technique for the last couple of years, it wonât be utilized by many folks for several reasons. First, it has the ânot invented hereâ stigma that has proven to be the death knell for many useful tools in disciplines of all kinds. Second, it isnât âsexyâ enough for some traders looking for algorithmic or esoteric strategies. Third, itâs boring, lacking intra-cycle action, since only one trade is made each month. Some posters have suggested adding protective stops, OTM options, etc. and they may well be productive and add to the ROI.
Good trading to one and all.
Re the strategy itself, yesterdayâs expiry marks the 74th time in the last 119 cycles that the month to month settlement has risen, or at a 62% rate. Since a five point bull put spread could have been done at an average of 2.20 credit (2,80 exposure), a flat bet each month was a modestly profitable strategy. (Note: the November settlement was 1195.73 and a December 1190/1195 credit put spread was done for 2.40). A modified martingale money management scheme (described in an earlier post) enhanced that dramatically, with very little additional capital required. Further, four of the forty five down cycles lost fewer than five points, two of them yielding a small profit, improving the overall ROI. For those interested, Iâll be more than happy to e-mail the spreadsheet detailing the investment record for the decade and the trading rules. Just e-mail me at wastingassets@comcast.net.
Whilst Iâve had success using this technique for the last couple of years, it wonât be utilized by many folks for several reasons. First, it has the ânot invented hereâ stigma that has proven to be the death knell for many useful tools in disciplines of all kinds. Second, it isnât âsexyâ enough for some traders looking for algorithmic or esoteric strategies. Third, itâs boring, lacking intra-cycle action, since only one trade is made each month. Some posters have suggested adding protective stops, OTM options, etc. and they may well be productive and add to the ROI.
Good trading to one and all.