SPX Historical Spread Plays

[HowardCohodas]

Quote from optionsmaven:

Whilst 'systems work until they don't' may well be true, I'm sticking with this one until it doesn't.

You just reminded me of a third concern. You haven't specified a clear metric for determining that your system no longer works. Without that, how will you know?

__________________
Author - "These Seven Trading (Investing) Secrets Will Explode Your Account: All I Know About Trading (Investing) I Learned in Flight School"

 

[optionsmaven]

Howard,

It's a simple 'metric'. If, in future months the credits received at initiation dwindle to below 2.00, then the expected ROI would be too low to be consistently profitable. I doubt seriously that the ratio of winning to losing cycles will change much, given the decade long recent history. But, were that to diminish, the strategy would also be adversely affected, to say nothing of the overall economy and the equities market generally. Frankly, it's difficult to imagine a more perilous period than the last 10 years, but anything's possible, I guess. Remember, this is not some ivory tower hypothetical scheme, it's the real trading world, and in that world, 'you bets your money and you takes your chances'.

 

[heiasafari]

Quote from optionsmaven:

Hi Howard,

Back testing with a preconcieved notion of how a strategy might turn out is prone to 'fudging' the numbers to fit one's ideas. However, the settlement numbers don't lie, and the facts are that over a decade in which the SPX had a net 15% loss of value, nearly two thirds of the monthly cycles were up. That's an anomaly that is hard to ignore.

It's not an anomaly. The simple explanation is that a drop of 2% (for example) is not equal to a rise of 2%. Add to that the fact that the market goes down faster than it rises... In the last 10 years, this data is saying you have been making lower highs. It would be interesting to calculate on average what would need the % of up SET the market would need to actually end up higher.

 

[optionsmaven]

heisasafari,

With all due respect, it is an anomaly. Your point about up 10% not meaning the same as down 10% when the level of the index is considered is correct, but has no relevance to my definition of an anomaly. Ask someone who was long in the basket of stocks in 2001 that equalled the SPX how he did in the last ten years. He's behind 15%. If you were to also tell him that those stocks were up in two thirds of the months during the decade, he'd probably think you had lost your mind. We're not talking about percentages from lows to highs or vice versa, but actual point differences in the monthly cycles. I defy you to name another decade in which the market was down and the monthly rises had a nearly two to one advantage over the monthly drops. If you can do so, you'll have my abject apologies.

 

[heiasafari]

Quote from optionsmaven:

heisasafari,

With all due respect, it is an anomaly. Your point about up 10% not meaning the same as down 10% when the level of the index is considered is correct, but has no relevance to my definition of an anomaly. Ask someone who was long in the basket of stocks in 2001 that equalled the SPX how he did in the last ten years. He's behind 15%. If you were to also tell him that those stocks were up in two thirds of the months during the decade, he'd probably think you had lost your mind. We're not talking about percentages from lows to highs or vice versa, but actual point differences in the monthly cycles. I defy you to name another decade in which the market was down and the monthly rises had a nearly two to one advantage over the monthly drops. If you can do so, you'll have my abject apologies.

I would like to know your definition of an anomaly in this case because I see no anomaly here... You can take any major index over a significant period of time and on average you'll find that it has a positive return around 60% of the time. In itself it is completely meaningless. It doesnt matter how many times you are right, its how much you make when you are and how much you loose when you are wrong. If you look at nothing else, you could have 99% up months and loose your shirt anyway. If the holder of the basket dcan't figure out in 1 minute how he can be down even though the stocks were up 2/3 of the months, then he had no business being in stocks in the first place.

I do understand that it can work very well for your strategy but it can because of risk management. Since your maximum loss is capped every period, it is perfectly sensible to have good results as opposed to buy and hold. The point is you can make money in a bad market if you manage risk well. I do think you have found an interesting angle but I don't see an anomaly - in any case its only semantics.

 

[optionsmaven]

heisasafari,

This is a tempest in a teapot. My entire reason for posting this strategy was that I thought it might be helpful to Forum participants. Nitpicking and parsing definitions does not serve to encourage other folks to submit their successful techniques. In any case, I don't wish to be accused of being anti semantic, so perhaps we can agree to disagree, lol.

 

[tman]

Interesting approach. I am definitely going to trade this small size. But, could you imagine a scenario where we are up 15% over the next 10 years but months go 2:1 negative???

Just sayin.

 

[optionsmaven]

Hi tman,

Glad to hear that you're going to give the technique a whirl. Of course, since I'm also trading it, I wish you the best of luck, lol. Re your, I guess, somewhat facetious question, I suppose anything's possible, but the optimistic bias of people generally probably precludes that eventuality. IMNSHO, that optimism is what has been responsible for attempting to reverse the down waves with the periodic monthly gains we've seen in the last decade. So, a complete flip flop to more monthly losses in up markets seems to fly in the face of human nature. For example, the up/down ratio was 5/7 in the disastrous 2008 market, but 10/2 in the 2009 rally. Again, welcome aboard and best of luck.

 

[tman]

Have you looked results on shorter time frames? Trading weeklys could turbocharge returns should the numbers dictate?

 

[optionsmaven]

tman,

No, I haven't done anything with SPX weeklys, mainly because they are not very liquid and the bid/ask spreads are terrible. So, for me the SPX weeklys are purely hypothetical. Maybe SPY would be better? Perhaps you could check it out and post the results.