SPX Historical Spread Plays
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doesn't that just show that if there are less downs than ups, but the net is down, the average of the downs is higher than the ups. Doesn't that make it safer to trade index call spreads only? I have heard many times about guys getting wiped out with spreads, but only on the sharp downs.
Makes sense to me. Michael
Makes sense to me. Michael
These spreads are structured to be more like a 50-50 bet. You win about $2-$3, or you lose about $2-$3. Depends on your credit received and b/a costs and commish, etc. So the idea is like a 50-50 bet that wins about 60% of the time (over a long enough period). It's not quite that easy of course, but that's what you are aiming for. At least, that's my interpretation.
This is a different trading style than the way OTM condors, for example, that have a high probability of being OTM at expiry. But can lose potentially 10X the credit recieved.
Wayne, that is correct, only if you go far enough OTM, you will win way more than 60% of the time. this is assuming you are looking for returns less than 5% per month. The thing that worries me the most is that one time where you lose 90% of the capital. I have heard it a lot, but only on the down movements of the market. That is why I was thinking of only doing call credit spreads and greatly reduce the possibility. What do you think? Michael
your rational is solid, but the market knows this, which is why calls are theoretically undervalued, and with a long term uptrend of equities, positive expectancy is debatable.
These spreads are initiated near the money, with strikes 5 points apart. The most they lose is 5 points, minus the credit. Or about 2.5 pts. The advantage of using bull put spreads, is that you get a credit and you might not have to pay to close them if SPX moves up a lot near expiry. And as we have seen the indices have moved up, monthly on average, about 60% of the time for the last 100 years.
The OP uses a mild up-as-you-lose money mngmt strategy. But even with this during a bad losing streak, if you are sane, you wouldn't lose 90% of your money. Of course any strategy works, until it doesn't...
Good trading to all.
That's exactly what it means. In down months, the average drop is larger than the average gain in up months.
In and of itself, that does not make an unequivocal case for call spreads because you don't know the distribution of the gains and losses. IOW, of the 60% of winners, you could have many months of very small gains and only a few months of max spread gains (hypothetically) whereas most of the 40$ down months could have been maximum losers.
One needs more info than just the number of up/down months to conclude that there's an edge.
