SPX Put Spreads - Question

[Palindrome]

My goal is to make about 5% a year trading the below system, and it works generally well.

What are the pro's and con's of this type of credit spread, and what the hell is it even known as? I don't even know what to call it as I leg into it sometimes.

Sell 1700 SPX Puts (60 days out)
Buy 1690 SPX Puts (46 days or, or essentially two weeks closer to expiration compared to my 1700's puts in which these hedge the 1700 Puts)

Usually NET between $150 to $200 Bucks on the initial credit, then I buy back the spread when it is worth about $40 to $80 locking about 70% of the original credit.


What are my risks here? Is there anything I am missing? I've traded them in August 2015 and most recently, they always win even when Volatility spikes. Is there anything I am missing here from a risk perspective?

I call this my "interest play" making a small portion of returns relative to my other speculations.

Thanks

 

[El OchoCinco]

5% a year? That is gross return I assume because after commissions and taxes it would be a lot less. You are making $150 while risking $985 if I read your post correctly sand you are selling one of these spreads. I cannot imagine there is a lot of premium 300 points OTM with VIX this low and only 2 months to expiration. Something does not sound right.

 

[Palindrome]

Yes, pretty simple math. If you have a 100k account, and trade roughly 5 of these spreads per month, you make 5% return. Once every 5 years, when the market corrects so hard, that the market gets close to your strike you lose 1 years worth of profit on the system. That's the way I look at it.

This is one of 4 systems I trade and this makes up only a portion of my overall returns.

Looking at it from that lens, what am I missing from a risk perspective, and what the heck is this type of spread known as? (I've been trading it for 6 years and I have no idea what it is called)

 

[J_Smith]

It will be interesting to see the replies you get from the option experts.

If you are selling puts without knowing your max risk per trade, then stop right now until you do.

Reason is simple - I sold puts in the past, little bit diff than you, actually had 85 winners in a row - not one loser.

Then the black swan arrived, just as I had ramped up to bout 4 times my normal size.

I was shitting bricks, couldn't sleep, and panicked - in other words, I hadn't a clue what I was doing.

It cost me bout $25k at the time, but I was lucky as I had already made the money.

Point - if you don't know how you are making money, what your max risk per trade is, and when to increase and decrease size by adjusting positions, then you are doing noting more than messing about - if you mess about in the markets, it WILL cost you money, guaranteed.

J_S

 

[Palindrome]

Thanks for the reply J_S. This is a hedged short put. I'm pretty sure my max risk is about $850 bucks per spread. I would also argue this is a pretty boring strategy, and I don't max my margin on this as it is not worth it.

Just curious what the options experts think of this, and what flaws are associated with this type of continuous bullish position on the SPX. Clearly it does not work all the time, but works most of the time.

 

[J_Smith]

Thanks for the reply J_S. This is a hedged short put. I'm pretty sure my max risk is about $850 bucks per spread. I would also argue this is a pretty boring strategy, and I don't max my margin on this as it is not worth it.

Just curious what the options experts think of this, and what flaws are associated with this type of continuous bullish position on the SPX. Clearly it does not work all the time, but works most of the time.

Yes, you are probably correct, as selling far OTM puts is a good way to generate income - once you do it correctly, never sell a put without protection, and have enough money to withstand sudden large moves in the market.

Overall, I see nothing wrong if you are doing it 6 years, and if I were you I would get a better understanding and learn how to spot the best strikes for risk versus reward, which just needs some additional learning.

FWIW, I traded the FTSE 100 index options - not sure how the SPX compares as I never traded them the same way, although I did a small few trades with just outright calls and puts.

Let's see what additional answers you get from the options experts?

J_S

 

[FSU]

You are short a put vertical and short a put time spread with the above position. Your risk is far more than you think as the time spread could expand significantly. Your risk is a large selloff, as you are long deltas with this position.

 

[Palindrome]

Thanks FSU.

Thanks for defining the types of positions I have been placing:

Short Vertical PUT Time Spread

So, what is my risk then? in this position?

Sell 1700 SPX Puts (60 days out)
Buy 1690 SPX Puts (46 days

If tomorrow the Market dropped to 1200, I would be down 1k per spread minus the $150 bucks I collected per spread.

In another scenario, If the market dropped slowly over the next lets say 40 Days, and was at 1750. My loss would be potentially much more significant. 1700 Puts could be selling for 30 bucks, where the 1690 puts with 6 days until expiration might only be at 10, potentially giving me a roughly negative $2000/contract which is much larger than your typical vertical credit spread.

Would the options experts confirm that the above would roughly be the worst case scenario?

 

[newwurldmn]

5% a year? That is gross return I assume because after commissions and taxes it would be a lot less. You are making $150 while risking $985 if I read your post correctly sand you are selling one of these spreads. I cannot imagine there is a lot of premium 300 points OTM with VIX this low and only 2 months to expiration. Something does not sound right.

Price is closer to 1/point. You can monetize about 90 cents every 2 months: 5.4/points per year. That's 2.5% annualized. And that assumes you trade at mid.

It's not that exciting.

 

[J_Smith]

Thanks FSU.

Thanks for defining the types of positions I have been placing:

Short Vertical PUT Time Spread

So, what is my risk then? in this position?

Sell 1700 SPX Puts (60 days out)
Buy 1690 SPX Puts (46 days

If tomorrow the Market dropped to 1200, I would be down 1k per spread minus the $150 bucks I collected per spread.

In another scenario, If the market dropped slowly over the next lets say 40 Days, and was at 1750. My loss would be potentially much more significant. 1700 Puts could be selling for 30 bucks, where the 1690 puts with 6 days until expiration might only be at 10, potentially giving me a roughly negative $2000/contract which is much larger than your typical vertical credit spread.

Would the options experts confirm that the above would roughly be the worst case scenario?

Do the work yourself and use payoff diagrams to see the numbers.

Do not believe everything you see!

This is delayed but good enough for the discussion.

J_S