Food for Thought:

Vertical Spreads Basics:
Vertical Spreads are Directional plays with predefined risk/reward, normally used as a stock replacement strategy.
Credit spreads have a greater probability of success but higher risk, while debit spreads have a higher reward/less risk.
Credit spreads are better when IV percentile is high while Debit spreads normally work best when the IVp is lower.

TastyTrades Vertical Spreads (credit or debit) Basic Concepts:
https://www.tastytrade.com/tt/shows/tasty-bites/episodes/trading-verticals-06-05-2013

Several other segments talking about credit spreads: (that is a lot of very good free informational education so take a look at it)
https://www.tastytrade.com/tt/search?utf8=%E2%9C%93&search=Credit+spreads&commit=Search

Credit Spread Optimal Setup: (this is a very important segment).
https://www.tastytrade.com/tt/shows/market-measures/episodes/credit-spreads-optimal-premium-levels-10-08-2015

We’ve been placing SPX credit spreads selling Delta 10 and utilizing a spread width from 10 pts. to 25 pts. The reason for this has been that the probability of success is greater the farther out we go; well, that is correct, but only when we hold the position to the end, win or lose.
However, on a Delta 10, 25 pts. spread on the SPX we risk $2,250 to make $150. So to avoid such a big loss, we mostly bail when the loss exceeds 2.5 or 3X the max profit. Once we do that the probabilities of success are not what we expect, but a lot less. So we are shortchanging and lying to ourselves believing that we are trading a high probability, non-directional strategy.
On the last link above, the guys at TT show the right way to trade this strategy.
They go out to 40-45 DTE and use a spread width equal to 2.5% of the price of the underlying and Sell at Delta 30 and get a premium greater than 20% of max loss.
On the SPX the spread width of 2.5% is 50 pts spread. 2000 X 0.025 = 50.
So with the SPX trading at 2000 as per Friday’s Mar 4th 2016 close, to sell a BeCS we will go to Apr monthly and sell the 2045 at $15.30 and buy the 2095 for $2.80 for a credit of $12.50.
Max loss = 5000 – 1250 = 3,750.
Prob. of Success = 3,750 / 5000 = 75%.
I believe this makes more sense.

What do you guys think?

#spxcampaign

thomberg1201 12:04 pm on Saturday, March 5, 2016

Thank you for the links and the info. It sure appears the risk reward ratio is better. If I understand TastyTrade philosophy they close positions at 50% profit.
However, for me, today, given the last week or so, 2045 seems too close.
Jeff 2:37 pm on Saturday, March 5, 2016

I think this 30 delta strategy sounds interesting and is worth looking at. However, I think comparing it to our #SPXcampaign is a bit apples to oranges. SPXcampaign is based on generating consistent weekly income and using rolling to stave off risk and avoid losses. It works beautifully in calmer times, as there were no losses between February and mid-August of 2015. My challenge since has been to develop tweaks for times of higher volatility.

The 30-delta was a study involving one trade per month, and comparing two methods: whether you put each month’s trade on blindly or if you only placed them when premium was sufficient. They were trying to show that high IV is the optimal scenario for credit spreads; if you sell only high IVR spreads, does that work better than selling spreads no matter the IVR level? The SPXcampaign takes a similar approach by NOT selling mechanically, but waiting for premium to spike in the direction in which you are selling.

I don’t believe this is a difference between “right” and “wrong” ways to sell spreads. These are two different approaches.
Sean 1:40 am on Sunday, March 6, 2016

Hi
Could you please direct me to the post or link that explains and gives full detail of “spx campaign “?
Many thanks
- Jeff 3:29 pm on Sunday, March 6, 2016
  
  At this point there isn’t a full plan available, as I haven’t held a webinar is awhile and I am currently revising the strategy to address the market volatility we have seen since August. You can use the “Strategies” menu at the top of this page and select “SPX campaign” to see all past trades, but for the complete picture standby for revisions which I will be publishing soon. Thanks!
  - prvtrader 3:54 pm on Sunday, March 6, 2016
    
    Would you consider using a higher Delta to setup a new position on a reversing market?
    - Jeff 6:40 pm on Sunday, March 6, 2016
      
      Yes. I have sold several rolls recently as very high deltas. If we get an indication that a market reversal (to downside) is happening, I would try again. But calling a reversing market is not easy right now. Within the current uptrend we’ve had a couple days of pretty sharp moves down, but they were only head-fakes.
elitethink 10:58 am on Tuesday, March 8, 2016

the question is for expectancy. is there edge in either trade, with an early exit. I feel there is edge in the dotm put spreads with an early exit. but, I also have crash protection for the gap. selling dotm spreads has worked for many years.

Josh

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