Selling bull credit spread (breakeven game?)

[scaft]

Hello,

I have a very big question mark about "selling bull credit spread" in option trading.

As my statistics shows, it seems to be a "breakeven game" or worse as in my simulation.
Notice: I am not 100% sure that I calculate everything correct?
I will show my exact simulation I did on the most 179 liquid stocks on Nasdaq and Nyse for the year 2015.

Let us assume weekly options with a lifespan of 6 trading days
This is now RAW statistics to get a mathematical model of probability!

1. I let the simulation buy if close > 0 which means anytime and then always exit the trade 6 trading days later.
2. Let us assume a strike price for the put option we SELL for credit 5% below the entry price.

STATISTICS:
Total: 3513 signals
3187 of those signals or 91% of the signals CLOSED ABOVE the strike price for the PUT we sell, - which means that we KEEP the premium. Our goal is to keep the premium as I understand.

Now let us take a trading example from this where the stock is trading at $100 and we sell and buy 1 contract in each leg:
95 strike for $0.23 (sell at bid)
94 strike for $0.18 (buy at ask)
$23 sell - $18 buy = credit 5$ (Max profit)

(95 - 94) * 100 = $100
$100 - $23(premium) = $77 (Max loss)

So if we now win 9 times out of 10 times(91% of the time), it should look like this:
Profits: 5$ + 5$ + 5$ + 5$ + 5$ + 5$ + 5$ + 5$ + 5$ = 45$
Loss: 77$
SUM: 45$ - 77$ = -32$


So my question is. We actually have a good winning rate here. As much as 91% but still we end up with -32$.

Now I wonder if I have calculated everything correct and if I have done that, I wonder how it even is possible to make a credit spread strategy that generates positive results. If that is possible, what is missing to improve the results etc?

Thank you!

 

[gerryg]

Hello,

I have a very big question mark about "selling bull credit spread" in option trading.

As my statistics shows, it seems to be a "breakeven game" or worse as in my simulation.
Notice: I am not 100% sure that I calculate everything correct?
I will show my exact simulation I did on the most 179 liquid stocks on Nasdaq and Nyse for the year 2015.

Let us assume weekly options with a lifespan of 6 trading days
This is now RAW statistics to get a mathematical model of probability!

1. I let the simulation buy if close > 0 which means anytime and then always exit the trade 6 trading days later.
2. Let us assume a strike price for the put option we SELL for credit 5% below the entry price.

STATISTICS:
Total: 3513 signals
3187 of those signals or 91% of the signals CLOSED ABOVE the strike price for the PUT we sell, - which means that we KEEP the premium. Our goal is to keep the premium as I understand.

Now let us take a trading example from this where the stock is trading at $100 and we sell and buy 1 contract in each leg:
95 strike for $0.23 (sell at bid)
94 strike for $0.18 (buy at ask)
$23 sell - $18 buy = credit 5$ (Max profit)

(95 - 94) * 100 = $100
$100 - $23(premium) = $77 (Max loss)

So if we now win 9 times out of 10 times(91% of the time), it should look like this:
Profits: 5$ + 5$ + 5$ + 5$ + 5$ + 5$ + 5$ + 5$ + 5$ = 45$
Loss: 77$
SUM: 45$ - 77$ = -32$


So my question is. We actually have a good winning rate here. As much as 91% but still we end up with -32$.

Now I wonder if I have calculated everything correct and if I have done that, I wonder how it even is possible to make a credit spread strategy that generates positive results. If that is possible, what is missing to improve the results etc?

Thank you!

32$ loss from 100$ invested? I think its too bad result, your strategy needs to be completely revamped I think

 

[scaft]

32$ loss from 100$ invested? I think its too bad result, your strategy needs to be completely revamped I think

The thing is that I am not 100% sure if my calculations are correct.
I beleive that is my question if it is possible to follow my calculations in my first post, if my calculations are correct?

 

[timsk]

. . . So my question is. We actually have a good winning rate here. As much as 91% but still we end up with -32$.

Hi scaft,
I've never traded options and know very little about credit spreads, so I'm afraid I can't help you. However, this topic was discussed at length six years ago when there were many active members who were very knowledgeable on the topic. The thread I'm going to link to goes down as one of the most infamous in T2W's history and the thread starter is certainly one of its most colourful and controversial characters. It's very long, but it does contain a lot of insight for any trader wanting - as you are - to trade credit spreads: Watch HowardCohodas Trade Index Options Credit Spreads.

Enjoy!
Tim.
PS. Thread moved to the Futures & Options forum.

 

[wintergasp]

Hello,

I have a very big question mark about "selling bull credit spread" in option trading.

As my statistics shows, it seems to be a "breakeven game" or worse as in my simulation.
Notice: I am not 100% sure that I calculate everything correct?
I will show my exact simulation I did on the most 179 liquid stocks on Nasdaq and Nyse for the year 2015.

Let us assume weekly options with a lifespan of 6 trading days
This is now RAW statistics to get a mathematical model of probability!

1. I let the simulation buy if close > 0 which means anytime and then always exit the trade 6 trading days later.
2. Let us assume a strike price for the put option we SELL for credit 5% below the entry price.

STATISTICS:
Total: 3513 signals
3187 of those signals or 91% of the signals CLOSED ABOVE the strike price for the PUT we sell, - which means that we KEEP the premium. Our goal is to keep the premium as I understand.

Now let us take a trading example from this where the stock is trading at $100 and we sell and buy 1 contract in each leg:
95 strike for $0.23 (sell at bid)
94 strike for $0.18 (buy at ask)
$23 sell - $18 buy = credit 5$ (Max profit)

(95 - 94) * 100 = $100
$100 - $23(premium) = $77 (Max loss)

So if we now win 9 times out of 10 times(91% of the time), it should look like this:
Profits: 5$ + 5$ + 5$ + 5$ + 5$ + 5$ + 5$ + 5$ + 5$ = 45$
Loss: 77$
SUM: 45$ - 77$ = -32$


So my question is. We actually have a good winning rate here. As much as 91% but still we end up with -32$.

Now I wonder if I have calculated everything correct and if I have done that, I wonder how it even is possible to make a credit spread strategy that generates positive results. If that is possible, what is missing to improve the results etc?

Thank you!

Yes your calculation is kind of correct. This is because there is a huge mispricing in the option market between the buyer and the seller. That means when you buy an option you get screwed on the price whereas when you sell it you receive the fair value plus some margin.

Your problem is with the backtest. In reality, you wouldn't lose 77$ because you should gamma hedge your position. If you want to deal with options, you need to know your greeks (gamma, vega, theta, delta, etc.) and understand the concepts of volatility and volatility pricing.

 

[Windlesham1]

you are selling spreads with strikes $100 or 1 point apart and taking in $5? Your maximum loss is $95.
This makes no sense- your risk is massive and a 5% move in a stock is nothing.
You have just discovered that the strategy has an edge in BUYING that spread or selling the naked put for $23. Option pricing is based on volatility and you simply cannot mechanically sell any old premium it makes no sense. As for hedging? Forget it unless you are trading big $$$,as the underlying will also smash you to bits