No registration required! (Why?)

ES vertical option spreads

Does anyone here do vertical spreads on the ES?

I've been doing them about 15% OTM each month to bring in 0.30 per contract with a high degree of success. Can't seem to get filled at anything higher then 0.30 per contract for a 1 month time period.

Does anyone else do this?
I had to lookup what a vertical spread is:

An options trading strategy with which a trader makes a simultaneous purchase and sale of two options of the same type that have the same expiration dates but different strike prices.

Profits are determined by the widening or narrowing of the difference between the option premiums on the two positions.

So how are you doing these spreads? Which one do you sell and which do you buy?
here is how it works. last month I calculated 15% down from the current S&P index price and that was 1150 roughly. So I entered a combo order to sell the 1150 and buy the 1140 strike price for the May options with a limit of $0.30 per contract. So since I sell the 1150 at say $1.00 and buy the 1140 at say $0.70 I have a net credit of $0.30 per contract in my account.

Now I'm betting the index goes up, stays flat, or goes down but not all the way down to 1150 in 1 month. That is very unlikely and if you plug the trade into a probability calculator the odds are skewed in your favor soo much. So you just sit on the trade till it expires worthless in 1 month. Thats it.

Here is the math:

40 contracts x $0.30 credit x 50 multiplier = $600 minuus trading costs

So in reality you are risking the spread between the two options strike prices (40 contracts x $10 spread x 50 = $20,000)... risk $20,000 to make $600 sounds a little backwards but since the probabilities are so great in your favor it works. Singles and Doubles thats what this trade is all about.

Now you dont have to hold the whole $20K in margin I have to only hold about 30% in margin so that increases the return:

$600/$20,000 = 3% return in 1 month
$600/$6,000 (30% of $20K) = 10% return in 1 month
That's a good bet/trade if the probability of losing $20,000 for a gain of $600 is less than $600/$20,000 which is 3%. i.e. Out of every 100 times that you do this you should have 97 winners and 3 losers to break even. You would need 98 winners and 2 losers to make a profit out of it in the long term.

So my question is: Has anybody back tested this theory to see how often you win and how often you lose over all the data that's available?

I'd imagine that this would be a very difficult concept to back test because accurate options data on each data at each relevant strike price is probably difficult to get hold of.
Well I looked back at the S&P500 and looked for the largest drops in a given month and didn't find anything greater then about 12% a few months back in jan - feb. so I'm confident that 15% away from the current index price is okay.

The other thing is you could always roll the contracts another month if anything serious started happening and you get nervous... your never locked into your position. I've only done this for the past 5 months but looking at the index price over the last 15 years I feel pretty safe.
Well if you run this over 10 years you will have executed this strategy 120 times and if there were no more than 3 drops of 15% then you'd be okay and would come out with a profit. So how many times did the market drop 15% in the 15 years that you looked at this?
I never saw a drop of 15% in one month over that time period.

I did see the big drop at the beginning of this year but thats it for month to month drops.

But you can always roll your contracts if it gets close just just wont make any money that month or two but you'll never face the max loss situation
It's an interesting strategy. I would have to take some time and run the numbers for myself to see that it would be viable. I believe that you need to be a sophisticated trader to trade something like this and I don't know how many sophisticated traders there are as a percentage of all traders. For that reason it may be difficult to find many people who've tried this or who even understand it.
basically what you are doing is selling those low probability options that ultimately expire worthless. since we dont want unlimited risk or huge margin requirements you use a vertical spread.

my opinion is if you cant tell where a stock, commodity, index, etc is going to go in the short term and when it will get there your better off selling the options, taking the money , and moving on.

I have a 1150/1140 May Put spread that will expire worthless tomorrow. the ES is at what 1400 and change. I sold options down at 1150/1140 a month ago and made 9.2% on my margin money last month.
Emini Day Trading / Daily Notes / Forecast / Economic Events / Trading Indicators / Search / Terms and Conditions / Disclaimer / Books / Online Books / Site Map / Contact / Privacy Policy / Links / About / Day Trading Forum / Investment Calculators / Pivot Point Calculator / Market Profile Generator / Fibonacci Calculator / Mailing List / Advertise Here / Articles / Financial Terms / Brokers / Software / Holidays / Stock Split Calendar / Features / Mortgage Calculator / User Pages / Donate

Copyright © 2004-2017, MyPivots. All rights reserved.