Well, it’s been some time since my last post and the failure that was the debit spread trading challenge. Admittedly, I could have tried adjusting the strategy but it was really difficult to see any profitable path forward. I was then, and still am of the belief that the long spread was essentially roulette. I was just picking red or black over and over again. Right or wrong, I couldn’t shake the thought and that made me question why I was wasting the time. I was losing money, it was taking a great deal of time and work, and after a few months I decided the casino would at least be more fun.
In any case, I’m calling the vertical spread back up off the bench as we get this new year started to see what may be possible. Only this time around I’m going to dial up the short vertical rather than that long spread bum. Officially, my lifetime p/l on short spreads comes in at a gut wrenching (-$584.08) which you can see from my OptionBoxer Portfolio Journal below. Lastly, for anyone not already familiar with the put credit spread options strategy this primer from Stock Options Dad should get you up to speed easily enough.
As a sidenote, I’m slowly clawing my way out of the hole I’d dug by trading every strategy I thought I had “figured out”. Clearly I didn’t as you can see. Fortunately, I’ve been finding success with cash secured puts and covered calls so eventually this chart won’t hurt as much. Until then however, I think I’ll keep attacking various strategies with that good ol’ never say die attitude. I’m sure that’s the secret… 🙂
Put Credit Spread Options Strategy Challenge
Now that I’ve formulated what appears to be a solid distaste for long vertical spreads, its time to try my hand again at short verticals. I haven’t been profitable consistently with any vertical strategy but I can’t help but think my plan has been the biggest problem. As such, I’ve concocted a new plan, which I’ll outline below. If you can see flaws immediately that I’m missing please let me know in the comments.
Trading Vehicle of Choice
After attempting to analyze and decipher 5 different assets during the long spread challenge I’m going to simplify even further and trade only one, SPY. Without exception, it’s the most liquid underlying available to options traders and has been for as long as I’ve been trading.
- SPY – S&P 500 ETF
Challenge Goal & Account Details
Rather than attempt to double my account (which certainly never left my mind during the long spread challenge) I’ll try aiming for a respectable percentage target. Additionally, I’ll upsize my account to a starting balance of $1,500 to allow for at least a few losses without knocking me out completely.
- 15% Return on Capital (ROC)
- $1,500 Starting Balance
Put Credit Spread Options Strategy Trading Challenge Plan
- Trade Criteria
- Options Underlying – SPY
- Options Strategy – Put Credit Spread Only
- Spread Width – $5 per spread
- Days to Expiration – approx. 45 DTE
- Short Strike Entry at .15 Delta
- Management
- 85% Profit Target
- 35% Loss Target
- Close position when price closes below short strike or at Loss Target, whichever comes first.
- After a loss – stay out of any trade for 13 trading days. Enter next trade on day 14.
You may have noticed from the information above I’m only trading the put credit spread. After the long vertical spread challenge I just don’t want to attempt determining market direction anymore. Yes, we may enter a sustained bear market and yes the put spread will suffer but as 2022, 2020, 2008, or 2000 have all shown me every bear market can have a rally.
Additionally, you’ll notice two critical rules listed under management. First, I’m aiming to close the position when the short strike is firmly breached. Second, I want to stay out of the market after a loss for enough time that any emotional noise has subsided. Not just my own but that of the market as well. The hope is if I take a loss I can stay out of the market while it falls off the cliff and catch any subsequent rally that may occur. Wishful thinking perhaps but we’ll see how it goes.
From the results I’ve provided below I think you’ll agree this was in the past an appropriate approach. Of course, reality and back testing are wildly different so take the results with salt until I’ve shared or you’ve experienced actual results.
Back Test Results
Keeping in line with the criteria outlined above I set out to test the strategy against the market in 2020, 2021, and 2022. We’ve seen just about everything in that 3 year run. We witnessed a black swan event with Covid in 2020. We enjoyed a roaring bull market in 2021 and the pain of an equally bearish market in 2022. My thought was if I could trade the strategy through all of that and still be profitable I might really have something worth the time and energy. Lastly, for good measure, I also ran the test in 2016 for no other reason than just to see the result.
2020 Back Test Results
2021 Back Test Results
| Trade 1 | $36 |
| Trade 2 | ($145) |
| Trade 3 | $84 |
| Trade 4 | $58 |
| Trade 5 | $51 |
| Trade 6 | $50 |
| Trade 7 | $50 |
| Trade 8 | $45 |
| Trade 9 | $37 |
| Trade 10 | $53 |
| Trade 11 | $46 |
| Trade 12 | $50 |
| Commissions | ($30.24) |
| Total P/L | $384.76 |
| ROC % | 25.65% |
| Trade 1 | $46 |
| Trade 2 | $45 |
| Trade 3 | $37 |
| Trade 4 | $37 |
| Trade 5 | $42 |
| Trade 6 | $34 |
| Trade 7 | $34 |
| Trade 8 | $38 |
| Trade 9 | $34 |
| Trade 10 | $44 |
| Trade 11 | $40 |
| Trade 12 | $37 |
| Commissions | ($30.24) |
| Total P/L | $437.76 |
| ROC % | 29.18% |
2022 Back Test Results
2016 Back Test Results
| Trade 1 | ($196) |
| Trade 2 | $47 |
| Trade 3 | $45 |
| Trade 4 | $50 |
| Trade 5 | ($176) |
| Trade 6 | $58 |
| Trade 7 | $51 |
| Trade 8 | ($177) |
| Trade 9 | $59 |
| Trade 10 | $58 |
| Trade 11 | $50 |
| Trade 12 | ($48) |
| Commissions | ($30.24) |
| Total P/L | ($209.24) |
| ROC % | (13.94%) |
| Trade 1 | ($187) |
| Trade 2 | $40 |
| Trade 3 | $47 |
| Trade 4 | $37 |
| Trade 5 | $31 |
| Trade 6 | $46 |
| Trade 7 | $34 |
| Trade 8 | $30 |
| Trade 9 | $36 |
| Trade 10 | $40 |
| Trade 11 | $36 |
| Trade 12 | $36 |
| Commissions | ($30.24) |
| Total P/L | $195.76 |
| ROC % | 13.05% |
Final Thoughts
Taking a look at the put credit spread options strategy results detailed above it appears to be a satisfactory approach to the vertical strategy. At no point did I have more than one spread open which keeps my risk of loss to the lowest possible level. Moreover, the strategy would require only a minimal level of upkeep each day which is a nice change of pace from the long vertical strategy. I should be able to enter the trade, the profit target, and a stop alert all at the outset of the trade.
Lastly, if I add up 2020, 2021, & 2022, my total profit for the three year period would be $613.28 with an ROC of 40.88%. Add in 2016, for fun, and the total jumps to $809.04 with an ROC of 53.93%!! Not bad for literally only having to trade 10-20 times per year. That said, If I am able to replicate this success in the years ahead I could always scale up as the account grows. For now though, I’ll just stick to trying to earn a modest 15% trading this put credit spread options strategy.
God bless,
Jeff
