Credit Spreads for Consistent Profit in Small Accounts

Sorry for the delay on these. Look for them to post on Monday mornings at the latest in the future. This post will show two weeks of activity in order to catch up.

Let me clarify what we are doing here. We are selling vertical credit spreads in high volatility. The process is as follows

-Scan stocks for IV Rank over 50 and secondarily IV Percentile over 60

-Check option chain for sufficient open interest and a reasonable spread (20-30% reward to risk)

-Look at chart to determine direction and key support/resistance

-We select spreads that have the short strike at or close to the .16 to .24 delta (these are essentially a shortcut to determining probability ITM. The larger delta is more risky, but tends to pay more.

Being a seller puts option greeks to work in our favor. Gamma causes delta to fall faster than it rises, so when the market is choppy, it is good. Theta decays value over time, which we love. Vega determines value based on IV. We are shorting on high IV and utilizing a philosophy of mean reversion to our advantage.

Week ending 4/28

Awesome Monday with world news causing stocks to fly. We took advantage of the surge by taking profits off the table. IV ran down as a result so we slowed down trade monday afternoon to see what happens on Tuesday. We happened to get a miracle play on GOOGL!! WOW. Realised TD Ameritrade pricing is not good for small accounts. Next week I will start with Tastyworks pricing: $1 per contract and no closing commission. That will save a bundle. One dark spot was that we had one short position on which got destroyed and we took our first loss (one of the rules in this strategy is that if price touches the short strike, the trade immediately terminates). Losing is part of playing the game. You have to be able to accept that and move on. Ended net positive in spite of taking a loss. After Monday, trades were increasingly difficult to fill. When markets are thin it is difficult to get what you want, best to take it easy and wait for setups. Watch out for earnings. I had a couple sneak up on me. The fortunate thing is that the nature of our trades benefits from the flush in IV that comes after earnings announcements. The danger is that the IV is warranted, and large swings can wipe out your position. BWLD went against us, but we profited. AMZN went for us, luckily. Big earnings on thursday, mostly tech, mostly good, so our QQQ hedge will be dropped at around half loss. Generally we hedge around binary events. Wrapped up the week with no positions, which is a good idea when you don’t know what is going to happen.

Read an interesting article about the “dangers” of trading credit spreads. Apparently the author had blown up his account with the strategy. I discern that he was not managing trades. If you think that this is a set it and forget it proposition, then you will lose. This is how I manage trades…

-Stop loss is the short strike. If price touches short strike, exit immediately. No questions.

-Take profits if they clear 80% of credit taken. It is worth missing the other 20% to not have your good fortune reverse overnight. (consideration given to proximity to expiration)

I thought about giving daily updates, but you can see in the trade notes what is happening.

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Week ending 5/5

Monday started the new pricing on contracts. Now I am getting $1 per contract to open and no cost to close. In two weeks I had spent about $140 on commissions, which makes this far more challenging. All of this week’s trades cost me only $8.

Came in this week with nothing on the board. With the government funding on the line I did not want to have risk on. They decided to fund and markets continue up. Earnings are really the only IV catalyst for the week. It makes for some more risky trades, but they can be rewarding as well in a shorter time frame. You’ll notice that both of our earnings trades ran against us in a big way but stopped right at our short put. Need those to rally off of that low. Noticing some profit in AAPL while I am still under entry price. That is why I trade this way. Technically wrong, but not losing. Beautiful! And I have time working for me every day that passes. Oil happened to be down quite a bit. Took the opportunity to get long with XOP and some good duration to see it happen. A bit close to the money for normal setup, but I am calling a bottom. 65% chance of success is still better than buying calls. We had a very positive jobs report on Friday that boosted things a little. Great news since I had two decent moves against me.

This is an interesting article I found

It seems to go against our strategy, but he makes the real point right at the end. We aren’t just blindly selling premium and praying for a winner. Our “edge” is in our selection. The elements are high relative volatility and, through technical analysis, some directional bias. Also we gain advantage by managing trades effectively. I have said before that we want to take profits at 80% of credit, but I think we can actually reduce that to 50% in most cases. Also there may be some value in holding losers to expiration day and then selling them. I suppose that depends on how far in the money the contracts are. We’ll see what that looks like perhaps on the TSLA earnings trade.

Friday evening I made some decisions. I closed all but the short FXE position just because I am really uncomfortable carrying much risk into a big event like pivotal French elections.


You can see the rules of trade are morphing. More on that in the next post!!