$30-wide wings and .10/.08 delta short strikes work magic again

I stuck to the revised system this week and once again had all winners (so far -- SPX trades expiring Monday 4/30 and Wednesday 5/2 are still alive).

The market went almost nowhere (net) after bouncing around like mad:

The accounts I am trading were up about 4% again this week, and I still haven't lost one of these trades.

Let's go back to our friend the Kelly Criterion ... I got $2.15, $2.95 and $2.75 on the $30-wide spreads this week. This is 7.71%, 10.90% and 10.09%. Averaging these three gives 9.567%. Plugging this into the Kelly Criterion assuming 95% wins:

So half that would be 21% ... not far from the 15% in our system. I'll keep watch on this and possibly boost the amount at risk on each trade based on revised statistics. But I think I'm going to stick with this system without any more tweaks through the end of May.

That's it for this week ... I started a new day job this past Monday, so my next move:

The market answers a question I had for Tom Sosnoff

I mentioned previously here that I'm a fan of TastyTrade, and one reason is that the founder, Tom Sosnoff, will answer email!

One question I've had is about "widening the strikes" between legs of a credit spread. For example, instead of just increasing the number of contracts on a $5-wide spread, first widen the spread to $10 or $20 or $30!

You make a lower return (based on margin) doing this, but are there other advantages? I wondered especially doing really wiiiide spreads (between the short strikes) .. the .10 delta.

I got my answer last week as we had a little piece of 2017 teleported back into the market:

Friday through Tuesday the market just went straight up, and I had a trade expiring Wednesday and one expiring Friday ... The short strike for the Wednesday-expiring trade was 2715 and for the Friday 2725. On Wednesday morning the price was lapping at 2715 and I realized:

That is: I was using $5-wide spreads meaning that if the Wednesday close was 2720 and the Friday one 2730 ... then I lose 2 in a row on these and 30% of my main client's account.

So I violated my trading plan and closed out both of these trades early Wednesday morning ... Suddenly the Widen the Strikes idea made sense:

Using a $30-wide strike instead of a $5 wide one, the 2720 and 2730 closes would be only a 16% loss of the amount at risk each time, totaling 4% of my client's account!

I ran a monte carlo simulation to check on this, assuming that instead of losing 100% on every loss that losses are distributed more toward the "not so bad" end ... and the results are in fact better than the $5-wide strike by far.

Just to clarify the results from this week: SPX in fact backed off and closed at 2709 on Wednesday and was down Thursday and Friday ... so still 100% wins for the 9 I have done so far. And this was the week where the NDX a.m. settlement trade is available, and of course that won again ... this time I did a "synthetic strangle" -- 50 points wide and got $6.53 in credit ... still a 15% return.

So that puts the final touches on my trading plan:

Iron condor with short strikes at the .10 delta on the put side and the .08 delta on the call side -- just moving this out a bit more ... every Monday, Wednesday and Friday on SPX with 4-5DTE (Monday -> Friday, Wednesday -> Monday, Friday -> Wednesday.  And I'm going to use $30-wide wings on this trade in any account that's big enough to handle it! And the NDX a.m. settlement when available and I should remember to use 1/2 Kelly Criterion on this one for sure!

Another 100% winning week and a refined risk idea ... plus fun with the Kelly Criterion!

I put on 3 more SPX and 1 more AMZN .10 delta condors this week and once again all worked. So I'm now 6-0 or 8-0, depending on how we're counting these.

Conditions were very favorable, with the VIX still relatively high (closed at 17.41) and the market going nowhere all week:

I'm using the Kelly Criterion to figure out how much risk to take on each trade, but to figure the K.C. one has to know how often the particular trade in question fails ... Since we haven't had this one fail, we can't use the Kelly. But ...

What happens to the Kelly Criterion for a trade or bet that always works, or almost always?

As expected: bet 100% of your stake/account if you have a bet that always wins ... (Make sure the "always" is true, though ...)

What about "almost" always: 98.5% of the time?

That's almost all of your account, fitting my intuition of what would be recommended. But once again, 1/2 the Kelly Criterion is plenty exciting/profitable: bet 45.5%, 46.75%, 47.75% ...

Just to be conservative while I'm waiting (no hurry!) for one of these trades to lose, I'm assuming 92.5% wins, and I get an average of 18% or so return on each trade. So:

So 25% ... but I'm not even going to do that ... bringing me to my final subject for this post ...

I said earlier that risking 33% overall of an account was plenty ... but the way the trades overlap makes it stopping at 33% leaving money on the table, I think.

If I risk 15% of the account on each SPX trade, that makes 45% maximum at risk ... but only for a few hours on Monday, Wednesday and Friday. Specifically, I usually put the trade on around 8am Pacific ... and one of the overlapping ones expires (worthless, we always hope) at 1:15 pm. So that's 5.5 hours of 45% exposure, 3 times per week = 16.5 hours of the 168 hours in a week at 45% risk and rest only 30%.

This seems like a balance of risk and reward that's worth doing. In fact this is an understatement. The mean expectation using this system (risking 15% on every trade) and getting a 15% return on every winning trade, winning 92.5% of the time, just for the rest of this year (40 weeks at 3x/week) ... a $50000 account becomes, on average, worth $247669.25!

More next week ...

OK, up 4% this week ... and implications if we can do this regularly (I think so!)

I am sticking to the plan I posted last week; this week I put on SPX .10 delta iron condors Monday, Wednesday and Friday and an AMZN one on Monday too.

The SPX trades expiring Friday and Monday looked a little scary until this happened Thursday afternoon:

This kept the SPX from getting too close to my short strikes (2685 for Monday) ... AMZN also was down into the wide open spaces just north of 1400.

So overall the biggest account I'm trading was up 4% for the week. I'm just getting started with this system, but I firmly believe that this can work 90% or more of the time. (I've done 4 of these so far: all winners.)

If this works 10 weeks in a row, that's a 48% from the starting point; I'm visualizing that!

And the implication if one can do this regularly: $200000 is plenty to retire in style on. If you're taking 1/3 ($66666.67) and you make 12 to 15% on that  a week (easily doable with current volatility), that's ... $8000 to $10000. Take $6000 of that, save the other $2000 to $4000 against losses ... that's $25K per month.

Enjoy!

More next week ...