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!

Trump crazy rally and my mistake hurt results but ...

This guy mentions Tax Cut and the market rockets up:

I've been doing mostly neutral trades for my own (currently small) account, as well as making a mistake "The S&P 500 will never get above 2520 this cycle, will it?" It did:

In any event, I've been trying the "trade small, trade often" Tastytrade method a bit ... overall it's less risky than the way I was trading before, but also less profitable.

So overall I'm now down to net liq $3599.77 ... which is down just about 10% overall.

I am pretty sure I have $55K or so coming into this account within the next couple of weeks and here's my plan for it:

(1) Continued Tastytrade canoodling, especially with higher-volatility stocks like TSLA
(2) Some earnings trades, selling a (small) 2-day iron condor just outside the expected move
(3) Short futures contracts ... probably 2 or 3 of these, selling puts against them every week
(4) For 25% of the account balance, stepping out of the Tastytrade arena and moving on to Ralph Vince (but using a trade idea from 2013 Tastytrade -- though I can't find the video right now):

Sell a 1 standard deviation SPX Iron Condor weekly option near the end of trading (1:15 PM Pacific) every Thursday, taking advantage of the (excess) premium in the options that remain because even though you can't trade SPX after Thursday 1:15, the actual settled price doesn't come through until Friday a.m., in a vehicle called SET.

I could just swear I saw at some point a customer-published study showing that this trade (or actually
the short strangle: an Iron Condor without the protective wings) works 91.67% of the time.

Assuming that, I'm "safe" risking 25% of my account every week ... each trade making about 15% on margin, so 91.67% of the time making 0.25 * 0.15 = 3.75% per week ... most weeks. If you do that successfully 10 weeks in a row, you gain 44.5% for those 10 weeks:

A monte carlo simulation running this 10000 times shows this hugely profitable ... but I have enough experience by now that I'm just going to test this with 1-lots (risking about $400 per trade) for 10 weeks in some of the (long suffering) people's accounts I am still trading ...before putting it to the 25% test in my own account.

I'll publish the results of the first such test this weekend!