Winning streak comes to an end, but changes to plan show their worth

Here's what happened to the winning streak this week:

Once again, the idea is that the trade pays off if it stays within a wide range for 4 or 5 days. But not this past week:

However, the last 2 changes I made to the plan paid off handsomely. First, "widening the strikes" ...

The short strike for Wednesday was at 2685, but the close was at 2697.79. That would have been a total loss for a 5-wide wing, but since the wings in this case were 30 wide, it was only a 37% loss.

Friday was similarly illustrative. I was short the 2725 call and was watching toward 1pm PDT for the closing price as it was just dancing around 2725. There was one final blip to 2724.whatever, where the whole trade would have finished worthless as desired (thereby letting us keep the full credit). But in the final few minutes is blipped up to close at 2727.72.

Since we got $2.35 for this one were only $2.72 inside the short strike, that's only 37 cents ... of a possible $27.65 loss: 1.34% of what it could have been.

And the other change, moving to the .08 delta: whew. If I'd stayed with the .10 delta for the call side, I've been clobbered on both of these.

All that being said: the Monday expiration is in danger of losing also, its short strike being at 2720. So I need a down day on Monday to get that back in the black.

I'm going to stick with this setup through May despite this episode, but two adjustments that I may want to do in June:

• Go even further out on the call side: .06 delta?
• Watch for the same short strike stacking up (like 2725 today and 2720 Monday) and adjust the later one out 20 points just in that case?

I hope that this week will prove wildly anomalous and we'll go back to 10 or 20 winners in a row ...

We'll see! More next week ...

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!