SPX Weekly Verticals

On a forum I read, someone suggested a strategy similar to one that I have researched in the past. Their rules were simple:

  • Sell a 20pt Bull Put Spread on Thursday in the opening hours, expiring the next week
  • The Short strike needs to be at least 100 points from the current spot price
  • Sell the vertical when it reaches 0.05
  • Allocate 50% of your portfolio to this trade.

This strategy is predicated on the belief that the SPX does not move more than 100 points in an 8 day window and that weekly vol is expensive. Looking at the last 15 years, I find this is true 99.31% of the time. There are 26 instances out of 3752 samples where the market moved down more than 100 points. Several of these were during the crisis in 2008, 2001, but the most recent period was in Oct 2014. Fortunately for this strategy, it did not occur on a Thursday so it got a lucky pass.

Here are the rules for this strategy:

TVert100pt-Rules

I choose 10AM on thursday to place the trade. Note also that slippage and commissions are also taken into account.

I tested this strategy from Jan 2008 through to Dec 2014. The results are promising.

Weekly Verticals 100Pts from Spot

Overall, this trade performs very well post 2011.

Prior to 2011, it is relatively flat. Largely this is because, while there were weekly expirations, there were not enough strikes available in those expirations to find conforming trades. So much of the time it just sat out of the market, and traded the monthly expirations.

During this period the 2008 crash occurred and while the strategy had a large drawdown during that event, in the big picture it did quite well. But its hard to draw conclusions given it sat out the the market 75% of the time during this period.

From 2011 onward, the trade really picks up steam. It is entering a trade every week by this point. It is also during a bull run, so the trade as a wind at its back. But you can see the drawdowns (lower chart) are relatively small.

But why 100 points? I think it was chosen for the reason that the market almost never moves that much in that time period (99.31% remember). But 100 points today (5% move) is very different than a 100 points in 2009 (8-13% move). So I need to also look at percentage moves. I tested 4.5%, 5%, 6% and 7%.

4.5%

20pt Vertical Spread 4.5% from Spot

20pt Vertical Spread 4.5% from Spot

5%

20pt Vertical Spread 5% from Spot

20pt Vertical Spread 5% from Spot

6%

20pt Vertical Spread 6% from Spot

20pt Vertical Spread 6% from Spot

7%

20pt Vertical Spread 7% from Spot

20pt Vertical Spread 7% from Spot

All Tests

Vert-All

The 4.5%, 5%, and 6% tests where pretty severely impacted by the 2008 crash. Afterwards they all take on similar performance. Its pretty clear that back in 2008 staying a greater percentage distance made sense. The 100pt strategy is essentially a 8-10% strategy when volatility is high and a 5-8% strategy when low.

The summary statistics show that the 100pt strategy has a very good sharpe, and reasonable drawdown considering you are placing 50% of your portfolio at risk every week.

Stats

 

 

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