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How Often the SPY Falls More Than 5% in a 30-Day Period and Why You Should Care

During any 30-day period from 1993 through 2014 the SPY (the Exchange Traded Funds, or ETFs, tracking the S&P 500) closed down 5% or more 11% of the time. I know this obscure fact because for every one of the 5,502 trading days during that period I compared the SPY closing price with the closing price 30 trading days later. (My results can be found here.)

And that’s not all: Further examination of 30-day periods that closed down more than 5% within shorter time frames (say 3 years) revealed rates as high as 20% during extreme bear markets (hello real estate meltdown) and as low as 3% during bull markets. That said, the 11% number was pretty consistent during most time periods.

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Why Is This Interesting?

Knowing that the SPY is more or less predictable in terms of how it performs over a random 30-day period and understanding the bear and bull market extremes form a great basis for building a consistent trading strategy. How about selling puts 30 days to expiration 5% out of the money on the SPY?

I choose to study the 5% down and 30-day parameters because they match up nicely with selling put options on the SPY. You could conduct similar research using different parameters optimized for your product of choice. The important takeaway is that this type of investigation is a strong starting point for crafting an effective trading strategy.

I Am Still Losing Money —What Gives?

Let’s say you sold $2-wide SPY credit spreads 5% out of the money 30 days to expiration and collected a premium of $20 per lot. We know that 89% of the time you would keep the full premium and 11% of the time you would lose the $180 risked. By making this trade 100 times you would collect $1,780 (89 * 20) and lose $1,980 ($180 * 11)—for a total account loss of $128. Understandably, you would want to know why you are losing money on these credit spreads.

More to the point, you should be asking how you could build your edge to develop a successful trading strategy. Simple observations of the past often can get you close to breaking even, and fine tuning can make you profitable. So if you were able to predict when your credit spreads would fall into the 11% zone or space the timing of your trades to increase your odds, you might be able to increase your overall returns. Imagine if you were able to go from 11% of failing trades to only 5%—that is the very heart of building your edge.

In future blog posts I will share how I build my edge by wisely managing bankroll, integrating other metrics such as the VIX and RSI readings, and properly spacing out trades. Stay tuned!

Related Topics: spy

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