Warren Buffett often says that he tap dances to work. He has found a method of trading that gets him high. I, however, would be bored to tears if I invested the way Buffett invests: I need more action, which is why I like to trade credit spreads and day trade the SPY.
Spicer's Soapbox
I backtest three position sizing methods for SPY put credit spreads to show how much to risk per trade for sustainable, compounding options income.
eOption.com has the cheapest commissions I have found for trading credit spreads, and lowering your trading costs is essentially a risk-free way to add returns.When I got interested in trading credit spreads, like most I harbored some skepticism. A credit spread trade seemed to be the type that works—until rather dramatically it does not. Then I set off to figure out the correct way to trade SPY put credit spreads. The path was familiar: backtesting.
When I talk to people about my credit spread trading strategy I often hear the claim that credit spread trading works great for 5, 10, or 20 thousand dollars, but the strategy can’t be scaled up. Are these skeptics suggesting a lack of liquidity to fill bigger orders?
To study how delta affects an opening trade I did—of course—some backtesting. I took a $10,000 account and placed put credit spread trades from 2011 to current. I opened up spreads that were $2 wide, at least 4% out of the money, and no more than 45 days to expiration.
Almost all of my credit spread trading is focused on the S&P 500 via the SPY or S&P 500 futures. Why am I hyperfocused on the SPY? So I can sleep at night (well, try to sleep—I do have a young son and a daughter on the way).
Every great trader has a bag of tricks. Each of these opportunities, if you will, is a predefined market condition signaling when to enter a trade and when to close it. One that has been in my bag for awhile is buying the SPY when the Relative Strength Index (RSI) indicator hits 30.
After 10 years I still can’t fully tame my emotions, which is why I rely on mechanical, rule-based trading over emotional decisions to stay consistent.
The day I learned to pay attention to volatility was the day I started to be consistently profitable in options trading. Most options traders start out trading stocks and they learn that if a stock is associated with good news its value often increases, whereas bad news sends a stock down.
