by billb
2. September 2009 08:42
Looks like the latest round of dips got my newest trading system all hot and bothered. Today a trade in IWM was flagged. To recap, I have an ETF trading system that I'm using to flag option trades. The ETF trading system is a low frequency/high probability setup and I add to my winning % by selling put credit spreads one standard deviation out of the money. A standard dev for the IWM is about $51 (current IWM price is 55.80), so almost 10% out of the money. If I put on a put credit spread 1 standard dev, here's what the P/L graph looks like over time.
(click to enlarge)
At the time of analyzing the position, I'm looking at a credit of 0.18, before commission. This sets my maximum profit of the credit and my maximum risk being the distance between the two strikes - the premium (0.82). I could do a few things, first, I could widen my strikes, if I did a 49/51 put credit spread, I could obtain a credit of 0.33 per spread but would also double my risk. I could also move the short strike closer to the money. If I did a 54/55 PCS for example, I would get a 0.39 credit, but if $55 was breached at expiration, the position would lose. So higher probability of loss, but bigger credit. Options are always a trade off and allow you to fine tune your position to what you're feeling.
I haven't decided if I'm going to go with real money or do another paper trade. I don't recommend anyone put this trade on. Doing so will likely be hazardous to your account value's health. This is in testing at this point.
As usual, just sharing an idea and always welcome feedback.
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