Friday, March 21, 2014

Selling calls of small Delta in up-trending market

In analyzing my losing bear call spreads in the last couple of months, I updated my TOS option profit and loss charting script so that it can track daily P&L for 6 rounds of trades. Then I did a back-test to see if I could keep selling calls with increased size and fixed Delta around 0.32 to end up with profitable month in current low volatility environment (VIX around 13 to 17).
As shown in the picture above, I made the trades using a combination of technical analysis and high probability method. On the technical side, I thought SPY broke a major support level of $177.5 initially and faced a resistance level of $185 later. All of these were invalidated by market moves. On the high probability side, I used Delta around 0.3 for short call options which corresponded to 70% probability of success approximately. After one adjustment, I decided to close all positions on 2-28 for a loss.

In my back test today using the ThinkScript, I wanted to see if I could adjust losing trades by increasing position size while keep Delta around 0.3 for up trending  market since I believe market does not "crash-up". So I started the bear call spread at 1 contract on 2-5. In the 1st adjustment on 2-12, I increased the contract size to 2. In the 2nd adjustment on 2-28, I increased the contract size to 3. When looking for Delta around 0.3, I found the strike prices got a lot more closer to the current SPY price as we approached expiration day. With 28 DTE, the short call price could be just $2.00 above current SPY price.

Thus, this test leads me to believe that we would still face challenges if we continue selling of small Delta (or small ITM probability) call options of the same month as the adjustment strategy in our efforts to maintain profitability for the option cycle in high probability trades even if the contract sizes are increased to bring in more potential profits to offset trade loses of adjusted trades. The starting point of the trade is also very important. If the trade did not start at the bottom of the Bollinger Band, the adjustment should work much better.

Due to the lack of any option data on 2-28 and in that weekend in TOS software (both ThinkBack and ThinkOnDemand), I could not sell option on that day while SPY price was higher in this back test.


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  2. Hi Charles,
    Really enjoying going through your blog and learning a lot. Can I ask how do you get the P&L function on your ToS charts? Is that something you have set up yourself? Thanks

    1. Hi Mark,

      I wrote TOS scripts to display daily P&L. If you send an email to me, I can send you the script.