Trading Short Put Spreads in the S&P 500 (INDEXSP:.INX)
Date Published: 2017-03-16
Preface
The S&P 500 (INDEXSP:.INX) is up 28% over the last three-years and 17% over the last year, but an option strategy that has invested in the index simply not "going down a lot," has yielded over 220% returns and further yet, has been successful over three-years, one-year, one-year and even the last six-months.
S&P 500 Index Options
Selling put spreads in the index options is a natural tack when looking to benefit from a bull market, but with an eye on making greater returns as long as the market doesn't tumble out of control. First we examine which put spreads have worked the best -- trading monthly options.
If you're reading this on a mobile device, that image is going to be hard to read, so we'll spell it out in a table, below:
50 delta: 176%
40 delta: 233%
30 delta: 217%
25 delta: 195%
So, we have a basic framework in place where we can focus on selling the 40 delta put -- a little bit out of the money (50 delta means at the money), and now we can try various put spreads in this area.
Now we can see that the 40/15 delta short put spread in S&P 500 (INDEXSP:.INX) index options has returned a whopping 233% return, again, while the index is up just 28%.
Here's a return chart with the index in gray and the short put spread in orange.
Is This Really Analysis, or Just Luck
Skepticism is natural -- trading isn't a game and that means we have to prove to ourselves that this isn't luck or happen stance.
What we need to do now is look at this short put spread over various time periods. We see that it has worked over the last three-years, now let's look at the last year:
It's not a magic bullet -- it's just easy access to objective data.
The short 40 delta put spreads have returned between 112% - 115% in the last year with the index up about 17%. But, we can also look at the number of winning and losing trades.
Over the last year we see 11 profitable short put spreads and 2 losing spreads, for a 84.6% win rate. For the careful option trader we can see that we have edge here.
A 'delta' is roughly a measure of probability -- so a long 40 delta put should be in the money about 40% of the time. In our case, selling a 40 delta put should end up in the money 60% of the time. But, instead, we see a 84.6% win rate -- that's actually huge edge -- quite unusual in a broad based index.
When we look at this short put spread in the S&P 500 over the last six-months, these are the results:
We see 7 winning trades with 0 losing trades, so a 100% win rate, and a 71.8% - 78.5% return depending on the spread that was sold. For context, the S&P 500 (INDEXSP:.INX) has been up 12.2% in the last six-months.
What Just Happened
This is how people profit from the option market - it's preparation, not luck. We had a hunch -- we checked it cross various strikes -- we honed in on the sweet spot -- we verified the results across all the time frames -- we found edge. That's it.
It doesn't mean this is going to work in the future, but what it does mean is that of the S&P 500 doesn't collapse, we have a very good idea of which options to trade and a strong conviction that there could be edge there. That edge has led to 6x returns in the last six-months and about 9x returns over the last three-years.
To see how to do this for any stock, ETF or index, the S&P 500, and for any strategy, with just the click of a few buttons, we welcome you to watch this 4-minute demonstration video:
Tap Here to See the Tools at Work
Thanks for reading.
Risk Disclosure
Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment.
Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.