RSI Trading Strategy For SPX Bull Call Spreads
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If you become a member, you'll get instant acccess to the entire Options Research activity feed including the first RSI options trading video focused on long call butterflies.
Here's a direct link to that video article.
If you're intersted in picking up a copy of the new LArry Connors book referenced in this video, use this link to find it on Amazon. https://go.magik.ly/ml/e7m0/
Buy the Fear, Sell the Greed: 7 Behavioral Quant Strategies For Traders by Larry Connors
This video used a short period RSI setting as an entry signal for trading SPX bull call spreads in a bull market. This is the 2nd video in the series. The other 3 videos using the RSI in this way will cover trading SPY Butterflies, SPY single call options, and SPX put credit spreads and will only be available on the Options Research website.
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The drawdown indicates that some of the trades went negative but the perfect win ratio indicates they all recovered from this drawdown. Can you tell me how many of these trades went all the way to expiration?
Yes, in this study the draw downs did recover. Now I don't have the exact number but most if not all of them would've been closed prior to expiration as a 20% gain would be less than the full value of the spread. I'm sure there were a few which were held close to expiration but don't think many went all the way.
The SPY is an ETF that tracks the index. So a little different. SPX is cash settled whereas SPY isn’t. Also SPY is about the 10th the size as SPX so good for starting with it and then moving up to SPX to scale up.
It shouldn't matter whether you do a credit spread or a debit spread at the same strikes.. they are the same trade... also... what nobody pays attention to is.. VEGA flips from long to short in credit / debit spreads..
At the same strikes they are exactly the same trade... doesn't matter if its a credit or a debit.. if they weren't.. arbitrage would exist.. debit spreads are credits spread and vice versa at the same strikes.
Good question. On SPX, a 1 strike spread will cost around $400. It could even be a little less. So a 20% gain would be around $80.
Although I didn’t backtest, SPY on this but if you did the same trade on SPY by stick with the same Deltas for the strikes, then trades would be even less.
Hope that helps.
Thanks Mike. Yes, selling an OTM put spread with an equivalent Deltas (delta 30 ish) should yield similar results although the profit target would need to be based on a percentage of max gain. This trade it was based on the cost of the debit spread.
I’ll actually be doing a bull put spread version later this month in the research website.
I like the concept BUT...a 1:5 average reward to risk ratio is not very appealing. Why not test some sort of a stop...even if it's 40% (twice the profit target). To me, this would be much more meaningful.
I did test a 50% stop and got stopped out several times which reduces the profitability.
There’s a sliding scale in spread trading where the higher the probability, the lower the risk reward. This strategy shoots for high probability 20% gains.
You should back test to 2007 so we can see what would happen when there was the market crash in 2009. Also remember we have been in a bull market for almost the last 8 years... go generally a downward dip would mean there is a recovery
Currently I can only back-test around 7 to 8 years. This is why I used the 200 sma as a filter. In theory, when the market crashed, it would’ve been trading below the 200 sma and you would not trade this strategy.
If enough people join the research center, I plan on purchasing farther dated data to back test more than 7 years or so.
https://i.imgur.com/ffwRfBQ.png I just checked current prices for a ~30 day SPX bull call spread and 72/70 had a 66% POP with 69% P50 while 31/28 had 35% POP with 69% P50 (there wasn't quite a 30/28 but 31/28 should be close enough).
The P50 is the same so as long as you close under 50% (as he certainly does in the video) you will have around the same chance of success either way. HOWEVER the pricing was VERY different. Obviously the ITM max profit was around 40% of the OTM max profit, and max loss was much greater for ITM vs OTM.
Admittedly, "right now" the RSI and SMA rules may or may not apply - I didn't check. But I would imagine generally the OTM prices will always always always be higher than ITM, and the POP at expiration will always always always be better OTM vs ITM. But if you close at 20% like he does in the video, you may very well get identical results.
Ultimately 20% gain is 20% gain, so however you get there more power to ya =)
It's better to use SPX as these are in the money call spreads and with SPX it is cash settled with no risk of assignment. With that said, for SPY, the August monthly Delta 71/71 would be to buy the 267 and sell the 277. For SPX it would be the 2780/2785.
How about using an actual example for the SPY if possible. Which options would you use right now in the SPY. Let's assume the RSI-values and everything were according to the system rules. Which call spread would you buy right now?
I’ll politely disagree here regarding the premium. One of these debit spreads is about the same as an OTM our credit spread in terms of max loss and gain.
Now you can widen the spread though like Delta 80/70 or something but selling a delta 50 call makes the trade a different probability.
Hope that makes sense.
I have started closing spreads and condors at 20% or 25% just because I've been hit with a hard few losses and even with defined risk I currently prefer the increased probability over the increased profit per trade. I may try squeezing more out if IV increases or as my account size grows, but for now a winner's a winner!
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