This segment discusses credit spreads and their optimal levels and reveals the results of a study testing mechanically placed spreads versus ones with a selective entry. The study may provide insights into a strategy many have neglected using. Don't miss the valuable info from this study.
We generally go long vertical spreads when volatility is low as they will tend to rise in value as volatility rises. We generally go short vertical spreads when volatility is high. They tend to decrease in value as volatility comes off.
The width of the strikes and the cumulative delta of the spread, along with volatility, affect the price of the spread. The trader has a variety of choices he can make. These choices are detailed here. A table displayed info highlighting some of the factors affecting pricing.
A study was conducted from 2005 to present using the SPY (S&P 500 ETF). We bought ½ Standard Deviation (30 delta) put spreads on the first of the month closest to 45 days to expiration (DTE). We compared mechanically selling every month to a selective entry of placing a trade if the credit was greater than 20% of the width of the strikes.
Watch this segment of “Market Measures” with Tom Sosnoff and Tony Battista for the takeaways and the results of the study testing mechanical versus selective credit spreads.
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