In today’s Market Measure segment, Tom and Tony look at the mechanics for setting up a debit spread and the historical P/L results of those spreads.
Earlier this week our team tackled vertical credit spread entry and optimal management. Today we take a look at the polar opposite of a credit spread, the debit spread. Debit spreads generally consist of a long ITM option and a short OTM option creating a position with positive theta decay.
In a study conducted by the Research Team, they looked at SPY (S&P 500 ETF) from 2005 to present. Using the 45 DTE options, our team bought debit spreads with the following setup:
From those occurrences, tastylive analyzed managing the spreads at 50% of maximum profit as well as observed how low IVR influences win rate and spread price.
Because of the positive, bullish drift in the S&P, long Put spreads have not historically performed well. Still, managing the position helped both spreads, and the lower IVR boosted the profit potential and win rates of the debit spreads.
Ultimately, tastylive aims to implement debit spreads when IV is low as option prices tend to be cheaper. Additionally, even though low IVR increases the profit potential and historical win rate of the debit spreads, long put spreads have not performed well due to the bullish sentiment in equity markets.
This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.