Whether it’s good or bad there are certain restrictions on an IRA account that margin accounts are not held to. Being naked short Calls is forbidden and short Puts must be cash secured, meaning that there is enough money in case the stock goes to zero. It’s for this reason that we generally stick to Iron Condors, Covered Calls and Vertical Spreads. Our goal when using a credit spread is to collect at least ⅓ the width of the strikes. Practically speaking, how close do our short strikes have to be to accomplish our goal of collecting ⅓ the width of the strikes?
Our study was conducted in the SPY (S&P 500 ETF) using data from 2005 to the present. We took measurements from credit Call Spreads and Put Spreads in which the strike width was approximately 1.4% of underlying price ($3 with SPY’s price today) and the credit received was at least ⅓ the width of the strikes. We then analyzed the Delta of the short strike of the spread.
A table of the results showed that the average Delta of the short strike for a Put spread was 44.8 and for a call spread was 36.5. Tom explained that the difference was due to Volatility Skew. A second results table divided the data by Implied Volatility Rank (IVR). The data was divided into IVR from 0-25, 25-50, 50-75 and 75-100. The table showed the importance of selling high Implied Volatility (IV) and IVR as there was a 10% difference in the average Delta of the short strike in both the Call spread and Put spread when IVR was at its highest. Moving farther away from the underlying price while still collected ⅓ the width of the strikes results in a higher Probability Of Profit (POP).
For more information on ⅓ the Width of Strikes see:
Options Jive from January 16, 2016: "Credit & Strikes for Spreads: Why 1/3 of Width Works"
Options Jive from April 6, 2016: "Vertical Spreads | Which Strikes Should I use?"
Best Practices from August 17, 2016:"Vertical Spread Mechanics"
Watch this segment of Strategies For Your IRA with Tom Sosnoff and Tony Battista for the key takeaways and the results of our study on how far away vertical credit spreads can be while still collecting one third the width of the spread.
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