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I posted this in another thread but I thought it should also be here.
In KC I am doing one short one long spread.
Here are tables from 20140922 when KC went up from 179 to 221 in 17 days. They all use 6X IM.
This one shows one short KCz4c237.5 and a KCz4c230c262.5 spread. The naked short went on margin call on 20141006. The spread had a high of 70.4% of acct used for IM and a lower draw down.
The naked short IM increased 213% on 20141006. The spread IM increased 66%.
This one shows one short KCf5c270 and a KCf5c250c270 spread. The naked short went on margin call on 20141006. The spread had a high of 51.6% of acct used for IM and a lower draw down. Notice that this is lower than the Dec spread.
The naked short IM increased 221% on 20141006. The spread IM increased 41%. This Jan spread IM increase is less than the Dec spread IM increase which was at 51 DTE on 20140922 vs 84 DTE for Jan.
This one shows a KCz4c230c262.5 spread and a KCz4c230c280 with two longs. They acted similar for this situation. So in this case I don't see the need for two longs.
Assume, for whatever reason, that the US goes into a recession starting next year. Have you given any thought or tried to model out what happens to the spread strategy during a recession? What would a potential alternative strategy be? What commodities rise when the market goes down or starts going into a recession?
Ron, thanks for your work. So the plan asks for 1xSP delta 5.0 2xLP delta 1.5 and 6xIM reserved capital. I hope I correctly paraphrased this. Furthermore you exit at 50% drop in premium - 50% from the premium of the SP or 50 % of the consolidated premium of the spread? Any time lock (like OR 50 days max). And any provision for the adverse development (like OR current premium is max 200% of received premium)?
Or do you even use a combined rule like 50% drop in rec. premium OR 100% rise in premium OR 50 days max -whatever occurs first?
Did the SP go ITM witin the first 30 days without any chance to close the spreads (without losing more than the received premia)? Wouldn`t rolling have helped? Why calls on a defferent underlying instead of selling calls on the ES (in such situation)?
A short put doesn't have to go ITM to lose more than you sold it for.
In the last 10 years only the ESz08 contract dropped more than 233 in 30 days. It dropped 379.75.
So you want your short put strike to be at least 250 OTM to avoid going ITM.
I have found that rolling is a 50-50 strategy. Sometimes it works. Sometimes you add to a loser. Sometimes you lose big. I tend to not do it now.
I don't like ES calls because of low ROI. Also during 2008 recession ES was extremely volatile up and down. The same contract, ESz08, that had the largest drop also had a 168.50 rise in 30 days. Largest in many years.