Option Spread Optimization and the $10 day

I slightly reworked a spreadsheet to provide a comparison between varied strike spreads at various strike levels and incorporated position sizing, Return On Risk, daily returns and the average ROR for the entire spread strike listing that is usable (ie all $1, $2, $3 and $4 spreads from 115 to 121 strike).

The result, the best bang for the buck is for the $2 spreads by a 0.5% margin.

With my Optioneer/Strikepoint trades I look for $10 per trade as a minimum target and that is based on a $5000 (less premium sold) risk profile. With my spreads I might feel comfortable with a 117 or 118 strike spread...go with 118 so safety.

A 118 strike with a $2 spread yields 3.27% based on $1200 gross risk.

This nets about $1.09 per day of the trade (January expiry) if I trade 6 contracts, $1200 total risk. Comparing against the same risk profile as Optioneer I would put $5,000 at risk and yield 3.95% and $5,50 per day.

117 strike the yield jumps to 6.72% and $9 per day
116 strike the yield jumps to 9.65% and $12.50 per day

Considering this is with the price of SPY at the low end of the trading channel now these numbers would look much better with a higher SPY price as the strikes would be that much closer...although the volatility would be lower and would depress the option prices a bit.

Thus the issue becomes how much to risk and how far out to place the strikes to lower the chance of taking a larger hit and meeting a $10 per trade per day target or the equivalent.

$10 per day at $5000 risk
$5 per day at $2500 risk
$2.40 per day at $1200 risk

Today that target could be met with a trade at 116 strike yielding 8.9% and a $2.80 per day profit.

Considering that there is no margin available for these trades and my account is just over $5,000 I would feel better placing more smaller trades so I will have to aim for the "equivalent to $5000" trades. I think that I can find combos to provide this particular cashflow without undue stress.

I also am aiming to be able to do any number crunching after market hours in order to place my trades before the market opens the next morning and not have to worry about intraday chart watching...I either get my target price or I don't. This certainly gives me a feel for what the Optioneer/Strikepoint guys do. I knew it would be fun.

Jeff.