Premium collection with spreads

S4 - Select - Underlying Markets nadex bull spreads (aka box spreads)
1

I thought I would share my trading over the last month using spreads. I have traded crude oil on Nadex using spreads with a wide proximity to the underlying market for premium collection. On the scanner the proximity that I’m referring to will show up as inverted, negative on a buy, positive on a sell. These are the type of spreads you would like to see in a good iron condor. Most of the trades were placed the night before using the 500 tick wide spread that opens at 1800 for the next day 1430 expiration. This would be an example of that type of trade.

For the Monday sessions I placed trades with the 300 tick wide spread that opens at 0800. I also did a few 2 hour intraday spreads to test their viability.

These trades won’t appeal to everyone as they can require over $400 per contract to place the trade and they take a long time to show a profit. A big benefit that I like is that you have a very large stop loss if you set your stop at your entry price.

For example, my trade for 3/20 was a sell of Crude Oil (May) 46.00-51.00 (2:30PM) at a price of 46.40, which was 86 ticks above the market at the time of the trade, with a max profit potential of $40. I entered the trade at 1930 the evening before and was stopped out around 0915 the morning of the 20th. So the market moved against me 86 ticks but I only lost $31.80 trying to make $40. If the spread had expired at my entry price of 46.40 I would have broken even on the trade. With trades like this, the premium you collect can manifest itself as either profit or a smaller loss depending how long you are in the trade.

Here is my trade log showing the trades that I took.

I added $489 in 4 weeks to my live account and the profit to loss ratio has been outstanding in my opinion, especially on the overnight trades. The trading has been extremely low stress so far, like being paid to watch paint dry.

How I choose direction on the trades is not set in stone at the moment. I have been looking at recent highs and lows, deviation moves, news and more recently magnet levels to help decide. For morning and intraday trades I add in trend catcher.

For oil inventory day I had been doing an overnight trade and exiting early before the news, but I may change how I trade on those days, perhaps intraday trades instead.

Moving forward I would like to increase the number of contracts per trade as my balance grows and evaluate other ways to take advantage of these types of spreads.

There are other markets that this can potentially be applied to such as gold, natural gas and the indices. Out of these I am starting to demo the wall st 30 as a second instrument to trade. I think gold and natural gas may be too unpredictable for me, although there may be some hedging opportunities worth exploring. US 500 may stop out too easily because of it’s tick size compared to ES.

I will start demoing a double spread strategy also, to allow the premium from this type of spread to cover an ATM spread with more profit potential. I’m interested to see how the profit to loss ratio turns out.

2

I would be interested in seeing more about this. About how you are choosing a direction. I just dont understand how you are picking these with as far from the underlying that you are picking…

Grimm

3

I’ll do some screenshots with my next trade.

As far as choosing a direction to trade, it depends on what I’m seeing on the charts. If the market moved a deviation or more in a day I may be looking for a possible reversal. I may see multiple magnet levels that the market could be pulled back to. I’m trying to become better at deciding direction.

I think that these spreads are the equivalent of a deep in the money binary. You could buy/sell a binary for $90 trying to make $10. The binary may be 10 ticks in the money, 10 ticks above or below the underlying. The thing about these trades is you can be much more wrong about direction and still keep your risk under better control than a binary (in my opinion).

4

This is my trade for 3/23 taken at 0630. Oil has moved down over 2.00 since Friday and has bounced a couple of times off one of my magnet levels so I bought at 45.34 which was about 34 ticks below the market (45.68-45.70). If I had been able to place a trade last night I would have probably gone short but oil has moved down another .35-.37 since midnight. 34 ticks really isn’t much of a cushion so I did add 10 ticks to my stop trigger so I will get stopped out at 45.24 if it comes to it.

I understand that trend catcher isn’t meant for spreads but I do like to see it going my way, especially on shorter time frames.

2015-03-23_0638 - wmiller561’s library

2015-03-23_0634 - wmiller561’s library

I have noticed that sometimes the proximity shown on the scanner isn’t correct, so comparing the price offered to the current market is a good habit.

I will post the outcome of the trade good or bad.

5

So I exited my trade around 1125, plus $55 before fees, the market has moved well beyond the ceiling of the spread. Being above the ceiling means that I would collect the maximum profit of $66 at expiration. I doubt that oil will move back below that level of 46.00 before it closes, but I closed my trade out just in case.

I’m still undecided on whether to hold to expiration in these cases or not. It’s not about greed but taking full profit when I am this far in the money can help to offset future losses. The market could move all the way back down to 46.00 and I still collect full profit at expiration. But a bird in the hand is worth two in the bush.

Now I am hoping that the market closes around 47.00 or higher, I will look for a sell this evening hopefully with a price above the high of today.

6

This is very interesting. I am trying to wrap my head around where you are setting your stops at. You are setting them at the entry price?

Still curious about how you are picking your direction. The how’s and why’s you are choosing that direction.

Such as it is, you said that you would be looking for a sell this evening. Why is that? What makes you say that?

7

I do set the stop trigger at my entry price. I like to have a cushion of 50-70 ticks so if that isn’t available I will add 10-20 extra onto my stop trigger price (usually just for the overnight trades, so it can have time to oscillate against me and hopefully move back in my direction). Further into the trade time I would probably move the stop back to the entry price.

As for my potential trade tonight, on my 10 minute chart I see the market is trading at my upper magnet levels, so there may be potential to move back down toward the lower levels. I am still new to using magnet levels myself and may apply them incorrectly. The yellow magnet lines are from 10 minute bars that had at least 15,000 contracts in volume. I have been placing magnet lines at 10,000 contracts (purple lines) but may drop them to keep the chart cleaner.

With my diagnostic bar chart I see that oil has moved over a deviation up today and is trading near its highest levels since the 18th, which was oil inventory and FOMC. The two red lines mark the recent highs on that day and on Friday the 20th.

I saw an article today that oil is up based on a weaker dollar. Since the US still has a vast storage of oil I’m not sure how far that can push the price up in the short term. In the short time that I have followed oil, the US session seems to set most of the highs or lows of the day. I mean if the US session could only push oil up to 47.00 then I don’t look for the Aussie or Asian session to push it much further. The European session can be another story. But by placing a trade around 1800 I get about 9 hours of fairly small moves, allowing me to collect premium over time.

Of course it doesn’t always work out but so far my profit to loss ratio has really helped me stay in the game.

8

I was reviewing this thread because I am very interested in it. So, I am wandering why you are doing a directional trade here instead of a condor? Is it the cost to put on the trade or something else? This may be my perception but, it seems to me because it is directional trade the risk is higher and probability is lower over that of an iron condor.

9

Iron condors are a possibility to consider. I actually have one on today. I also had one on for the 26th which netted a loss of $40 the day Saudi Arabia bombed Yemen.

I think overall that directional trading may offer more profit potential since oil moves so much and iron condors are best when the market stays close to where you enter it. It is worth tracking in demo for a while to see the results.

This is still a new process for me and I’m still trying to find the best way to take advantage of these types of trades. This week will be the first with a net loss for me since I started as I have struggled to find oil’s direction. I got pushed around by news a lot: strong euro news, oil inventory (I should know better), and a war( can that be added to the news calender next time?).

For today’s live trade I got in a cheap hedge with an otm binary. The market moved in my favor early and I took got an $11 binary with a strike of 52.00. My spread is short with an entry at 41.83. I set my stop for the spread at the strike of the binary, so the approximate $40 win if oil goes up to that strike will cover the loss on the spread. The $11 hedge covers a max profit on the spread of $83.

10

Here is a two week update on these trades. Last week netted about a $30 loss with a nice rebound this week. On a couple of trades I took a binary trade as a hedge. What I did for that was place a working order for a binary that was near the entry price that I had on the spread. For example on the 31st my spread entry was a sell at 49.50. I placed a working order to buy a binary with a strike of 49.50 for $10 ( was around $30 at the time). The market moved down allowing my binary to get filled.

Potential outcomes of this setup:

Max profit on the spread of $48, losing the $10 binary.

Less than max profit on the spread, still losing the binary.

The market could move up to 49.50, stopping me out on the spread for a loss of approx. $30 (depending on when it happens) and a $40 profit on the binary if I place a take profit at $50 (market has moved up to the binary strike).

Last week I think the hedge would have helped overall, this week it just cost me $20 so I’m not sure if I will continue it or not.