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I am wondering what kind of technical analysis anyone applies to this type of trading. The only technical analysis I am applying relates to previous highs and lows. For example, on a weekly close on Friday, I look at the previous weeks (Mon - Fri) high and low. If the current week breaches the high of previous week (hopefully on Monday or Tuesday), I will sell a bull put credit spread with the short option below the low of the previous week. In this forum, which I suppose that based in part upon delta, most are doing the same.
I have found that if the current week broke the high of the previous week, the current week has historically only closed below the low of the previous week 3.9% of the time with an average close -.78% and a maximum close below at -2.5%, again, this is only if the high of the previous week was breached.
I looked at the same with intra-week. If you look at a Wed expiration of SPX, I have analyzed the following: look at Fri/Mon as previous two days. If Tue/Wed breaches the high of Fri/Mon, there is historically 3.9% chance that the Wed close will be below the low of Fri/Mon. Of those 3.9% the average close below the low is -.5% and the max close below the low is -4%. In my research, you can find strikes to trade if the high is breached on Tuesday that are below the -4% of the Fri/Mon low.
At this point, with my trading style, I would like to see the high breached before I sell a put. If the high is not breached, there is a 32% chance of closing below Fri/Mon low with an average close below that low of -1.4% and max of -12.3%.
While this strategy may cause some missed trades, it may reduce the trouble trades. But then you might reduce the Central Limit Theorem impact. More analysis to do for sure, just trying to improve the edge!
Thanks for sharing. Interesting info, though it sounds like you might artificially constrain yourself too much. Just because you might break the low again doesn't mean you shouldn't trade. It merely means you should trade a strike that's sufficiently low, i.e., at a strike below that previous low. I made a ton of money in March 2020 that way. March 2020 was the best month for put selling so far.
And also the way you calculate your positive signal: A 3.9% chance is actually quite high. I have a much lower % probability of going ITM on my contracts without much of a technical signal.
The way I monitor technical signals is not so much in the levels but in daily returns. If we had a -2% move in the last x days I certainly pick my strikes more than 2%, probably 3-4% below the current index. One can call that technical analysis, but it's just in line with a GARCH risk model.
I know this group does not trade bear call spreads, but that would be the implication if the low is broken. Sell calls with a strike above the high of the previous session. In the case of the Fri/Mon and Tue/Wed, if the Fri/Mon low is broken, the Wed close has only closed above the high of Fri/Mon 4% of the time, the average close above 1.15% and the max at 4.2%.
Again, I know this group primarily trades Puts, and rightly so, taking advantage of the bend of the market, this is just for evaluations sakes. There
