Bear Call Spread with SJ Options Instant Backtesting Software
Bear Call Spread with SJ Options Instant Backtesting Software
Watch this video lesson on the Bear Call Spread as we instantly back test it with our patent-pending options trading software that backtests 100X faster than traditional software.
Through our analysis of the Bear Call Spread, we see it can lose much more than it can make, and it would be very easy to lose an entire year's income in one week with this trade setup.
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Hi there everybody! This is Morris from San Jose Options. In today’s lesson, we’re going to be looking at the call vertical spread and we’re looking at the Russell it’s this very popular training vehicle. What I’ve done is I’ve sold the 10 delta over here and I bought the next delta which was ten points down further out of the money. This is a pretty standard, considered to be a high probability bear call spread and typically a trader will put this trade on my name. I think the market is going to go down and oftentimes, we’ll try to time this particular spread with resistance. You’ll be looking at, for example, we would try to time this type of spread. At these points, when you’re at these resistance levels, however, sometimes obviously, you’ll be wrong. For example over here, you may see that you have your resistance here maybe you think it’s going to extend out this way and then you may enter into 1. At this point, however in this case, you know it continue going up. So that’s the problem with strategy.
Here’s another location over here where if you were going by your resistance and you drew your line like this way, then again you, if you entered your bear call spread here, it could’ve given you some pretty tough results there and the same thing over here. So again, if you entered it over here, thinking this is resistance and then it breaks up this way, it’s going to cause a lot of dry down. And then when you’re working with the print side credit, you know typically, the traders are going to try to enter those on your support levels. In hindsight, it’s a lot easier to see where all these support and resistance levels are, so it makes it easier. But when you’re trading in real time, then I would say you’re going to miss a lot of those.
The important thing is as we trade and develop our strategies, it’s to be able to back test them, to back test them fast, so what I’m going to show you is how our—this is only one phase of our patent pending tool to back test. There’s a lot more to come but I’m just want to show you how the first phase works and how it can help you construct trades with lower risk and design solid performing trades. And also how to make you aware of the trades that you’re using, that type of exposure that you have, the risk exposure but also that profit potential and make sure it’s something that you’re comfortable with.
Back over to the risk profile, most of you watching this, I’m sure everybody knows where their credit spread is so I’m not going to explain. But this area here, this is your profit zone that goes all the way to the left that you have this amount. In this case, the maximum is like $725. So you’re looking at about 700 here. But then on the right side down here, this area is going to be your maximum risk and you can see it’s over like 9,000. In this case, you’re looking at making maybe 8% or so maximum up here. So this gives you about 8% maximum return if the underlying stays. This is your breakeven over here. It has to be that way or to the left at expiration. This looks like a 30-day trade. But now you see this red line here, this is representing your profit and loss as you go through the trade. The inherent risk with this is if the underlying moves to the upside, you start to have a lot of dry down. And then it’s a race between time and this directional move.
You’ll find when we work on the back test that a lot of the trades are going to get down and be over here and could be down 30, 40, 50% within just a 5-day period. So that’s what makes this trade so stressful. It’s because the maximum you may make could be 5-10% but then any significant move with the trade, you could easily be down 30 to like 50%. So the risk reward on this trade is really, really bad and a lot of credit spread traders, again, they prefer like, “Put it aside, we’ll look at those later.” And the put aside, typically with the Russell, you know, long term, the Russell typically goes up but you’ll have these years where it could drop 50% and so. It’s kind of hard to predict that. And if you’re doing the print side, you can have a lot of problems as well.
Anyway, let’s go to the back tester and we’ll run some tests. We have this instant back testing tool and it’s about 100 times faster than you’ll find in the performance of Thinker Swim Back testing tools or Option view. It’s really great. You just construct your trade once, as we did, and then you just, you can’t see it but you click instant back test button and then it gives you instant results and it back tests all your trades for you.
Here we have a 2-week move, traded up, shows a slight profit. That would be a situation where the time overrode those effects of the direction. That was the situation where the trader really worked for the trade. Here’s another one where we see 25 days into the trade so it almost went entire linked to that trade. It moved up 5% and then you’re looking at, don’t look at this one, the PM is for portfolio margin traders but if you look at the T-margin amount, you’ll see it lost about over 18% there. And then we’ll find where the trade, typically, struggles is when you have a fast move. See. Here, you’re looking at one of these 5% moves, almost 5% in 10 days and like 53% down. So this is the problem because the credit spread trader, they tried to rely on the probability. You look at the trade, maybe has a 70, 80, 90% probability, depending on your deltas and volatility in the market, but as soon as the trade goes against you, look, this is just a 10-day move against the trade and it’s down 53%. You can build a portfolio based on the probabilities over the years and be making 5% a month and you might do it 10 months in a row but as soon as you have even just a, you can see a 10-day period where it goes against you, you can lose it all back. It takes a while to make money doing this but then again, you can lose it back so fast. That’s why I personally don’t just do credit spreads. Every time I try I might get hammered and it’s just a reminder like, “Wow, I don’t know how people do it.”
Here’s another one, 20% down, 10-day move in the wrong direction. Obviously, if we test the, here’s another upper move, sideways move and the moves going down, then our profit that we already know that here’s another, you see 8% in 4 days. So you could see how fast you can lose that money back. It takes you an entire month to make 5%, but notice how, in just a few days, you can lose your entire months income. Here we have a downward move. But the problem with the call side vertical is that the market typically goes up. Your probability is working in the wrong way against you; you’re going against the trend.
Here we have, again, 1-week move of 6%. It sort of like—it’s either all profit or all loss but the problem is the losses are so much greater than your earns. Look here, 45% draw down. So I think by just seeing this, the risk that you’re taking on here, when you compare the risk to reward, it made a shoot up in your eyes and warn you against doing the call side vertical. Here you have 50% loss.
Let’s look for a sideways move. See if we find a positive return for once. So this one, underlying dropped and it made 9%. So that about wrapped it up today. I just wanted to do some testing on that bear call spread. Make sure you guys are fully aware of the risk, make sure you are aware of the reward and hopefully, this back testing that we’ve done today has given you some insight on that trade. If you’re going to do it, then, well, you can see that you really have to implement some type of defensive adjustment every time you’re wrong on the direction because if you just let it go 3, 4, 5 days in that wrong direction, you could certainly lose a lot of money on this particular spread. It’s one maybe you need to keep on a short leash, have some adjustment process, design the plan ahead, maybe even have a trigger type of order where it hits a certain price and you just take it off or something like that but it’s very directional trade, you can see. As it goes the right way, you can make like 5-10% but again if it goes the wrong way, you can lose up to 50%. In a bullish market, you could just see the performance. I mean you could be losing 30, 40, 50% over and over again. Hopefully, these tutorials helped.
Thank you for watching. This is Morris from San Jose Options, demonstrating the 1st phase of our patent pending instant back testing technology. Let’s do one more here, 31.5% loss. Thank you very much!