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Trading S&P 500 Options Using Technical Analysis, That Has Won in All Markets, Even the Great Recession

Trading S&P 500 Options Using Technical Analysis, That Has Won in All Markets, Even the Great Recession

Trading S&P 500 Options Using Technical Analysis, That Has Won in All Markets, Even the Great Recession

Date Published:


The results here are provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation.


Some may balk at the idea of a multi-legged option strategies -- too complex, too many trades, not my style. It isn't any of those things -- and in the S&P 500, there's only so long the results can be ignored when the market hits a volatility zone -- or when it doesn't.

Building the Strategy Before We See the Results

We constructed a multi-leg strategy for the S&P 500 ETF, SPY. It has a bearish tilt, but it does turn a profit in a bull market as well.

Here is the image of the strategy created in Trade Machine's custom strategy builder.

As usual, rather than take this is one big trade, we can actually break it into two familiar trades. This could be one way to apply this lesson in real life. That is, open 2 put spreads.


The first leg is simply long one put spread:

* Long one 37/20 delta monthly put spread.

This is long one put spread

The second leg is simply short two put spreads:

* Short two 30/10 delta monthly put spreads.

This is short two put spreads

You can view the strategy and the results in the quick 2 minute video, below:

What Does This Mean?

This is casually called a ratio put spread, and specifically this is a 1 x 2 x 1 x 2 (read out loud as "1 by 2 by 1 by 2") put spread.

The idea is to create an option position that:

* Creates a credit at onset.
* Has no upside risk (a stock rise to any price should be profitable).
* Has some downside bias (if the stock goes down it profits at the maximum level)
* Has a hard limit on total downside.

Broadly speaking, this is how all of that looks in a profit and loss chart at expiration:

This strategy is profitable in the green shaded area, and shows a loss in the red shaded area.

To get your bearings:

* The maximum loss starts at the lowest strike price. Any stock price there or lower shows a capped loss at its maximum.
* The maximum gain occurred right at the second-strike price (the first short strike price), which is below the initial stock price at onset of the trade.

This strategy does well in a bull market but does best in a bear market. It does worst when there is a very large stock drop, but that loss is capped.

Addressing a Problem

As we can see from the PnL chart, while this trade does have limited risk, a big bearish move is going to be a loser. So, we need to add a condition using technical analysis that attempts to avoid the trade when the market is either in a down trend, or appears over bought and may soon turn into a down trend.

We accomplish both goals with a set of rules:

The first two requirements exist solely to try to avoid a bear market -- when a stock is above its 200-day moving average (DMA), and the 50 DMA is above the 200 DMA, we're not in a down trend.

The final requirement tries to avoid times when the stock is over bought. We do this by finding times where the short-term 10 DMA is below the 21 DMA.

Taken altogether, we have created a powerful filter. So, let's see it.

Finally, The Results

Here are the results of this strategy over the last ten-years.

The Bear Market

But here's the part that really caught our eye. We can test this strategy during the throes of the bear market -- the worst of the worst in the last decade. First, the last six months of 2018:

And here are the results:

While that may look rather tame, here is the exact same strategy but this time, without the technical requirements:

We see a 90.7% loser flipped to a 15% winner by using technical requirements for the moving averages. All of a sudden, one trade that yields 15% looks pretty good relative to a 90% loss on eight trades.

We can also look over one-year, namely all of 2018, when the SPY returned -6.1% (negative returns):

That's a 44% winner on three trades when the market was down more than 6%. And here are those results if we ignored the technical safety valve:

The technical safety valve avoided fully 10 trades, leaving the losses behind with just three trades, all of which were winners.

And, finally, we can look at the results from 2007-2009, the period that has the Great Recession. This time we put a 20% limit gain on the trade, and here are the results:

And that compares to these returns without the technical requirements on the moving averages

How to Try This Yourself

We simply used the Trade Machine® Custom Strategy builder. You can create it yourself immediately as a Trade Machine member, by simply clicking on any of the back-test links above, then click the "edit" button, and save.

What Happened

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Risk Disclosure
You should read the Characteristics and Risks of Standardized Options.

Past performance is not an indication of future results.

Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment.

Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.

Please note that the executions and other statistics in this article are hypothetical, and do not reflect the impact, if any, of certain market factors such as liquidity and slippage.