Monday, April 14, 2014

a 30-delta, kelly-positive credit spread on spx

i was expecting high probability credit spreads that are kelly-positive to be as rare as unicorns, so i was surprised to find one in the spx at a 30 delta strike but here 'tis:

bear call spread at 38 delta expiring in 40 days in may4 expiration
the benefit-to-risk, b, is .7857 - this 30 delta spread is pricing at nearly 50% of the strike width. the probability of success, p, is .6239. this gives a kelly number of: 0.145 (=(.6239*1.7857-1)/.7857)

this implies a huge edge in this trade. if you recall my previous post that jeff ma had a mathematical edge in blackjack of just 2% from the science of card-counting and that this translated into a .02 kelly number.  well .14 is 7 times bigger.  what is going on?

there may be some speculation on a buy-the-dip event, possibly bear traders buying upside calls for protection.

well ... maybe.

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