Sunday, April 13, 2014

kelly on credit spreads

here is the rule of thumb i was taught for finding credit spreads - look for a 30'ish delta option expiring in 40 days or so - then sell that option and buy the next strike further out-of-the-money. on the spx i find trades like this:

spx put credit spread at 37 delta, expiring in 40 days
here's what kelly has to say about this trade: our p is .6066 and b is 1.45/3.55=.408, thus the kelly number is -0.35 =((.6066*1.408-1)/.408). so if you have been taking trades like this and your net liq is net licked then maybe this is the reason ... or not.

i have several questions about this result that i will address in following posts:
  1. how much credit do you need to collect on a credit spread to make kelly happy?
  2. how common are kelly-positive credit spreads?
  3. should we be buying these spreads instead of shorting them?
  4. does a time-stop change the story?
  5. does an early buyback change the story?
  6. does a sense of direction change the story?

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