Paper Trade 1 (Week 2) (Part 1)

Yesterday, Avg IV increased from 16.3% to 17.1% on a second consecutive 10-point down day. This is not the magnitude for a 1-day volatility spike I originally described as a criterion for taking the trade.

The main issue I’m having is a low number of occurrences. If I take this trade then it’s only the second trade in 1.5 months. At that rate, it will take 75 months–over six years–for me to get 50 trades (a small but probably acceptable sample size). Another problem with the infrequent trades is that it can’t be counted on as a consistent income generator.

I could do a couple things to increase the number of occurrences. First, I can allow for Monday trades rather than Tuesday through Thursday only; that is something I am doing here. I originally excluded Monday trades because Avg IV usually expands on Monday since the tradeless weekend has passed; this can distort Avg IV change data. Second, I could look for more than a 1-day IV spike. If IV increases 0.8% one day and 1.2% the next then that’s a 2.0% spike in two days, which is a lot. Neither would meet the “roughly 2.0% or more on one day” criterion, though.

Another thing I might have to consider is taking all trades just to see how the trade generally performs. If the trade is only profitable when IV spikes then it’s an opportunistic, occasional trade. My preference would be one I could place regularly, though. There may or may not be such a thing as that “consistent” trade that is a reliable profit generator. I’m skeptical.

Yesterday, I would sell 10 * 1180/1150/1150/1110 IBF for a credit of $21.44/contract. MR is $19,000 so the profit target is $1,900 and max loss is $2,750. At T+1, these would be hit at 1129 and 1170. I will continue monitoring accordingly.