February 20, 2009
The vast majority of the time, the S&P500 index moves less than 10% in a given month. One way to play this is to sell a vertical bear call spread with the sold leg strike at 10% above the current SPX price every month (generally on the third Friday of the month) . - This strategy in absolute cash received each month yields less than the naked call, but because of the higher margin requirements for the naked call, the spread yields a better return. It also has the advantage of having less risk. Returns range between 8 and 12% per month, but the risk is that if a spread yield is 12%, then if you are wrong, you will lose 88% of the money you have invested. Not a big deal given the low probability of the stock achieving this level, but absolutely should not be done by someone who is relatively new to options. You will eventually lose with this strategy and if your money is not properly managed, you can lose it all. It is probably best coupled as a supplementary trade to a covered call trade, or a well balanced portfolio.

We initiated investing in this strategy with $100,000 on February 20, 2009, by Selling twenty calls with a strike of $845, and buying twenty calls with a strike of $900. By so doing, our account balance went from $100,000 to $113,582.00.

We also initiated a double vertical combination selling a vertical bull put spread and a Vertical bear call spread. Because both sides can never be called out at the same time, the margin for the spread defaults to the leg with the highest risk, so we effectively double our yield without increasing the maximum amount that can be lost. The risk increases because there are now two directions that the market that can cause a loss to us, but the market must move more than 10% to reach them. We sold the same vertical bear call spread above and a bull put spread between $690 and $635. Our account balance went from $100,000 to $127,580.50

Summary: The Vertical Bear call spread starting value of $99,950. If successful, the one month return will be 13.58%
The double combination vertical strangle starting balance was $99,900. If successful the one month return will be 27.58%.

March 20, 2009:
The prior month was successful, and while the market fell more than 15% in the month, it quickly recovered to close near last month's open, as expected. The result is the complete return anticipated last month. The account balance is now $113,523 for the bear call vertical, and $127,452 for the double vertical strangle. We will roll these into the coming month. We sold 23 vertical calls between $860 and $915 for a margin cost of $113,505. The net credit was $12,916. The total account balance moved to $126,439. For the double vertical strangle, we sold the 29 calls between $860 and $915, and 29 puts between $715 and $650. The net credit after brokerage fees was $34,616, bringing the total balance in the account to $162,068 (if including interest from last month of about $308, the balance is $162,376). Let's see what another month brings.

April 17, 2009
This month ended up particularly high, given a historic move that has been resistant to correction. The market needs to correct in order to gain momentum for another move, but has been buoyed by earnings. Earnings have not been good, it is just that analysts have been overly pessimistic, so really bad earnings look good. Both those who are positive about the market and those who are negative both generally agree that the market will probably fall in the short term. Anyway, this month we almost exactly hit our high end price of 860. The actual market open for the SPX was $865.18 this morning. Hence, I had to cash settle the position at 5.18 per share and our position last month was 29 calls and puts. This was a total of $15,022. Hence, our balance went from $162,376 to $147,354. We still profited considerably this month ($19,594 as opposed to $34,616) plus we collected $405 in interest, so the true balance was $147,759. In the coming month, there is little upside risk but we will keep the top at 10%, but there is a great deal of downside risk, which the market likely to at least test the prior lows. As such, we will start the down side at 20% below market (as opposed to 10%). Which I would normally not even do this month. I would just do the call side of the trade, save for the fact that we are doing an experiment. Anyway, buying 655 put, selling 700 put, selling 955 call, buying 1005 call yields a profit of $3.65 per share with a risk profile of $41.35 per share. Holding $147,759 in our account, we are able to sell into 35 contracts, which costs $220 in commissions, leaving a net credit to our account of $12,030 Bringing our balance to $159,789. The profit this month is much smaller because we are being conservative on both sides. The market definitely does not expect any more upside. Presently 5% up is being treated like 10% up was treated last month. If we were to do a sale at 5% up instead of 10% up, the net credit for the 4 leg position would be $44,580, keeping the down side intact. If we were to do a sale at 10% down instead of 20% down, the net credit would be $56,305. Finally, if we were to do 10% above and 10% below as we did last month, the credit would be $21,480.

May 18, 2009:
Every scenario we talked about last month was correct as the market did not move much last month. We will carry forward the safest strategy of 10% up and 20% down which means we start with an account balance of $159,789 plus $400 in interest for the month = $160,189. today we will sell at 10% above and 20% below just like last month because the market did not move and is still destined to fall this month. It is currently at 900, so we will vertical the put at 720/675 and the call at 990/1035. Doing the call only, the trade would be 37 contracts with a net credit of $8019. To do the double vertical, the total contracts would be 38 and the net credit would be $10,972. Not much this month, but again we are being very conservative. This brings our cash balance to $171,161. Had we done 5% up and 20% down, which is more reasonable, we would have been able to do 43 contracts at a credit of $35,207, and had we also done a 10% down instead of 20% down, the credit would have been $54,442 on 48 contracts.