It seems that the best trade and probably the safest spread to trade is when the return % of risk is equals to 3233.33%. That in my observations is the safest trade. It is also usually the trade that offers no meaningful premium for the investor. Nevertheless, it is good to queue for that trade because you just might get it when the market is trending sideways or is in a directional mode.
So since that trade is usually not available, I am inclined to take the easy way out and trade the next pair that is closer to the current price.
That strategy will ultimately have some implications.
Say for example:
If current price is now 136. Safest Trade for a put spread would be the pair 130/131 at bid $0.01 premium. The next best (not so safe) trade would be the pair that is nearer to the current price at 131/132 at bid $0.05 premium (my criterion for a trade is that it must be at least be at $0.04 premium).
If I were to take the easy way out and sell that spread at $0.05 premium, I would get it for sure, but if the market is in a directional trending mode, which might mean the safest trade might eventually see a premium of at least $0.04. My easy way out trade would have appreciated in value to perhaps at least $0.08 or more.
If the market price drops drastically in a day by $2 to 134, this is definitely stressful conditions and investors might start to throw their trades. This concerted action might cause more downside and stress the price downwards to 133 with a depreciation of $3.
What this means for me is that my easy way out trade might see an increased in premium to 2 or 3 times the premium that I sold the trade for. In view of that, it might even trigger my cut loss mechanism of 4 times the initial premium sold. Now I don't want that to happen.
So for the easy way out trade to occur, I should have some signal or trigger that must happen, in order for me to enter into this easy way out trade.
1. There must be a strong upward/downward movement in current price. At least $2 would be ideal, but $1 would be a minimum. If the movement is $3, then I will take the safest trade, because that would automatically become available for me.
2. I will queue for the easy way out trade but not at the bid premium offered, but rather at a higher premium. This is because if the $1 movement is observed, there might be a chance that it might move to $2. In which case, premiums would increase, thus resulting in the safest trade becoming accessible.
3. This would also mean the easy way out trade would now have a spike in value, and a higher premium would be secured.
Conditions
I do have some conditions that must be fulfilled before I enter into that trade, so this is just strategy that is swimming around in my mind at the moment. I will talk about trade entering conditions in another blog post. That's all for now!
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