As with others, I've begun selling put and call spreads rather than simply puts (i.e. iron condors). I've got some observations that are from getting started - what it looks like so far and how I'm approaching things.
NOT-ADVICE
My starting point is that I am using is that instead of using cash to back put sales, I am using that cash to back put credit spreads. And then, having sold the put credit spread, I also get a similarly sized and structured call credit spread for "free". It's not actually free of course, but it doesn't carry any incremental margin impact -- it does carry incremental risk (and reward / credit).
The net of the two is that I enter Iron Condors via two trades (put credit spread, call credit spread). I can get there via a single transaction should I choose. But I think of these as 2 positions - if for no other reason than that is how I manage them.
As the margin / backing for a credit spread is dramatically lower than what is needed for a naked put I can sell a LOT more of these. As a for instance - a $25 spread needs $2500 to back it, while a $500 strike put needs $50k as backing. That means I can sell 20 of the first to 1 of the second. This has desirable properties for me. One is that I can use 1/4th or less of my cash to back these spreads and in practice I'm finding that my earnings are somewhere between comparable and much better.
And as a result I've got a lot more unencumbered cash in the brokerage account - cash that I am also using for living expenses and large purchases; such as a downpayment on a house or what have you. That additional flexibility on the spending side would be worthwhile all on its own, even if the rest of this was a wash on risk and income levels.
Some notes about how I'm thinking and managing these positions.
1) I normalize these different trades by choosing a position size and using it consistently. Maybe I use $10k as my position size - that means I'll sell 4 of a $25 credit spread ($2500 * 4) or 5 of a $20 spread (5*2000). By having a consistent position size, then I don't need to watch any position more than another due to amount at risk. It also makes it a lot easier to compare results position to position.
As I gain more experience I can readily imagine increasing the position size. The only difference in setup, management, and teardown of a $10k position size vs. $100k position size is the number of contracts. The effort is the same.
2) I have mostly been using delta to decide on my entry strikes. I think of these in terms of the short put and short call, with the insurance being $20 or $25 further back. I'm not stuck on those two spread sizes - its just what I've been using so far, and I have a bias towards bigger spread sizes over smaller (larger total credits providing a larger window for a break even or slightly better result).
My target delta has so far been .10. I'm finding significantly better credits on the call side and my thinking is shifting towards .15 put delta and .10 call delta. The real point is that I want pretty low risk positions. I find I am getting completely adequate results with these distant deltas.
3) By normalizing my entry points using delta I am finding that the trades behave in remarkably similar fashion. The size of the entry credits are in the same ballpark (my target is 10% of the spread size, with actual credits in the 7-12% range). The spread value changes very slowly until the final day when the bulk of the earnings finally occurs. The real difference between opening earlier in time (5-10 DTE) vs later (1-3 DTE) is not in the credit but in the strikes used for the entry. With fewer DTE the strikes get closer and closer to the share price. A 7 DTE I opened last week for expiration this week started with a $130 difference between the put and call legs. A 3 DTE I opened last week was more like a $60 difference.
4) My exit strategy is for most of these positions to go to expiration worthless, or come close enough for a small cost early close. If the difference between the put and call options is large enough then a reasonably large fraction of these will indeed go to expiration worthless.
5) For management I hope to be able to roll a winning leg closer for an incremental credit. So far this seems to happen about 1 or 2 days to expiration. So far this is mostly what I'm seeing. For the losing leg I will have a bias towards an early close for a small loss over rolling the leg out a week, though both are available. I know that there is a max loss from the insurance but I want to take small losses more frequently over allowing a larger loss to develop.
Rolling a winning leg for incremental credit - I tend to use max pain / put call / call wall / BB type of information to find a strike that I consider safe. The delta tends to not be important to me. In fairness these have also been positions that were 1 or 2 DTE - I have a lot more info at that point about what will happen in 2 days.
6) I haven't figured out the 'right' DTE to open. I don't really think that there is one, but I'm getting a feel for how these evolve and expect to find the balance that works for me. I've done both 3 and 7 DTE ICs so far and liked how both of them have worked.
That's about what I've got so far. I'm interested in learning about what others have been learning in their put and call credit spread efforts.
