Actual trading from February 21, 2025
While staying in Puerto Vallarta, Mexico for 2 months, I decided to run daily #CarCrash trades to see if I could make enough money to cover the entire trip cost of about $6,000. (just more fun in the sun right?) After four weeks and 13 entries, my record was perfect and my short strikes were never touched. That untouched streak ended on Friday, Feb 21 when SPX finished down over 100 points or 1.75% on the day. With the confidence of a mechanic that I’ve deployed many times before, I was able to turn what could have been a massive loss into a small profit.
With SPX making a fresh all time high of $6147 just two days prior, my general lean has been to sell OTM Call spreads, with the thinking that upside risk would be more limited than downside. I often either open with an Iron Condor or open a sell-against position at some point.
The Trading
Wednesday morning (Feb 19th) I sold 48x of the SPX 6190c/6265c for $1.15 expiring Friday ($5,520 credit) and everything was looking good. (Times below are ET)
Friday morning I wanted to open a larger position so I offered to sell 80x SPX 6225c/6300c for $3.00 ($24,000 credit) when it was trading at $2.95 hoping price would come to me. That fill never happened so I let the market run a little bit to get the tone for the day.
10:05am [SPX 6080] – I sold 48x 6035p/5950p for $.50 ($2,400 credit) giving me 55 points of room to the downside. After about an hour and a brief run of red ink, this position was green to the tune of about $600 but I decided to leave it on. This open would eventually produce a loss of almost $105,000, and the reason for all of the trading that followed.
12:35pm [SPX 6066] – I sell 48x 6100c/6135c for $.90 ($4,320 credit) as it is starting to seem like a no turn-around, selling day. Thinking is that if this new spread were to be tested, it would mean the heat was coming of the original open.
1:04pm [SPX 6045] – Still headed down but instead of waiting for a touch of my 6035 short strike, aggressively I sold 16x 6030c/6060c for $16.60 ($26,560 credit with equal extrinsic on both legs) in hopes to capture some intrinsic as it dropped further. After dropping as expected and producing a profit of over $6,000 SPX turned around and began to rally. Not wanting to get burned with this defense, I closed 11 minutes later [SPX 6046] for $16.15 ($25,840 debit), profiting $.45 in total ($720 profit)
1:34pm [SPX 6034] – First touch of my SPX 6035 short. Sold 48x 6020c/6080c for $19.35 ($92,880 credit). My risk is now reversed to the upside above 6035.
1:37pm [SPX 6043] – First whipsaw so I sell 48x 6050p/5990p for $15.80 ($75,840 credit). Risk is now back to the downside at 6035 again.
2:01pm [SPX 6028] – Second whipsaw so I sell a second 48x 6020c/6075c for $14.15 ($67,920 credit) Risk is now to the upside above 6035.
2:23 pm [SPX 6020] – breached so I no longer have downside intrinsic protection for 96x contracts so I buy back the 48x 6050p/5990p for $29.15 ($139,920 debit) Risk is now to the downside below 6020.
That was the last trade of the day as I watched SPX chop between 6008 and 6022. There was a ton of extrinsic to burn off in that last 1.5 hours with my P/L as red as -$73,000. The risk I was exposed to changed direction four times this day.
The results of each trade:
6190c/6265c +$5,250
6035p/5950p ($104,976) cash settled assignment value
6100c/6135c +$4,320
6030c/6060c +$720
6020c/6080c +$92,880
6050p/5990p ($64,080)
6020c/6075c +$67,920
Ending profit of $2,034 (does not include commissions or exchange fees)
Mindset – Emotions
At this point in my trading history, I’ve probably run over 100 of these CarCrash trades and have had to defend less than 10, not counting those run during a week long coaching session where I intend to demonstrate these defenses in real time.
I know what needs to be done… I need to collect more and more premium to offset the losses that my initial position is producing. However I do have to keep a constant dialog of self talk going to prevent panic. Mostly the confidence that I have done this many times in the past and the only failures came when outside circumstances (not the market) were to blame. Had a few moments where my MS Surface was getting sluggish, TWS from IB was frequently going offline (had to reboot the app once), but all turned out fine.
I initially set alerts at 10pts away for being touched so that I don’t have to constantly watch the screen. The less your eyes are glued to the chop, the easier it is on your (or at least my) psyche. I probably set/moved 20 alerts and they were triggered maybe 8 or 9 times this day.
The critical aspect is knowing your mechanics, your <whatIfNext> routine. What will you do when a short strike is breached? Then breached again? And again? How much buffer will you allow to burn before you act? Minutes can last for days when spot price is close to a level that requires your action.
I cannot emphasize this enough… while I have been perfect over this #PVpaidfor #CarCrash effort, it is NOT and easy way to trade.
Defenses
How to defend always comes down to the trader in front of the screen, and where the confidence and pain points are. The general idea is that you keep selling premium to build a buffer that can survive further whipsaw and price action. Here are some defense ideas that I have used in the past:
Creating an inverted Strangle : This is my primary go to. When your short strike is breached, sell an ITM spread on the other side (Puts if your Calls are tested, etc.) This creates a ‘zone’ where no more intrinsic damage is taken and you are just trying to run the clock out to collect all of the premium you’ve sold
Bring in your untested side: This involves selling more OTM risk away from your tested strike. If you opened with risk in both directions, you can either move the original or simply add a new short.
Make an intrinsic play: If you have relatively high confidence in some direction (like non-stop selling all day) then you can short ITM to collect both intrinsic and extrinsic as it moves in your favor. This is much more aggressive and if I use this, I will often use only a fraction of my opening lot size.
Oversize and undersize your responses: Based on your confidence you can defend less than 100% or more than 100% of your tested open. Had I been more aggressive in my defenses as the day wore on, I would have done much better, but other days that might be your undoing.
Removing positions: Always look for opportunities to remove positions that have too little extrinsic to carry to the end of the day. You might need the buying power for more defending and carrying these past their usefulness can be dangerous. Be very mindful that there might be a large loss in a position that you are taking off so be sure to keep your current P/L situation and premium left to be earned in mind.
Rolling out and away: The defense of last resort (and one that I’ve not used for a #CarCrash yet) is to roll your short strike out in time and as far away as possible, looking to do so for a small credit. This will expose you to overnight risk which is never a good idea unless you are doing this with futures.
Have your next defense loaded and ready to go in your platform. You’ll need to change the offer (I use mid) at the last second and sometimes might need to chase for a fill if it’s running hard.
Final Thoughts
DO NOT DO THIS! The whole reason I developed this was as a demonstration for coaching clients in how I defend writing naked UVXY Calls that run into trouble.
Whipsaw is by far the greatest danger here especially later in the day when usable extrinsic to sell gets smaller and closer to spot.
If you are foolish enough to do this. Practice, practice, and practice some more, using the smallest size possible (like a 1 lot SPY, or /MES) Learn how you tick, where you panic, what your weaknesses are, where your thoughts go. All these will jump up in your face when the red ink starts to grow.
Most traders simply use stops and take small losses as opposed refusing to take a loss and going into battle to defend. That is a perfectly acceptable approach if it works for you.
You need to develop a keen appreciation for extrinsic values on every strike you sell and buy, notice see how fast they change. These are the whole game here. I don’t use any greeks for this trade, just extrinsic in dollars.
And oh yeah, I can come visit you and teach you how to do this if you decide to ignore the advice above. :p