SPX Put Credit Spread Strategy: Resilience Amid the August 2024 Market Sell-Off

The global stock market sell-off in August 2024 was a wake-up call for many investors. Triggered mainly by the Bank of Japan's unexpected 0.25% interest rate hike, which sent shockwaves through global markets, the volatility index (VIX) spiked to one of its highest levels in recent history.

The sell-off was exacerbated by the unwinding of the infamous Japan Carry Trade, leading to a sharp decline in asset prices across the global stock market.

However, my put credit spread strategy proved to be notably resilient, even during such extreme market conditions.

The August 2024 Market Turbulence: A Recap

As the Bank of Japan's rate hike took the markets by surprise, the ripple effects were felt globally.

The VIX, often referred to as the "fear gauge," spiked as uncertainty gripped investors.

For many, this surge in volatility was a nightmare, particularly for options strategies that thrive in calm, predictable markets.

Options strategies like the famous 1-1-2, which are structured to profit from gradual theta decay, found themselves in deep water due to significant tail risk associated with the 2 short puts at the lower strike price, when VIX spiked suddenly.

The Strength of Put Credit Spreads

In contrast, my SPX put credit spreads demonstrated their resilience.

As a recap, put credit spreads involve selling an option and simultaneously buying a less expensive option with the same expiration date but a further out-of-the-money strike.

This strategy limits both potential gains and potential losses, making it an appealing choice for traders who prioritize risk management.

When the sell-off occurred, I had two open SPX credit spread positions. As the market plummeted, the short leg of my put credit spreads quickly moved deep in the money.

This situation could have been alarming, but the beauty of a credit spread lies in its built-in risk management.

The long leg of the spread gained value as the market declined, effectively cushioning the blow and protecting my overall position.

Managing the Risks: A Real-Life Example

Each of my credit spreads had a capped maximum loss of $5,000. However, in reality, the loss is often far less if the position is managed correctly.

By not holding the spread to expiration and instead managing it near 21 days to expiry (DTE), you can significantly reduce the potential loss.

In my case, I realized losses of $2,406 and $1,156 on the two positions, respectively.

In other words, by managing your put credit spread position early, you can typically limit your actual loss to less than 50% of the theoretical max loss. Impressive, right?

Still, taking a loss is never easy, but the amounts were manageable and far from catastrophic.

It's a reminder of why I favor put credit spreads as part of my trading strategy: they offer a balanced approach to risk and reward, even in the face of extreme market volatility.

With disciplined risk management, I expect to recover these losses and potentially break even in the coming months.