10-Delta Short Strangles

[Theinkdon]

Hi all, I think is my first-ever post on ET, but I've been reading for a year or so.

TLDR: High IVR stocks with at least 2M volume and weekly options, short strangles with legs at 10∆, 5-10DTE, take profit at 50%, roll untested legs up/down as the other side is challenged, to a straddle if necessary but not inverted. Roll out a week if it can't be saved otherwise.

If you want to skip all the backstory that's coming up, and how I got to the point of wanting to start this journal, then skip to the next post called "RESULTS".

About me: 57m, trading stocks, mutual funds, and ETFs since about 1993 with mixed (mostly positive) results, but very interested and active in the market (401(k)s, Roths, TSP, etc). Messed with options a few times not knowing what I was doing, lost money, stopped doing that.

January 2021 I decided to teach myself options. When I decide to do something I tend to go overboard (ask my wife). Bought and read books by Hull, McMillan, Cohen, Wolfinger, and probably some others. Watched a lot of TastyTrade stuff, read a bunch of forums, watched a lot of Youtube videos, training courses through CBOE, Fidelity, And TD Ameritrade (TDA), etc.

Opened 2 TDA paper-money accounts under one of our real Roth accounts, and practiced lots of strategies in those: long calls, covered calls, cash secured puts, naked puts, put credit spreads, call credit spreads, and iron condors. I think those are all the strategies I tried in earnest.

I first got excited about ICs but abandoned those because they weren't growing fast enough for me. Then I thought that PCSs were the sauce, but then suffered a 28% drawdown that was disturbing; but in a couple weeks I was back even, however after another couple of weeks I had another similar-size drawdown. So I gave up on that.

Next I started selling naked puts, and that was doing pretty well. And then one day I read where someone said, "the broker's already holding the buying power (collateral) for the Put, so you might as well sell a Call also and make it a Short Strangle (SS)." Sounded interesting, so I started trying those, probably at around 20-30∆ like TT recommends.

Then someone on Reddit/options obliquely mentioned that he does SS's at 10∆, which seemed crazy that you could go way out there in strikes and still get decent premiums. But I tried it and it seemed to work. One week led to 2 weeks led to 1 month where it just kept working with no drawdowns over 5%. So I kept going.

Results in the next post. Thanks and congratulations if you read this far!

 

[Theinkdon]

RESULTS

After 9 full weeks the account was up 62%. Crazy, I know! And still no drawdowns >5%. All short strangles at 10∆. Going into this thing I had wondered (for a silly reason) if it was possible to make 1% per trading day with options. And here after 9 weeks of trading a 50k TDA/ToS paper-money account it had happened: in simple terms, 62% in 9 weeks is 6.8%/week, or 1.3%/day.

At that point I got quite excited and decided to share it with two of my market buddies from work. One wasn't interested in options at all, and the other only a little bit. But I wanted to share it with somebody, mainly to keep myself honest, so I set up a website/blog where I could post this strategy and backstory, plus a trading journal going forward. It's not quite ready for prime-time yet, and I don't know what the rules are here for things like that, but I'm not selling anything. Just trying to generate discussion around this strategy, which is why I finally came here.

So I kept trading that account the same way: Setting up 10∆ SS's in ToS, putting them on Monday or Tuesday for this Friday, or if later in the week then next Friday. Immediate GTC buy-to-close (BTC) orders at 25% of Premium (minus 3 or 4 cents to cover commissions on both sides), rolling up, down, or out as necessary, but otherwise not touching them unless they went, or got very close to, ITM. [I said in the first post 50% profit, but that's now too old to edit so I wanted to clarify it here: I knew then that trying to keep 75% of profit was too ambitious (but it worked okay), and I've since backed off to the traditional 50%.]

Before I continue with that account though, let me address the sure-to-come replies that it's "not real money" so it doesn't trade the same. I'm no expert, and don't have experience on any other paper-money platforms, but I do have 3 other TDA accounts that I trade in ToS (2 ROTHs and a cash/margin acct) that I trade daily to weekly, even using many of the same symbols (especially in the margin acct), and I haven't seen any glaring differences in how the paper-money orders fill. Trades rarely go at the Midpoint, you have to move them toward the Natural price, and especially when rolling orders at 0 or 1 DTE I've had to go worse than Nat to get a fill. And of course ToS deducts commissions, 0.65/contract.

I would be doing this with real money right now, but I didn't fib enough to TDA to get Tier 3 option approval the first time I asked. My income and assets were good, they just wanted me to have 3-5 years of options experience before they'll give me that. I took their 6-hour course and got the certificate and everything, but they said I still had to wait 60 days before reapplying, so by the end of August I should be trading with my own cash. Hold me to that if I don't post an update about changing to real money!

I'll stop here and do another post with more performance numbers for the 10∆ SS strategy, and one at 20∆.

 

[caroy]

Interesting stuff and thanks for sharing. I do believe these premium selling strategies can have a profitable track run but am always worried that long term it's like picking up nickels in front of a steam roller. What's your exit when something goes wsb reddit against your short call and you have unlimited losses? You can roll the put up to the straddle but if it keeps running? Roll out a week but it seems that delays the inevitable? I would think these risks could be minimized with solid risk management strategies? How much buying power in your account are you allocating to these weekly trades? Are you all in? How many different stocks are you putting these on in at once? Could you elaborate on the mechanics of the risk management in terms of capital allocation? Thanks for posting all of this - it is intriguing. Appreciate you putting it all out there.

 

[Theinkdon]

MORE RESULTS

I kept trading the 50k TDA/ToS paper-money 10∆ SS account the same way, with the goal of seeing how long it would take to double. Forgot to mention earlier that I'm doing 5%-of-NetLiq-sized trades, and adding positions until "Option BP" is just above 10% NetLiq, always trying to stay almost 90% invested. I know that's too aggressive, and I did have some negative margin occurrences, but I dealt with them just as I would with real money, closing positions, etc, but of course not adding more money.

The account doubled in 13 weeks and 2 days, just a hair over 3 months. Again, I know that's crazy! It shouldn't be possible, should it? That was from April 5th to June 23rd, 2021. The largest daily drawdown was 9% due to a wonky GME trade, which finally brings me to what you've likely been wondering: what symbols have I been trading?

See any meme stocks here?

AMC, BB, CCIV, DKNG, EXPR, FSLY, GME, JMIA, KODK, LABU,
MVIS, NKLA, OCGN, PLTR, RIOT, SPCE, TLRY, UPST, VIAC, & WISH​

That's 20 of the ~70 symbols currently on my watchlist, and before you fall out, I cherry-picked the list to put the memes here. Others are names like DOCU, FSR, MRNA, NUE, OSTK, RAIL, and X. Sure, some of those are memeISH, but not in the same league as GME & AMC. To find these, I run a scan on Barchart (>$5, >2M shares, weekly options), sorted by IVR. Then set up a theoretical week-long trade on these candidates and see if ROI is >5% per week. That's the bar I've set for symbols to be added to the w/l, but some offer ROIs north of 10, up to 20%.

I'm calculating ROI as (Premium - commissions) ÷ Buying Power Reduction (BPR). I know that's aggressive and there are other ways to calculate ROI, especially risk-adjusted ROI, but I figure if the broker trusts me with that much BPR for that trade, and if I'm watching my trades every day and proactively managing them, then it's a close enough measure of capital at risk.

I've stopped trading AMC & GME, but you could take that list of symbols right now and put 10∆ short strangles on them, with a 50% GTC BTC order, and you'd be amazed at how they perform. (I had many, many 75% of max-theoretical profit trades with AMC & GME, but they each burned me once by going crazy and making me modify and chase them until I could close them at a decent profit; so I decided they weren't worth the trouble when other symbols provide as good or better ROIs.)

After that doubling in 3 months I decided to see if I could do it again. So on June 21st I reset the account to $10,000 and started over. Same 10∆ strangles on the same group of stocks (minus AMC & GME). Same 75% keep-profit. After 4 weeks it's up 23%: 5.7%/week, 1.1% per day. I'll keep running that until it doubles, but there's something else even more exiting.

The same day I started that campaign, I also started a 100k account doing 20-delta strangles, but taking them off at 50% profit instead of 75 (I was starting to realize that 75% has some issues). Otherwise the same strategy, same pool of stocks, same strike selection methodology, just at 20∆ instead of 10. (Although, in this account I actually used ToS's "Prob.ITM" column, and chose the strike with probability closest to 20%. So if say the choices were 18.5% and 21.2%, I'd choose the strike with the 21.2 because it's closest to 20; in other words, I don't mind going over 20%. Very mechanical, just scroll down, pick the strikes nearest 20%, set up the trade. (But I did bump up the trade size for this experiment to 7.5% of account per position, just because it was a lot of work to maintain 19 or 20 trades in the 5%-trade-allocation 10∆ account, plus our other 3 TDA accounts.)

That account doubled today, exactly 4 full weeks later. I couldn't believe it. I mean I knew theoretically it would double faster because of more premium per trade, but I didn't think it would be three times faster than the first 10∆ campaign.

So I flushed all those positions today, reset the account to 100k, and will try to do it again with 30∆. (Really 30% Prob. ITM because I'm starting to trust that more than delta.)

I would offer to post "proof", which most wouldn't believe anyway, but I'll post a list of all the trades from ToS if anyone is interested. And this whole thing may be a moot point if "real money" BP isn't about the same as "paper money's", so I might be getting myself excited about nothing. But I'll start posting daily trades here in the meantime, and then when I switch to real money in Aug/Sep I'll either keep that up or post here that it didn't work out.

Thanks for reading all this! I hope we can have some good discussions about short strangles, whether as aggressive as these or not. I feel like there's something about trading strangles at around 10∆, even if it's with more mainstream stocks and not memes.
Mike in Atlanta

 

[caroy]

Thanks for this. It does seem pretty aggressive. I don't know if i could stomach that type of allocation in my account but i'm pretty much a pussy and only trade with about 7% of my capital at risk each week. I'm looking for some type of premium selling strategy. Undefined risk worries me greatly thanks to a blow out years ago in fucking minneapolis wheat with some short calls. Curious what was your largest single loser in your experiment and how did you decide to exit it? I've always figured with a short strangle if you had the capital and it explodes up you could just put a buy stop at your short call +premium received and you're good if it runs away but you'd need the buying power to do this and I would imagine the margin changes as it goes against you eating up buying power. But then again i'm used to SPAN margin in futures so maybe it is already set.

 

[Magic]

The difficulty of this trade is the rate at which your gamma can gear up if the stock gets local to your strike. Retail can’t dynamically hedge that easily so rapidly picking up a huge delta position is a real concern. The negative skewness on this PnL distribution is awful.

A month or two ago I was winding down a position in RBLX and I left 50 lots of the 70/80 strangle on into expiry. Spot was at 75.5 a half hour before Thursday’s close. It opened at 78 the next morning and quickly spiked up to 84. Wasn’t feeling too good about tying to collect that last 0.40 in premium anymore.

I had some short GME calls marked at 0.05 one Friday and I had to buy them back at 17 later that day. That’s like months of vol edge I’ll have to collect on similar positions just to make that up.

Profit taking rules at arbitrary figures will just mute your expected PnL and the variance a bit. This same dynamic will still come out to bite your sometimes. You’re still going to be at the mercy of gaps as well. It’s not that hard to find spots with a few points of vol edge on otm strikes and when you are close to expiry it does monetize relatively quickly.

But if you trade this long enough you will collect some horror stories. It’s easy to overlook the risks here and trade bigger than a few points of edge can sustain a positive geometric mean at. Firms that have cost and infrastructure to hedge at high frequency have a huge advantage over retail on taking junk into expiry.

I would really recommend finding a cheap wing somewhere to cap your risk at a defined level. You can gamble for a while with a small account but if you have a significant amount of capital pool up you don’t want to risk losing it all on a black swan. Trading naked puts at least has a fixed loss at zero but naked call side in any degree of size is essentially using a distant PnL stop (liquidation). PnL stops almost always degrade the expectancy of a strategy. So if your trade can’t earn enough to finance some protection somewhere that’s a pretty good signal to pass over it.

 

[Theinkdon]

Interesting stuff and thanks for sharing. I do believe these premium selling strategies can have a profitable track run but am always worried that long term it's like picking up nickels in front of a steam roller. What's your exit when something goes wsb reddit against your short call and you have unlimited losses? You can roll the put up to the straddle but if it keeps running? Roll out a week but it seems that delays the inevitable? I would think these risks could be minimized with solid risk management strategies? How much buying power in your account are you allocating to these weekly trades? Are you all in? How many different stocks are you putting these on in at once? Could you elaborate on the mechanics of the risk management in terms of capital allocation?

Hi, Caroy, thanks for being my first replier! I have to say this: I was waiting for the "steamroller" analogy so you get the prize for being first with that. More on that in a minute, but first, I think I answered most of your other questions in my third & last big post, which I was working on when you replied. I'll lay it out here too:

I'm sizing trades at 5% of NetLiq. With a big account it's easier to get granular with that, but with 10k ($500 per position) I'm usually choosing between 1 or 2 contracts. I don't go over 5% in that account. And some trades are just too big to put on, like TSLA.

I add positions until "Option BP" is just above 10% of NetLiq, so 90% invested.

Theoretically that's 18 positions (5% x 18 = 90%), but because trades are sometimes much smaller than 5%, I usually have on 19 or 20 trades. I work from home right now with flexible hours, so I'm able to watch and adjust as needed.

Risk management starts with the position sizing of course, and a lot of it then seems to be taken care of by the BTC orders; they come off pretty quickly at 50%, sometimes just a day or three. I was using 75% in my first 10∆ SS campaign, and now 4 weeks into the second, but I'm going to switch to 50% in that one next week. In the 20∆ doubling campaign you've probably read by now I was using 50%, and I'll use that from here on.

The rest of risk management I do by rolling up/down or out. Believe it or not, I haven't had a trade yet that I haven't been able to wrangle into a profit. And not just a dollar profit so I could say it wasn't a loser, but a real profit on the order of what I'd put the trade on for. I had a real battle with AMC about a month ago that I wrote up for my blog; I'll go find that and come back and post it here. That ordeal proved to me that it could be done (at least in TDA paper-money), but I don't want to ever go through it again. (Look at AMC from about May 20th to June 10th; I stayed solvent through that tsunami and came out the other side with a decent profit, but it ate up nearly ALL of my BP.)

And all that said, so far this has just been an exercise to see if I could do it, make 1% per day. I realize I'm breaking a lot of rules, but even still, it's been very enlightening. When I start doing it with real money I'll probably stick with 5% trade sizes, but I'll definitely stay less-invested. And I'll move away from the meme-like stocks, or at the very least trade them at smaller deltas.

Which brings me back to the steamroller. I've seen that analogy a lot, but I haven't embraced it and here's why: to me it's all about the probabilities. I don't care what the underlyings are, because the market has already told me that this option has only a 10% chance of being breached before expiration (I realize that ∆ isn't a perfect approximation of probability, which is why I'm more using ToS's Prob.ITM now). And if that's the case, then the trade has an 80% chance of being profitable from the get-go. Now, take the premium and divide it by BPR and you get a number that's usually much less than 20% (but sometimes not), so that tells us that the EV of the trade is negative, right? But I think it's really not BECAUSE YOU CAN ADJUST THE TRADE or exit it early.

You don't have to put on a trade and then just take whatever it gives you at expiration. I know there's 2 camps about what "rolling" really means, and I've gone back and forth myself (do I just call it what it is, buying back a losing trade with the proceeds from a new trade?), but if you always roll for a credit (and I have), then it seems to me you're still in the same trade. Now, the BP will fluctuate, and maybe a lot, so I don't worry about percentages then, but if I can get out of a trade while keeping at least half of the credits earned, I consider that a successful trade.

Almost forgot to finish with the steamroller: my thinking has come to be that I'm picking up dimes and quarters (even the occasional dollar) w a y o u t h e r e a t 10∆, while the steamroller is driving mostly parallel to me w a y over there at 50∆. (Imagine a stock price chart, with my short options parallel to and bracketing the price action.) If the steamroller turns and starts angling toward me I probably have time to move out of its way, or get off the road entirely (abort the trade).

And you'll be surprised if you start looking at it just how far out 10∆ is on something like BB or KODK: that steamroller has to travel quite a ways almost perpendicular to its natural direction of travel to threaten you.

I don't pretend to know everything, or even ANYthing, and this is probably all just beginner's luck and/or won't transfer to the margin requirements of a "real money" TDA account, I'm just reporting what my experience and observations have been, and I hope that'll intrigue someone enough to at try short strangles at 10∆.

I see you've posted again, so I'll go read that.
Mike

 

[Overnight]

"...The account doubled in 13 weeks and 2 days, just a hair over 3 months. Again, I know that's crazy! It shouldn't be possible, should it?..."

It isn't possible, unless you are a robot. Which you are not. You have already convinced yourself that it should not be possible. Your subconscious is now going to eat away at your brain on the drawdowns when your own money is on the line. Good luck.

 

[Theinkdon]

The difficulty of this trade is the rate at which your gamma can gear up if the stock gets local to your strike.

Hi Magic, thanks for your detailed reply. I have to admit that I'm not (yet!) a sophisticated enough options trader to understand much of this wisdom, but I would like to respond/ask about some of your points.

I've always read to "Beware of Gamma!", especially in the last week (which is where all my trading has been), but it never clicked with me until one day GME spiked up 16%, causing my 147P/240C short strangle's Call strike premium to QUADRUPLE. The trade wasn't ITM (didn't have the "ITM" symbol next to it on ToS), so I didn't notice it until later in the day, but the SS was trading at 6.70 against the 2.56 I'd collected for it, so "on paper" I had: lost the premium, lost the premium again, and then half-again the premium.

That did NOT look good and I did panic, but then I said, "Wait a minute... Spot is 215, well between the short options, so this thing hasn't lost real money yet, should I really get this excited right now?" Shortly after that I realized that this must be the Gamma Monster everyone warns about. I didn't notice what it did to my BP, but I do try to keep that positive, so if it went negative I probably closed out some other positions. I waited it out that day, didn't modify the trade, but the next morning GME was up another 10%, flirting with the 240C, so I rolled up the 147P to 185P. That got me through that day, but the next day it broke through the 240C and I did more managing.

My question to you is: Was that Gamma?

I assume it was. So what I did there, just waiting till it went back down, if you had enough BP remaining (or could add dollars), could that get you through most gamma spikes? Because I'd hate to close a trade like that at a big loss when the price of the stock was still in the range your Deltas predicted!

Was that what you were saying here:
"Retail can’t dynamically hedge that easily so rapidly picking up a huge delta position is a real concern."
And I know there are other steps I need to learn to take when a strike is blown through, just haven't pursued them yet.

"The negative skewness on this PnL distribution is awful." - This I don't understand, but what factor(s) can I change to fix that? DTE? Percent invested?

"A month or two ago I was winding down a position in RBLX...
I had some short GME calls marked at 0.05 one Friday and I had to buy them back at 17 later that day.
If you trade this long enough you will collect some horror stories. "
​

Thanks for those stories, they help "make real" the risks out there. I mentioned to caroy that I had an epic battle with AMC that I wrote up for my blog. I actually called it "My AMC Saga" and it spanned a week or more but I came out of it with a respectable profit. I'll dig it up and post it here later as a pdf. I even say in it 2 or 3 times that, "I should've just closed the trade here for a small loss," and I will do that with real money, but for these experiments I'm just trying to see if every situation can be managed. That'll either: 1) help me when trading real money, or more likely 2) make me overly confident that I can out-trade whatever the market does.

"Profit taking rules at arbitrary figures will just mute your expected PnL and the variance a bit. This same dynamic will still come out to bite your sometimes. You’re still going to be at the mercy of gaps as well. It’s not that hard to find spots with a few points of vol edge on otm strikes and when you are close to expiry it does monetize relatively quickly."​

Don't understand much of this, but how do you do profit-taking? I'd like to learn other ways, that's mostly just "the TastyTrade way" I learned.
Gaps, yes, have seen a bit of that. Smallish trade sizes I think help with the underlying-specific ones at least?
In the last sentence are you thinking that I'm actively looking for advantageous strikes, or that 10Δ just kind of puts you a good neighborhood to happen upon thos? Because I'm not doing any active evaluation of options, and I don't look at the charts, or even if the stock is up or down at the time. I simply pull up an option chain in my DTE range, pick the 10∆ (or 10% prob.) strikes, and place the trade. I'm an engineer by trade (and by nature), so I'm looking for a very mechanical, methodical system that doesn't tie me to the screen for more than about a half-hour a day.

"I would really recommend finding a cheap wing somewhere to cap your risk at a defined level. ... So if your trade can’t earn enough to finance some protection somewhere that’s a pretty good signal to pass over it."​

I've read this a lot and really need to start learning how to do that. That last sentence really struck home with me because part of the reason I'm doing short (naked) strangles now is that Iron Condors weren't giving me the rate of return I wanted. But I was doing what I think are traditional ICs, with pretty tight 1- or 2-strike wings. Probably if I went out to "cheap wings" like you said, then the ROR of the ICs would go up.

Thanks for your time and your super-useful insights!
Mike

 

[guru]

this is probably all just beginner's luck

This would be my biggest concern, especially that the market is so good this year that no one seems to lose.

Great start though.
I don’t see big issues with paper vs live, but there may be some. Mostly I would account for $0.10 potential slippage per option/trade, but it can be as much as $0.50, for example. Also, many OTM prices on smaller stocks are very inaccurate, especially with very wide spreads, so if you see a bid/ask spread like $0.50/$3.00, then the actual marketable/sellable price could be just the $0.50, in some cases, and totally wrong on ToS. At least a few live trades would help you check the accuracy of your assumptions.
Other than that, there are so many people showing off their huge profits from buying OTM options, that doing the opposite sounds nuts.
You may have a bit of an edge by focusing on high-volatility, and diversifying among non-SPY correlated stocks that can move more randomly and won’t all lose 1000% on each position all at once. But it may happen.
The biggest issue may be that we don’t see many people using this strategy, possibly because they blew their accounts at one point or another. At least you and anyone wanting to provide an opinion about your strategy should wait until you actually do experience very large drawdown, or at least until some crisis in the market. You will feel the heat at some point, and I hope you’ll feel it sooner than later, for your own sake.
Looking at probabilities doesn’t matter, as they’re only the current probabilities and based on as short historical period as the DTE of your options, not future probabilities.