10-Delta Short Strangles

[Theinkdon]

"...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.

Hi, Overnight. I agree with you academically that "it isn't possible." But it IS possible at least in the "Paper Money" side of TD Ameritrade's ThinkorSwim platform (and maybe that's all I'm proving to myself with this exercise). I've convinced myself of that once trading 10Δ Short Strangles for 13 weeks, again with 20Δ SSs (technically, 20% Prob.ITM) for 4 weeks, am 4 weeks and 23% along the way of doing it again with 10Δ strangles, and just started today with 30Δ strangles, with no reason to think that won't double in a short time also.

So the first 3 of those are facts that I've proven to myself and could prove to anyone who could access (or believed my posted pdf's of) my ToS trade logs. But the REAL question here is: WILL THIS STRATEGY TRANSLATE WHEN I A START TRADING REAL MONEY WITH TIER 3 OPTIONS APPROVAL. That's what I'm worried about. Because as I said elsewhere, I put some real money (it was 5k) in a TastyWorks acct I had that was supposedly unrestricted with respect to selling naked, but the same SS's I was trading with TDA paper-money were requiring 2 or 3 times the BP/collateral there. So if I find that to be the case with real money at TDA, then we can just forget all this I've posted!

Although......taking just the 50k 10Δ account that doubled in 3 months, even with worst-case 3-times the BPR required, does that mean it would take 3x longer to double, or is it more complicated than that? Because 3 x 3 months is still "only" 9 months, and 100% in 9m is more than respectable. In fact it borders on "not possible."

So right now this is all just a science experiment and I'm not promoting it as a Holy Grail, I just thought I'd post here to get some feedback and engagement, so thanks for yours!

 

[Overnight]

Hi, Overnight. I agree with you academically that "it isn't possible." But it IS possible at least in the "Paper Money" side of TD Ameritrade's ThinkorSwim platform (and maybe that's all I'm proving to myself with this exercise). I've convinced myself of that once trading 10Δ Short Strangles for 13 weeks, again with 20Δ SSs (technically, 20% Prob.ITM) for 4 weeks, am 4 weeks and 23% along the way of doing it again with 10Δ strangles, and just started today with 30Δ strangles, with no reason to think that won't double in a short time also.

So the first 3 of those are facts that I've proven to myself and could prove to anyone who could access (or believed my posted pdf's of) my ToS trade logs. But the REAL question here is: WILL THIS STRATEGY TRANSLATE WHEN I A START TRADING REAL MONEY WITH TIER 3 OPTIONS APPROVAL. That's what I'm worried about. Because as I said elsewhere, I put some real money (it was 5k) in a TastyWorks acct I had that was supposedly unrestricted with respect to selling naked, but the same SS's I was trading with TDA paper-money were requiring 2 or 3 times the BP/collateral there. So if I find that to be the case with real money at TDA, then we can just forget all this I've posted!

Although......taking just the 50k 10Δ account that doubled in 3 months, even with worst-case 3-times the BPR required, does that mean it would take 3x longer to double, or is it more complicated than that? Because 3 x 3 months is still "only" 9 months, and 100% in 9m is more than respectable. In fact it borders on "not possible."

So right now this is all just a science experiment and I'm not promoting it as a Holy Grail, I just thought I'd post here to get some feedback and engagement, so thanks for yours!

You had better find some contemplative music before you delve into it with real money...

...and also seek advice from the most knowledgeable options trader I have witnessed here, @destriero before doing what you are thinking. He's gruff and rude but shoots from the hip, you know? That's the best educator. Someone who doesn't suffer fools well.

 

[tnatrader]

The big issue is gaps. If there's a big gap, good luck rolling since it's mostly intrinsic at that point. It's not as easy as it sounds to be diversified either. If there's a big macro event, all these tickers move in tandem.

That's not to say there's no merit in this kind of system. Since it doubles so quickly, maybe just put 10k in and pull out money as quickly as you make it, you're basically playing roulette betting that IV will swamp realized vol. If nothing else, at least it's fun.

 

[Theinkdon]

Theinkdon said: "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. .

Hi guru, thanks for chiming in! And wow, you said a lot, most of which I'd like to respond to.
(Before I get started though, is there a way to see my replies directly below the post I'm replying to? I'm getting lost trying to keep up, and hoping that for you guys my replies show up right below yours."

I'm particularly glad you said this:

"I don’t see big issues with paper vs live, but there may be some. Mostly I would account for $0.10 potential slippage...
At least a few live trades would help you check the accuracy of your assumptions."​

Have you made that switch, or comparison, between paper and live? (Has anyone here?)
I've been mindful of bid/ask spreads and try to stay away from really-wide ones, and I actually have traded a lot of the same symbols in my real margin account (where I can't do SS's yet), mostly with PCSs, but also IC's, and the occasional Iron Butterfly. I haven't directly compared BPs between the 2 platforms, but I've also done ICs and IBs in the 20∆ paper money account I don't track on my blog, and I can't say I've noticed any stark differences regarding fills or BP.

"...so many people showing off their huge profits from buying OTM options, that doing the opposite sounds nuts."​

Thanks, I think?! I don't know, but after a lot of reading, and I can no longer remember exactly where, but at some point the "insurance company" analogy clicked with me and I decided to pursue being on the selling side.

"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."​

My focus on high-vol was/is simply to find the option premiums that might make 1%/day possible. That was just a "that would be cool to do" dumb initial idea I had, but it's worked out so far and I'll stick with it for now for these experiments.
When I transition to real money I'll likely trade off premium (and ROI) for lower-IV stocks. But you're right: they're definitely not correlated to SPY! Whether that's good or bad remains to be seen...

"We don't see many people using this strategy, possibly because they blew their accounts... 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."​

GREAT observation, and that's EXACTLY what brought me here to start this Journal! I've found VERY little information on the web about trading Short Strangles, almost NONE about doing it way out at 10∆, and ZERO about anyone doing it exclusively.
I started a blog which I haven't "advertised" yet, and thought I'd get some people at least wandering in accidentally, but haven't yet. I'm not ready to promote it yet, but I finally remembered the "Journals" section of ET forums, and I knew that if wanted to get feedback/critiques/challenges about the strategy and/or implementation it would be here. And so far I've NOT been disappointed!
So far I haven't had a drawdown of more than 10% in any of the iterations of the strategy, but I know that can and will occur. And you're right, I hope it happens while I'm practicing!

"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."​

I took the liberty of underlining 'current' and 'future' because I think that's what you were kind of saying: current vs. future probabilities
As a Mechanical Engineer by training with a smattering of statistics in college, and then later a Nuclear Engineer by vocation with a whole LOT of theory and real-life application of probabilities, I have to ask if I'm understanding you correctly here.
If we assume that Delta is a proxy for probability (or perhaps better, that ToS's Prob.ITM is an accurate measure of it), then would it be correct to say, "It's Monday and this XYZ $10 Call for Friday 4 days from now shows a 10% probability of being ITM by then. That means there's a 90% change it'll be OTM then, as things stand right now."
Is that an accurate way of interpreting delta/probability at the time of the trade? If not then I've got it ALL messed up! But if so, then I would say, "We have to start somewhere, right?" 90% PoP today is of course going to change by Friday as the stock moves around, but it feels like a comfortable place for me to start. Am I grossly out to lunch with that?

Thanks!
Mike

 

[Theinkdon]

You had better find some contemplative music before you delve into it with real money...
...and also seek advice from the most knowledgeable options trader I have witnessed here, @destriero before doing what you are thinking. He's gruff and rude but shoots from the hip, you know? That's the best educator. Someone who doesn't suffer fools well.

Thanks for the contemplative music, I'll tuck it away for the day I might need it!

So far you're the biggest naysayer I have, and I totally respect you for that, it's what I came here for. But can I give you a little challenge? Do you have a paper-money account you can try stuff out in? Or do you have approval to sell naked options in your cash account(s)? If either, would you just do a 1-lot of ONE of these 5DTE 10∆ trades and see how it plays out?

Not GME or AMC, but something like CLF, an iron ore miner. Closed at about $20 today, 28M avg volume, and its YTD price action has been mostly ho-hum: a bit choppy, but steadily trending up. It's after hours right now so these numbers will change by Monday, but it's pricing for me in ToS paper-money at 0.30 for the 23Jul 16P/24.5C Short Strangle (sell both options of course).

Buying Power Effect is $200, and net Credit after commissions is 28.70. Let's even say you don't get filled at 0.30 and have to drop down 5 cents to 0.25. Net Credit is now 23.70 against BPE of probably still about $200. Divide Credit by BPE: you get an ROI of 11%. That's 11% return on collateral in 5 days. Is that not worth taking a chance on determining for yourself if it works?

Put a 50% GTC BTC order on it, and I bet you'll find it closes itself automatically in 2, maybe 3 days. And look at CLF on a 6-month chart: it hasn't seen 16 since April, and it's never breached 25. To me, THAT'S the power of trading at 10∆.
If you don't like CLF, use something you're more familiar with. But please try it and see what you think, that's all I'm trying to do here is get people to just try it.

 

[guru]

If we assume that Delta is a proxy for probability

Someone else mentioned Gamma, and the Gamma basically changes the delta as the stock moves, which could be so extreme that the previous delta wouldn’t matter, therefore the starting probability may not matter. There is also a question of what that probability is based on. If you trade weekly options then you’re looking at the probability based on the previous week, so if the stock didn’t move much the previous week then it doesn’t mean that it won’t explode the next week. Generally if stocks were predictable then there would be many more $millionaires, but it’s the unpredictability that everyone is scared of. The math/greeks/probabilities are simply results of some calculations, but the stock market doesn’t utilize any calculations and doesn’t care what someone calculated. When Reddit decided that they’ll destroy hedge funds by piling into GME and AMC then it didn’t matter how many mathematicians and probability experts those hedge funds had on staff. Some of the biggest blow ups happened to funds ran by mathematicians. Therefore the math and probabilities don’t matter

Of course you have to start somewhere and have to decide on some delta, so that’s fine, like choosing a systematic approach and utilizing set criteria for trading. This is better than not having any rules. I just wouldn’t focus too much on expecting actual probability, but simply utilizing the delta for being based on recent volatility and implied volatility. In theory your probabilities may be even better than implied by delta, because you’re selling implied volatility, which means options that are expensive due to people’s stress/fear/expectations of high volatility. So in theory the realized volatility should be lower than IV and that’s how you collect the profit. But that’s also how discussing probabilities on such stocks doesn’t even make sense, at least to me. And I’m not a math guru, just a run-of-the-mill ordinary guru wannabe.

 

[guru]

Btw, mathematically speaking, I believe selling ATM straddles should have the highest return because you’re collecting the most money per spread/unit, basically risking $0.50 per dollar move in each direction near ATM, then risking more while collecting less and less profit OTM. While collecting premium only far OTM gives you only a few cents profit per dollar of risk.

So if you’d use that logic and decide to sell ATM straddles, this would also give you more money and enable you to protect yourself in each direction by buying wings (OTM calls and puts) instead of selling them. This would limit your max loss. In the end this actually is an ATM butterfly, and it’s one of the most common trades utilized by pro traders due to the max profit per dollar while having limited risk. Butterflies also collect theta/premium when the stock doesn’t move much, so in the end it should work similarly to selling any kind of premium, but safer.
Just something to sleep on, or compare your results to.

 

[JSOP]

All I want to say is there is a reason why the premiums are so high and sooner or later the reason gets revealed and when that happens, the result can be devastating. Countless traders have discovered this and by the time when they do, it's usually too late.

 

[JSOP]

Btw, mathematically speaking, I believe selling ATM straddles should have the highest return because you’re collecting the most money per spread/unit, basically risking $0.50 per dollar move in each direction near ATM, then risking more while collecting less and less profit OTM. While collecting premium only far OTM gives you only a few cents profit per dollar of risk.

So if you’d use that logic and decide to sell ATM straddles, this would also give you more money and enable you to protect yourself in each direction by buying wings (OTM calls and puts) instead of selling them. This would limit your max loss. In the end this actually is an ATM butterfly, and it’s one of the most common trades utilized by pro traders due to the max profit per dollar while having limited risk. Butterflies also collect theta/premium when the stock doesn’t move much, so in the end it should work similarly to selling any kind of premium, but safer.

Or an iron condor, Sell ATM Call/Buy OTM Call + Sell ATM Put/Buy OTM Put.

 

[JSOP]

"...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.

Nice to have you back. Was going to ask about you. There are a few reasons for this. First and foremost, he's trading in paper-trading account in which the option prices do not reflect prices irl and I find most often in ToS, the prices are "rosier" than irl. The premiums are usually higher, the spread is tighter and many times you can even get free arbitrage opportunities which almost never exist irl. Second, the option for meme stocks are mispriced I find in that the volatility is way overpriced. The PA has quietened down quite a bit but the IV is still priced quite high. Is it really mispricing? Only time will tell.