10-Delta Short Strangles

[Theinkdon]

You could take some of your premium collected and buy cheap OTM put and call flies that are pretty wide below your put and above your call. If you have a runaway stock you could end up with lotto like profits but this would work better on high priced equities like AMZN and you'd need around 40k in buying power to put on one 10 delta strangle. You've inspired me a bit. I've looked at going live on monday with a 5 delta strangle in AMZN but I'm a fly guy so I'd buy a 100 pt wide lotto fly above and below with some of the premium collected. I'd look to exit the strangle in a day or two at 50% and leave the free flies on. Earnings end of the week in AMZN who knows. I will think about putting this on over the weekend for Monday morning.

Interesting idea with the flies, is that mostly what you trade option-wise? How do you make them work in general? And is this a "100 pt wide lotto fly"?

AMZN earnings are on 7/29, is the idea that you would put a lotto fly on either side of current spot (whether with or without a strangle?), betting that the price move after earnings would land on/in one of them? Would you center them at +/- the Expected Move? I don't know what that's predicted to be, but would your position (without a strangle) look something like this?

You profit if AMZN makes the Expected Move, but not so much if it stays put or moves too far? Or are your centerpoints closer so that the triangles intersect and profit stays green in between?

I can see that working for an earnings play, but how would it work as protection for a strangle, and about where would you place the flies? I tried modeling it on CLF that I've been referring to in this thread, and this is the best-looking curve I could come up with:

That's an approximately 10Δ short strangle with a $1-wide iron fly $1 outside each strike. I thought I'd see the characteristic peaks of the iron butterfly at each end of the plateau, but that's the best I could get out of it. And if I moved the flies further out it just looked like this:

That lowers the BE and does provide a bit of extra downside protection, but not what I was hoping to see. Plus it's 10 contracts in and 10 out; at 65 cents per at TDA, that's $13, not insignificant against the $43 max profit of that trade. Have you done "strangles with flies" before?

 

[Theinkdon]

Right, I got that prior to asking my question. The reason I asked is because saying that you will only allocate small amount is a bit misleading, imho. Once you get used to that “income” coming in, it is hard to stop. So you will likely keep putting new money in when that margin call comes, because you know that the probability of you getting out at break even or a profit is very high. That’s how it sucks you in.

I do opportunistically only. I prefer to play smaller but getting higher premiums like ATM with undefined risk. Small means I would be comfortable to take assignment on the stock either long or short (that means higher quality stocks). I think it’s very much what TT preaches although I only know them from free YouTube content.

That being said, I don’t sell any premium in this low vol environment and with stocks at levels where I don’t want to be either short or long really.

Sounds like you've been doing this for a while and seen some things. Thanks for the warning on getting "sucked in" on margin calls, I'll definitely try to heed that advice.

When you DO sell volatility, are you doing ATM straddles or really tight strangles? Sounds like you're almost doing The Wheel, selling a Cash Secured (or naked) Put and not minding being assigned, but also selling a Call at the same time, before you're assigned the stock to sell a covered call on. If so, it seems to me to be about as good an idea to take assignment on the Call side as well as the Put side. (I say "about" because of the actual "infinite risk" on the Call side vs. the Put side.)

Thanks for your thoughts, and correct me if I'm wrong on any of that.

 

[qlai]

When you DO sell volatility, are you doing ATM straddles or really tight strangles? Sounds like you're almost doing The Wheel, selling a Cash Secured (or naked) Put and not minding being assigned, but also selling a Call at the same time, before you're assigned the stock to sell a covered call on.

I haven’t been doing premium selling for long, but as yourself, I have been thinking on how to produce some “retirement income” consistently for a while.
I am trading the wheel of sorts, although I prefer to call it swing trading with options. I try to get in the stock with good entry price, that’s the most important part. If I timed it well and am quickly at profit, I may sell both call and put weeklies around the stock - but only if premium is high enough to compensate me for giving up the possible upside. So I will have below outcomes(assuming long stock):
1. My stock goes up and gets taken away with the call.
2. Stock goes down and I get out of stock at break even and keep the naked straddle/strangle open. I will watch the stock for possible re-entry.
3. Stock gaps down and I may take assignment on the put - which is worst case scenario.
4. Both options expire worthless and I may start legging into another strangle next week.

As you can see, it’s very primitive so I am not advocating this, just sharing.

 

[Theinkdon]

Its been a period of very supportive central bank policies. In the long run though, its highly likely to underperform against SPX buy and hold, especially given the credit risk you'd have to take with single names, see the cboe short strangle benchmark comparison:
https://www.cboe.com/us/indices/dashboard/SSTGK/

Hi, tayte. Sorry I missed replying to you earlier.
I've seen that CBOE short strangle index before (I even took some options courses through CBOE). I think the trouble with it though, and with most every backtest of every strategy I've seen, is that they're not actively managed. And not only that, but in this one there's no pre-defined profit-taking OR stop loss measures. I'm not talking seat-of-the-pants stuff you might do on the fly, but things like 50% BTC orders, or "if it loses 2x the premium I'm out." I read through the supporting calcs, and best I can tell they're selling a month-out strangle, then at 3 weeks rolling it to the next month. Way too mechanical over what you or I could do with GTC BTC orders and maybe stop-losses on the other side.

Plus they're selling the options that are simply 4% OTM, which doesn't take probabilities into account at all. I pulled up a 30DTE SPX option chain (it's Saturday, 7/17, so the 16Aug) and SPX last closed at 4327. 4% lower than that is 4154. CBOE's calculation methodology says they have to choose the strike that's at least 4% away, so we have to pick the 4150 strike. It's Delta is 22 and Prob.ITM 24.0%. Maybe we'll see about the same probabilities on the Call side, right?

4327 x 1.04 = 4500. The 4500 strike's Delta is 7! And it's Prob.ITM is 6.7%. I guess a trade like that would work, but doesn't that artificially skew the trade to the Put side? Maybe that works just as well as "probability-centering" the strangles like I do, I don't know. (I just made up that term, maybe it's silly.)

And I don't have much experience selling strangles at 30DTE, but I think I said in my introductory posts that I often see Monday-morning 5DTE strangles coming off at 50% profit on Wednesday, sometimes Thursday. Heck, sometimes even Tuesday, but that's rare. It's kind of hard to make a direct analogy between a 5-day week and a 4-week month, but if 5DTE trades are coming off in 50-80% of their available time, then that's at least a slight edge over the CBOE index where the trades are forced to wait 75% of their time before being closed at whatever their price is.
Without the opportunity for winners to be taken off early, or losers cut short, a mechanistic approach like this index doesn't "prove" much to me.

As for beating SPX buy-and-hold, that's actually not impossibly hard to do, even over the long term. But when you bring the "risk-adjusted" idea into it then no NON-buy-and-hold strategy proponent is ever going to win that argument, so I won't even go there.

Thoughts on my analysis of the CBOE Short Strangle Index?
Take care,
Mike

 

[Angelo_60]

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?

Hi, just my 2 cents.

Retutn on collateral is meaningless, because no trader in his own right mind would consider just the collateral required by the broker when allocating the capital required to naked short selling.

Also, IMHO, you shoudn't be fixated by the ROI.... the ROI should be your last worry...... the first beeing no to blow up.... as sooner or later you'll discover by yourself.. sorry my friend .... but there should be a reason if there's not one (name JUST one) big fund using your strategy... isn't it?

Anyway, just a look at your proposed strangle.

According to my IB account require 375 USD as margin (IB has stricter margin requirements than other broker.... nevertheless I found them appriopriate most of the time)

At 3x margin --- hence 1125 usd--- your max ROI (should all leg expire unexercized) is 2.5%.... which is still very high, consedering normal rerturn of US stock market.

So, your ROI calculations are inflated by the supposed leverage used which is not simply aggressive (as you stated) but more or less..foolish (don't want to offend, but that's the way I see it).

If you can make the distinction between what decisions like position sizing, hedging, etc, are just changing the shape of the distribution of your future PnL vs. which ones actually increase mean PnL that will be a good realization.

...........

You need to ask yourself how much variance you are holding to collect what expected PnL. Try to optimize this ratio.

IMHO, these points abive are fundamental. Would you mind expanding a bit?

 

[CET]

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.

If you are planning on going live on this in an IRA/Roth (since your paper account was opened under those type accounts), you may have a problem. TDA does not allow me to have a naked call, at least as I understand it. Just FYI. Getting this clarified may save you some time, unless you want to do it in a regular margin account. But then that adds other issues you don't have to deal with in an IRA/Roth.

 

[Theinkdon]

If you are planning on going live on this in an IRA/Roth (since your paper account was opened under those type accounts), you may have a problem. TDA does not allow me to have a naked call, at least as I understand it. Just FYI. Getting this clarified may save you some time, unless you want to do it in a regular margin account. But then that adds other issues you don't have to deal with in an IRA/Roth.

CET, hi and thanks for that heads-up. I have a "cash/margin" account set up that's separate from everything else, just waiting to reapply for Tier 3 options in mid-August. You're right though that I opened the 2 paper accounts under my wife's ROTH account, but it let me select what kind of accounts I wanted them to be, IRA or Margin, so of course I chose Margin and they seem to trade like margin accounts.

I'm glad you said this though, because I just went to check the actual names of the account choices and I saw that ToS PM offers a Portfolio Margin account type now. I'm quite sure that wasn't there before. That's my ultimate goal with real money, and I've been reviewing their Portfolio Margin Tests to get ready for it.

I was vaguely aware of the Wash Rule, but never really encountered it. Probably because like you said, it doesn't apply to IRAs, and that's mostly what I've been trading in over the years. I shall have to keep an eye on that, though I hope to not have any losing trades!

Take care,
Mike

 

[Theinkdon]

I haven’t been doing premium selling for long, but as yourself, I have been thinking on how to produce some “retirement income” consistently for a while.
I am trading the wheel of sorts, although I prefer to call it swing trading with options. I try to get in the stock with good entry price, that’s the most important part. If I timed it well and am quickly at profit, I may sell both call and put weeklies around the stock - but only if premium is high enough to compensate me for giving up the possible upside. So I will have below outcomes(assuming long stock):
1. My stock goes up and gets taken away with the call.
2. Stock goes down and I get out of stock at break even and keep the naked straddle/strangle open. I will watch the stock for possible re-entry.
3. Stock gaps down and I may take assignment on the put - which is worst case scenario.
4. Both options expire worthless and I may start legging into another strangle next week.

As you can see, it’s very primitive so I am not advocating this, just sharing.

"Swing trading with options," I like that! I've always been a short-term momentum guy (look at the chart and if it's trending up, buy it), and what I think of as a swing-trader also: weeks to maybe a couple months max. Anyway, early on in my options education (all since January) I wrote an entry in my journal titled, "Momentum with options!" Including the exclamation point. That didn't work out too well (buying 70∆ Calls mostly), but I'm interested in what you're doing here.

So are you doing Covered Short Straddles/Strangles? But if the stock goes down you'll sell it but keep the straddle/strangle on? I had written this: {What kind of DTEs are you putting them on at, and if you choose to do a strangle what strikes do you choose?} Then I re-read and saw that you're legging in. Would you mind sharing an example trade?
Thanks.

 

[Theinkdon]

Hi, just my 2 cents.

Retutn on collateral is meaningless, because no trader in his own right mind would consider just the collateral required by the broker when allocating the capital required to naked short selling.

Also, IMHO, you shoudn't be fixated by the ROI.... the ROI should be your last worry...... the first beeing no to blow up.... as sooner or later you'll discover by yourself.. sorry my friend .... but there should be a reason if there's not one (name JUST one) big fund using your strategy... isn't it?

Anyway, just a look at your proposed strangle.

According to my IB account require 375 USD as margin (IB has stricter margin requirements than other broker.... nevertheless I found them appriopriate most of the time)

At 3x margin --- hence 1125 usd--- your max ROI (should all leg expire unexercized) is 2.5%.... which is still very high, considering normal return of US stock market.

So, your ROI calculations are inflated by the supposed leverage used which is not simply aggressive (as you stated) but more or less..foolish (don't want to offend, but that's the way I see it).



IMHO, these points above are fundamental. Would you mind expanding a bit?

Hi Angelo, thanks for your take on it, and no offense taken, I welcome criticism/correction/enhancements.

I recognize from an earlier experiment I posted on Reddit (selling naked puts instead of cash secured) that I'm way over-leveraged here. I wouldn't trade real money at 90% of margin utilization, but was thinking that 50% might be alright. Is that still too high?

What's the "3x leverage" you mentioned, is that a thumb-rule? Does it mean that I should only be using 1/3 of the available margin or something like that? I readily admit I'm pretty naive when it comes to all the implications of margin, but I'm starting to learn.

I did/do kind of fixate on ROI, but mostly because it gave me a way to find trades that met the capricious 1%/day metric I initially chose, just to see if it could be done. I read in someone's post somewhere that he targets a certain ROI per trade, so he used BPR as the denominator and then chose the trade that gave him the desired Premium for the numerator. So I just kind of adopted that.

But in my example CLF trade with a credit of 30, if I used your IB margin requirement and tripled it to get 1125, then just traded a 1-lot, is it reasonable to say that ROI is (30 - commisions) ÷ 1125? I think that's what you did because I get 2.5% also.
But did you notice that it was a weeklong trade, 5DTE? So then do I get to call that 2.5% per week on that sum of money? And if I was 50% invested, and assuming every trade made 2.5%/week, do I get to say that half my money made 2.5%, so therefore all of my money made 1.25% that week? And then multiply by 4 to get 5%/month, and then by 12 to get 60%/yr?
Sorry, I didn't intend to belabor the point so much, just trying to understand how people customarily measure and talk about ROI. I mean I know that at the end of the year I can see what percentage my portfolio increased, but I'm really interested in the idea of tweaking your trades for a certain return on investment from the outset.
Thanks for your time.

 

[CET]

CET, hi and thanks for that heads-up. I have a "cash/margin" account set up that's separate from everything else, just waiting to reapply for Tier 3 options in mid-August. You're right though that I opened the 2 paper accounts under my wife's ROTH account, but it let me select what kind of accounts I wanted them to be, IRA or Margin, so of course I chose Margin and they seem to trade like margin accounts.

I'm glad you said this though, because I just went to check the actual names of the account choices and I saw that ToS PM offers a Portfolio Margin account type now. I'm quite sure that wasn't there before. That's my ultimate goal with real money, and I've been reviewing their Portfolio Margin Tests to get ready for it.

I was vaguely aware of the Wash Rule, but never really encountered it. Probably because like you said, it doesn't apply to IRAs, and that's mostly what I've been trading in over the years. I shall have to keep an eye on that, though I hope to not have any losing trades!

Take care,
Mike

My guess is that TDA did not make sure a paper trading account has the same limitations on it as the real accounts it is under. As I understand it, they only allow limited margin in an IRA/Roth account for trade settlement purposes. Basically you have 1X margin.

It appears PM is only allowed in a margin (non-IRA) account. Here is a link to the PM info on their site.

https://www.tdameritrade.com/investment-products/margin-trading/portfolio-margin.html

Key considerations
Portfolio margin can be a great resource for people who want more investing flexibility. Before you get started, keep these details in mind.

• Portfolio Margining is not suitable for all investors and is greater risk than cash accounts
• If you want to minimize risk, consider diversifying your portfolio and aligning margin requirements on the net exposure of all your positions, not just one of them.
• If your account falls under $100,000 Net Liquidating Value and you do not bring it above this watermark, you will be removed from the portfolio margining system.
• The requirements for portfolio margin are: a minimum of $125,000 account equity (you cannot combine accounts to reach this), full options trading approval, and three years of experience trading options.
• Portfolio margin is only available to margin (non-IRA) accounts.

Good luck, and keep posting your results.