I can see how it dampens the enthusiasm. It doesn't negate the strategy it just makes the returns more worldly than other worldly. I'm going to sell another strangle in Amazon next Monday 5 delta and see if I can make it part of my weekly / monthly trading plan. If I net $400 a week or 2k a month its 24k a year on a 250k account so close to 10 percent. I figure I have enough buying power left to defend with some gamma scalping buying stock on the way up if it touches my strike and selling on the way down with the same in mind. Risk becomes whipsaw back and forth around the strike. When added to my flies hopefully i'd be happy with annual returns of 40%.
10-Delta Short Strangles
- Thread starter Theinkdon
- Start date
Caroy, thanks for the encouraging words. You're right, the returns I was seeing were indeed "other worldly," I should've recognized how crazy they were. But your AMZN trade results and the fact that you're going to try it again does give me hope.
On the AMZN trade you collected $835 against a BP of 43k, which is 1.9% on that 5-day trade, 0.4% per day. But you went 5-delta and not 10, so I wonder what 10∆ would've gotten you? I just simulated some AMZN 30Jul short strangles at 5 and 10∆, and the premium is almost exactly twice; I guess one should expect that. BP for the 10∆ trade was 20% higher, which meant that the ROI wasn't twice as much, but still much higher.
Daily ROI for the 5∆ trade is 0.46, while for the 10∆ it's 0.76 per day. That's not too far off the 1% per day I've been targeting, and given that this is AMZN and not something super-high IV like GME that's pretty impressive. It gives me hope.
When you do it again next week will you post the Credit and BP? Thanks.
Less a few caveats; your expected PnL over a long time horizon is going to be the difference between the implied volatility you sold and what the realized volatility of the underlying is. You have to stop thinking of the profit as the total amount of premium received.
Wider strangles will expire worthless more often but the mean PnL will still average out to the implied/realized spread over time. The only way you can enhance this is if you also have an edge predicting deltas and you are monetizing that with your hedging scheme and/or strike selection.
This is actually an oversimplification but even the naive view that you’re collecting expected value equal to the full spread between the skewed otm implied vol and local realized vol will get you a lot more realistic expectations, which are necessary to optimize leverage and return on capital.
There are billions of $$ in risk capital seeking returns in the economy. If selling otm strangles blindly in highly liquid stocks has an extremely high sharpe, capital will flow in and bid down the edge until it is comparable with other economic activities with similar risk.
I don’t think it’s a bad idea to learn about this space and I encourage you to go ahead with trading it live when you can. Experience is a good teacher and oftentimes the only one we will listen to. Right now you don’t fully understand the underlying dynamics of what creates PnL in vol space and what kind of PnL distribution you’re dealing with. Your expectations are too high which is going to cause you to make suboptimal decisions which will show up if you operate foe a long enough time horizon.
Two other useful tidbits that were shared with me early on are that there is no free lunch in finance besides diversification—alpha is fleeting and takes a lot of effort and deep understanding to produce because a lot of well-capitalized, highly intelligent groups are competing for it. And also if you are a little guy trying to monetize a niche you should really know whose lunch you’re eating and why.
Wider strangles will expire worthless more often but the mean PnL will still average out to the implied/realized spread over time. The only way you can enhance this is if you also have an edge predicting deltas and you are monetizing that with your hedging scheme and/or strike selection.
This is actually an oversimplification but even the naive view that you’re collecting expected value equal to the full spread between the skewed otm implied vol and local realized vol will get you a lot more realistic expectations, which are necessary to optimize leverage and return on capital.
There are billions of $$ in risk capital seeking returns in the economy. If selling otm strangles blindly in highly liquid stocks has an extremely high sharpe, capital will flow in and bid down the edge until it is comparable with other economic activities with similar risk.
I don’t think it’s a bad idea to learn about this space and I encourage you to go ahead with trading it live when you can. Experience is a good teacher and oftentimes the only one we will listen to. Right now you don’t fully understand the underlying dynamics of what creates PnL in vol space and what kind of PnL distribution you’re dealing with. Your expectations are too high which is going to cause you to make suboptimal decisions which will show up if you operate foe a long enough time horizon.
Two other useful tidbits that were shared with me early on are that there is no free lunch in finance besides diversification—alpha is fleeting and takes a lot of effort and deep understanding to produce because a lot of well-capitalized, highly intelligent groups are competing for it. And also if you are a little guy trying to monetize a niche you should really know whose lunch you’re eating and why.
So even though this whole thing might not work out as I'd hoped, I'll keep posting daily updates. Screenshot at the end of today:
You can see from the positions panel at the bottom that 3 of 6 trades are ITM: BBBY, BLNK, & PLUG, all on the Call side. In the Filled Orders section starting at the bottom I rolled those to Short Straddles. Total credits received put the upper BEs higher than spot. If they continue to rise I'll roll out to next week.
CLF was up 6% but didn't breach its Call, so I rolled it up to a 19.5/22.5 SS.
I put on a FUBO trade again (closed yesterday) for next week.
Lastly, RIDE closed itself.
Not enough BP to put on any new trades.
You can see from the positions panel at the bottom that 3 of 6 trades are ITM: BBBY, BLNK, & PLUG, all on the Call side. In the Filled Orders section starting at the bottom I rolled those to Short Straddles. Total credits received put the upper BEs higher than spot. If they continue to rise I'll roll out to next week.
CLF was up 6% but didn't breach its Call, so I rolled it up to a 19.5/22.5 SS.
I put on a FUBO trade again (closed yesterday) for next week.
Lastly, RIDE closed itself.
Not enough BP to put on any new trades.
Magic, thanks again for your insights, though I still don't understand a lot of what you say. As for having an edge, or "alpha", I certainly don't and don't pretend to, I'm just trying to figure out if this thing I'm doing has any merit, and then maybe tweak it to be a bit better. The astronomical returns I've been seeing are almost assuredly due to different margin requirements between TDA paper-money and real money accounts, but there's something about selling these very wide, very high probability strangles that appeals to me. At least more than any other options strategy I've tried so far.
Loved your quote about knowing whose lunch you're eating. I know there's no free lunch in the market, and that it's always wise to consider who's on the other side of our trades and why.
The account is up 10% at the end of its 4th full day, but of course that may only be because lax margin requirements allowed me to put on too many trades.
You can see in the Filled Orders section that CLF came off and I immediately did it again. Same with BB. I put MARA on as a new trade because there was some BP left.
The three symbols that show "ITM" are because they're all Short Straddles now, and those are always going to be ITM on one side or the other.
BBBY is behaving: came down 0.48 today to close at 29.41 against its 29 straddle.
BLNK is almost perfect, coming down 1.10 today to close at 33.10 on a 33 straddle.
PLUG also, closing at 27.41 on a 27.5 straddle.
I won't let those go into expiration as straddles because I don't want to be assigned on either leg, so I'll close them tomorrow for a profit if I can, or roll them to next-week short strangles.
The PLUG trade is slightly positive right now, but BBBY & BLNK are still negative. But if the stocks hold near those prices tomorrow, then as theta burns off I should be able to close them at a profit.
You can see in the Filled Orders section that CLF came off and I immediately did it again. Same with BB. I put MARA on as a new trade because there was some BP left.
The three symbols that show "ITM" are because they're all Short Straddles now, and those are always going to be ITM on one side or the other.
BBBY is behaving: came down 0.48 today to close at 29.41 against its 29 straddle.
BLNK is almost perfect, coming down 1.10 today to close at 33.10 on a 33 straddle.
PLUG also, closing at 27.41 on a 27.5 straddle.
I won't let those go into expiration as straddles because I don't want to be assigned on either leg, so I'll close them tomorrow for a profit if I can, or roll them to next-week short strangles.
The PLUG trade is slightly positive right now, but BBBY & BLNK are still negative. But if the stocks hold near those prices tomorrow, then as theta burns off I should be able to close them at a profit.
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Break down this trade into short a call or short the put
Are you expected to make money over long term shorting either? If so why?
Why 10Delta? Can you do better with other strikes? Are 10 delta strikes really overpriced? If so why aren't there more sellers in the market driving the prices of these down till the expected returns is 0.
Why is the margin requirements so high? Or is it to be expected because black swans occur more frequently?
Try to answer all these questions to understand your strategy better
Hello,
Made some backtests
Purchasing 10 delta strangle every week at Friday 7 DTE for 2-3 years.
BB - 78%
BBBY - 57%
RIDE + 39%
FUBO - 110%
MARA - 84%
PLUG - 16%
GME - 23%
Normal stock:
AAPL + 44%
TSLA + 4%
BA - 15%
AMD + 20%
AMZN + 54%
GOOG + 53%
Return from REG-T margin invested.
Example 1 GME strangle required 411 REG-T margin.
Calculated by mid bid/ask spread, usually impossible to get this price in real life, excluded commissions.
If 100% or even 50% margin invested all strangles will reset the accounts balance to 0 during March 2020, drawdowns x 10-15 REG-T margin invested.
Made some backtests
Purchasing 10 delta strangle every week at Friday 7 DTE for 2-3 years.
BB - 78%
BBBY - 57%
RIDE + 39%
FUBO - 110%
MARA - 84%
PLUG - 16%
GME - 23%
Normal stock:
AAPL + 44%
TSLA + 4%
BA - 15%
AMD + 20%
AMZN + 54%
GOOG + 53%
Return from REG-T margin invested.
Example 1 GME strangle required 411 REG-T margin.
Calculated by mid bid/ask spread, usually impossible to get this price in real life, excluded commissions.
If 100% or even 50% margin invested all strangles will reset the accounts balance to 0 during March 2020, drawdowns x 10-15 REG-T margin invested.
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curious what the results would be with a 5 delta strangle?
5 delta, BB + 40%, but REG-T margin 12, average profit 4.5, commission and slippage eat all profits.
Lower delta bigger bid/ask spread and commission 50+ % from profit.
Lower delta bigger bid/ask spread and commission 50+ % from profit.