that's too much truth for them to swallow lol
10-Delta Short Strangles
- Thread starter Theinkdon
- Start date
that's too much truth for them to swallow lol
Executed the following 5 Delta Strangle in AMZN
Opened on Monday 3320-4100 sold at 11.30 bought in today at 5.60 for a $570 winner. Went against me Monday on the sell off to around 13.00 but then collapsed over next couple of days. Wanted to be out by earnings. Had a similar 5 delta trade in TSLA earlier in the week as well for a winner. SPX broken wing fly will expire out of the money for an income trade as well. Will see next week after earnings and the vol drop what the 5 delta strangle looks like in AMZN.
Opened on Monday 3320-4100 sold at 11.30 bought in today at 5.60 for a $570 winner. Went against me Monday on the sell off to around 13.00 but then collapsed over next couple of days. Wanted to be out by earnings. Had a similar 5 delta trade in TSLA earlier in the week as well for a winner. SPX broken wing fly will expire out of the money for an income trade as well. Will see next week after earnings and the vol drop what the 5 delta strangle looks like in AMZN.
Very nice, thanks for sharing.
Do you recall about what the BP was on the AMZN trade? Maybe about 40k? If so you made about 1.4% on that trade in just 2 or 3 days (depending how early and late the trade went on and off).
In real-money accounts I started Monday selling Cash Secured Puts at ≤ 30% Prob.ITM and they've done pretty well. When I put them on the ROI was typically around 1.5-2% for the week [Premium ÷ (Strike x 100)].
Sold EXPR 30Jul 4.5P for 0.17 Monday at 9:48 and it came off later the same day at 3:39 for 0.05. $11.35 net credit ÷ $50 = 2.5% in one day.
AMC did the same: 32P on at 9:39 for 0.69, off at 3:40 for 0.33. $34.70 ÷ 3200 = 1% in one day. Did it again before the close Monday and it came off near the close today, Wednesday. 0.8% in 2 days.
FCEL on Monday, off Wednesday for 4.35 net on 600 collateral, 0.7%.
Not awe-inspiring trades to be sure, but if you average the daily percent returns you get 1.1% per day, or 5% per week if you could keep churning them like that. Anyway, just something I'm trying until I get approval to do Short Strangles.
Update on AMZN strangle - Sold another 5 Delta Strangle this week did some defending I wanted to share how it played out.
8/16 3120 put 3450 call collected $4.64 in premium 5 delta strike selection
Sell off Monday and Tuesday pressures position as it almost doubles in value against me.
Being rather risk adverse I stat to get worried and having flash backs to a naked position in Minneapolis Wheat that crushed me in my 30s.
8/18 Made following adjustments
Rolled down untested side collected more premium bot 3450 call sold 3350 call collected $1.30 in premium total collected $5.94 at this moment.
Added a long bear put spread with some of credit for $1.06 3160-3150 figured if we continue lower this will go full carry and be a $900 winner against any losses but am giving up premium collected.
Also added a two lot of a cheap bull call spread for $0.49 3290-3295 so gave up $98 on this. My protection cost a total of $204 so about a third of the total premium.
8/19 exited all trades. bot in new strangle at $3.00 +$294
sold put bear spread @ $1.15 +$9
sold call spread @ $0.05 -$88
Net P/L +$215 so really still made a little under half the original premium collected.
Not sure how I fell about all these adjustments. Had I not been a pussy and just left it on would have been profitable. But sitting with a naked put that close to expiration and gap risk thursday to Friday just wanted out. I'm not a fan of rolling out to a different expiration because I view that as locking in a loser and establishing a new trade. But with the vol jumping on the big down moves really the 5 delta was rather buffered. Happy to entertain thoughts and ideas for how to manage this differently. Not sure what I did was actually intelligent or a good way to go about it. I could have reversed gamma scalped with shares on the way down. I wanted to be out by thursday to free up all my capital for my flies I trade thursday to friday.
8/16 3120 put 3450 call collected $4.64 in premium 5 delta strike selection
Sell off Monday and Tuesday pressures position as it almost doubles in value against me.
Being rather risk adverse I stat to get worried and having flash backs to a naked position in Minneapolis Wheat that crushed me in my 30s.
8/18 Made following adjustments
Rolled down untested side collected more premium bot 3450 call sold 3350 call collected $1.30 in premium total collected $5.94 at this moment.
Added a long bear put spread with some of credit for $1.06 3160-3150 figured if we continue lower this will go full carry and be a $900 winner against any losses but am giving up premium collected.
Also added a two lot of a cheap bull call spread for $0.49 3290-3295 so gave up $98 on this. My protection cost a total of $204 so about a third of the total premium.
8/19 exited all trades. bot in new strangle at $3.00 +$294
sold put bear spread @ $1.15 +$9
sold call spread @ $0.05 -$88
Net P/L +$215 so really still made a little under half the original premium collected.
Not sure how I fell about all these adjustments. Had I not been a pussy and just left it on would have been profitable. But sitting with a naked put that close to expiration and gap risk thursday to Friday just wanted out. I'm not a fan of rolling out to a different expiration because I view that as locking in a loser and establishing a new trade. But with the vol jumping on the big down moves really the 5 delta was rather buffered. Happy to entertain thoughts and ideas for how to manage this differently. Not sure what I did was actually intelligent or a good way to go about it. I could have reversed gamma scalped with shares on the way down. I wanted to be out by thursday to free up all my capital for my flies I trade thursday to friday.
I'm not an expert by any means, and in fact am just a neophyte, but I'd say in future to have more faith in delta. 5 delta is WAY out there, and implies about a 95% chance that AMZN wasn't going to hit 3120 by the close Friday. And as you said, it didn't. The low for the week looks to be about 3177. I ran the trade through Thinkorswim's OnDemand feature, and at the close Thursday, with AMZN at about 3177, your 3120P had a delta of only 11, which is still very low.
You started out doing what I would've done, rolling down the Call. Did you go for a certain delta there, or just 100 closer to the money or something? It looks like it might've been at about 11-delta. Given the trend of AMZN, I might've gone with a 20-delta Call there, which would've gotten you more premium of course. Or you could've rolled it down again later in the week.
And don't forget that your 5.94 credit meant that your lower break-even was actually at about 3114, not 3120, so you had some room to play with there.
I'm glad the trade worked out for you though.
Disagree with the above advice. Don’t have faith in delta. That is non-sensical. Delta is a measure of the positions sensitivity to spot price change, that is all. A -15% gap against you on some freak news or stock dilution can always happen regardless of what delta you opened your position with and regardless of what delta it has now.
You actually did something quite rare and good compared to almost every inexperienced vol seller; when your risk and various exposures rose due to spot movement you actually reduced risk and gamma back down with your subsequent trades, instead of engaging in an unwitting martingale by doing nothing and hoping to be bailed out.
I said earlier experience is often the only teacher people listen to, and it seems that you really learned from your loss in wheat to be sensitive to gap risk and proactively worked to reduce the damage of risk scenarios occurred. The mechanics of how you did that are less important than the fact that you brought your exposures back down.
I shorted 1500 COIN deltas at $240 toward the end of the week because I was getting too long. Doesn’t matter that I felt like it should bounce soon. And sure it bothers me a bit seeing it close in the high $250s but such is the life of a trader. Control your risk, optimizing the mean : variance ratio of your PnL and if you have expectancy the capital will accumulate.
You actually did something quite rare and good compared to almost every inexperienced vol seller; when your risk and various exposures rose due to spot movement you actually reduced risk and gamma back down with your subsequent trades, instead of engaging in an unwitting martingale by doing nothing and hoping to be bailed out.
I said earlier experience is often the only teacher people listen to, and it seems that you really learned from your loss in wheat to be sensitive to gap risk and proactively worked to reduce the damage of risk scenarios occurred. The mechanics of how you did that are less important than the fact that you brought your exposures back down.
I shorted 1500 COIN deltas at $240 toward the end of the week because I was getting too long. Doesn’t matter that I felt like it should bounce soon. And sure it bothers me a bit seeing it close in the high $250s but such is the life of a trader. Control your risk, optimizing the mean : variance ratio of your PnL and if you have expectancy the capital will accumulate.
But delta generally IS accepted as a proxy for probability in the money.
Wikipedia:
All the bolding is mine, to point out that it's only an approximation, and not its real definition or derivation, as you stated.
Maybe you don't trade options using probabilities, but when I first started and read things like all the above and began to see it in action, it intuitively made sense. Then I evolved into using Delta to get me into trades with about a 90% chance of being successful (selling 10-delta). But I've since switched to using TDA's "Probability ITM" number they provide in option chains.
For Caroy's 5-delta AMZN trade it doesn't make much difference, as you can see in this screenshot of AMZN 03Sep Puts:
The far-right column is Prob.ITM. Compare to Delta: they're very, very close.
But for something like GME, not so much:
So when I use Delta in the context of probability, I know it's not exact, and not its purpose, but it's close. I'm more likely to quote Prob.ITM actually, but u/caroy used Delta so I stayed with that (and in fact they're essentially the same for AMZN, for 5-delta Puts at least).
Wikipedia:
"The (absolute value of) Delta is close to, but not identical with, the percent moneyness of an option, i.e., the implied probability that the option will expire in-the-money."
OptionAlpha:"Delta can be used to estimate the probability a stock will be in-the-money at expiration."
TastyTrade:"Unlike the other Greeks, delta has several common uses in the options trading world. Today, we are looking more closely at one particular application of an option's delta. Specifically, an option's delta is often used as a proxy for the estimated probability that a given option will finish in-the-money."
TD Ameritrade:"[M]any traders look at delta as an approximate percentage chance that an option will be ITM at expiration. Although it’s not a perfect science, an options delta calculation can provide a pretty close estimate."
All the bolding is mine, to point out that it's only an approximation, and not its real definition or derivation, as you stated.
Maybe you don't trade options using probabilities, but when I first started and read things like all the above and began to see it in action, it intuitively made sense. Then I evolved into using Delta to get me into trades with about a 90% chance of being successful (selling 10-delta). But I've since switched to using TDA's "Probability ITM" number they provide in option chains.
For Caroy's 5-delta AMZN trade it doesn't make much difference, as you can see in this screenshot of AMZN 03Sep Puts:
The far-right column is Prob.ITM. Compare to Delta: they're very, very close.
But for something like GME, not so much:
So when I use Delta in the context of probability, I know it's not exact, and not its purpose, but it's close. I'm more likely to quote Prob.ITM actually, but u/caroy used Delta so I stayed with that (and in fact they're essentially the same for AMZN, for 5-delta Puts at least).
The math doesn’t apply as well for the approximation out on the wings. Regardless, when the option’s delta changes so does your probability of ITM expiry. The specific delta at a random point in the past has no bearing on future price movement.
You talk like since you sold a 5 delta put, if it’s sitting at the money a few days later and time to make a decision, you still expect that it’s more likely to expire otm than itm. Also the verbiage of a 10 delta strangle being 90% successful shows that you still don’t understand that options are priced in a risk neutral manner around an amount of variance. If the IV is too low it doesn’t matter how many times you are ITM vs. OTM at expiry. You have net negative PnL expectancy.
We’ve already been over this though. My post was mainly for the benefit of caroy. He made some good decisions and was asking for feedback so I wanted to let him know he’s on the right track with his trading process.
You talk like since you sold a 5 delta put, if it’s sitting at the money a few days later and time to make a decision, you still expect that it’s more likely to expire otm than itm. Also the verbiage of a 10 delta strangle being 90% successful shows that you still don’t understand that options are priced in a risk neutral manner around an amount of variance. If the IV is too low it doesn’t matter how many times you are ITM vs. OTM at expiry. You have net negative PnL expectancy.
We’ve already been over this though. My post was mainly for the benefit of caroy. He made some good decisions and was asking for feedback so I wanted to let him know he’s on the right track with his trading process.
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This is the basis of misunderstanding.
5 delta is almost (*) the chance of finishing ITM all other things being the same (CETERIS PARIBUS).
All other things don't stand still, so this metric is almost (*) valid only FOR a very short time, in a very narrow price range.
Also, the more you go far away from ATM....the more it loses significance.
So, no, you don't have to have faith in just DELTA, option trading has a lot of facets to be aware....
(*) in B&S jargon, DELTA is N(d1), while probab of finishing ITM is N(d2)--
N(d2) tends to N(d1) .... the lower the implied volatility and the shorter the time to expiration.... so sometimes Delta is a reasonable proxy of expiring ITM, but not always.
Moreover, as it has been said, it is a risk-neutral probability, not a real world probability.... but this is just math, not really meaningful for most (hint: if the "drift" is UP and anything but meaningful, as for now "delta" of call option is obliged to be really underestimated).
So, Caroy last week it has happened ...nothing!!!....so you can't deduce really anything about the strategy. Take this simple ..............test the strategy in real times of stress e.g. 2007 and/or 2008. Or in Aug 2015.
Of you do so, maybe you will have a better understanding, surely you will have more data to think about.
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