20-Delta Short Strangles

T

Theinkdon

Hi all. I came here to Elite Trader on July 16, 2021 and started a new trade journal about selling short strangles at 10-delta (and also 20-delta). At the time I was trading PAPER MONEY (PM) in TD Ameritrade's (TDA) Thinkorswim (ToS) platform and getting mind-blowing results using mostly meme stocks. So much so that people were saying it wasn't possible to replicate with REAL MONEY.

And that turned out to be true. Mostly. I finally got Tier 3 options approval from TDA to sell naked options (they'd first denied me and I had to wait 60 days to re-apply.)

So I'm going to run a 20-delta Short Strangle strategy USING REAL MONEY, logging my trades here daily.

After getting Tier 3 approval I found that TDA jacks up the Buying Power/margin requirement/collateral on highly-volatile stocks. Makes sense, I just wish they'd modelled PM to do the same; they got me excited that crazy returns like doubling in a month with 20-delta (20∆) short strangles (SS's) was possible. Comparing trades in the real-money account to a PM account, names like AMC, FCEL, GME, MARA & UVXY have 8 times the margin requirement. BBBY, MVIS, NEGG, & TNA are 6 to 7 times higher. KODK, MVIS, & VXX are 3 to 5 times higher. No wonder I was making crazy-high returns: PM wasn't accurately modelling the margin requirements.

After going through my whole watchlist, only 18 of 69 symbols I'd been regularly trading had the same BPR with real money as with PM. So about three-fourths of the returns I'd been getting in PM can't be duplicated in a real money account. But there's some good news: 8 other symbols have margin requirements 2-3 times higher than PM, but they still offer ROIs of 5% or more per week (the arbitrary metric I use). Some are actually quite high: WISH has 3x the margin requirement, and yet a 5DTE 20∆ SS priced at 0.28 Natural price against BP of $272, for a one-week ROI of 9% if held to expiration (I don't do that, but use it as a way to evaluate trades).

A little about me, then the ground rules of the strategy in the next post. I'm 58, male, married, an engineer by trade and disposition. I've been 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 learn 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.

After trying a lot of different things I've found that I like selling strangles. So some rules in the next post.
 
Ground rules:

  • TD Ameritrade Thinkorswim REAL MONEY margin account.
  • Log end-of-day balances. Measure drawdowns best-EOD to worst-EOD.
  • Stocks will be high-IV, >$5, >2 million shares avg. volume, and have weekly options.
  • Only selling short strangles (sell a Put and a Call in the same expiration, no protective wings).
  • Strikes will be the ones closest to 20% "Prob.ITM"* on ToS, whether higher or lower than 20.
  • Immediately place a Good till Cancelled (GTC) Buy to Close (BTC) order at 50% profit**.
  • Trades will be 10DTE or less, and offer >1%/day return on margin: (Premium ÷ BPR)/trading days
  • Mon & probably Tues trades will be for this Friday. Wed or later, next Friday.
  • No stop loss orders, but I can exit a trade at any time.
  • Position size 10%*** of NetLiq. Stay up to 80%*** invested.
  • First trade management technique will be to roll the untested leg toward the money.
  • That can include going all the way to a Short Straddle, but not inverted.
  • Next will be to roll out to the next week if possible for a credit. Otherwise go another week.
  • All rolls will be for a credit. Add up credits and change the BTC order to half of that.
That's all the rules/constraints I can think of. Let me know if there are others I should implement. I'm trying to make this as rule-based and repeatable as possible.

  • *Note: I call this a "20-delta" strategy because I started months ago with 10∆ where I was using delta as a proxy for probability. But I've since come to trust more the Prob.ITM number in ToS. It might make a 1- or 2-strike difference sometimes.
  • **Note: I like to take out commissions, both entry and exit, when calculating "half-profit." TDA charges 0.65 per contract, so if I sold a strangle for $50 (0.50 Credit) I'd subtract (4 x 0.65) = 2.60 for a Net Credit of 47.40. Dividing by 2 gives 23.70, then round down to 23, and the BTC goes in at 0.23. (It's a minor difference, 0.23 vs. 0.25, I just like to know that I got 50% of the net profit available.)
  • A related note: TDA has a Nickel Buyback program: no commissions on closing orders of 0.05 or less. Since it costs 1.30 to exit a strangle, it wouldn't make sense to exit at 0.06 because you'd effectively be exiting at 0.047. And a 0.07 exit is effectively at 0.057, so if the BTC calculates to 0.06 or 0.07, I'll set it at 0.05.
  • ***Note: 10% is far too aggressive but I chose it to minimize the number of active positions, and therefore the amount of time spent on this public experiment. Likewise, 80% invested in something like this is way too much, I'm just doing it now to help amp up the returns.
 
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I actually started trading this account on 8/12/21, and added some cash this weekend so it starts at about 10k NetLiq:
image-25.png


It comes into this week with these open trades:
AMD (3) 17Sep long 190 calls, currently valued at 0.015 each. If AMD turns around and those become worth something, I'll withdraw the profit. Because I want this to be strictly a 20∆ SS account from here on.
FSR (1) 27Aug 11.5P/14.5C SS for 0.38
PDD (1) 27Aug 60P/85C for 3.04
RBLX (1) 3Sep 75P/90C for 2.51
SOFI (1) 27Aug 13P/15C for 0.30
SSYS (2) 27Aug 20P/20C, a Short Straddle which started as a SS but I've had to roll it. Total credit 1.04.

New SS orders staged for Monday 8/23:
APPS (1) 27Aug 45P/52.5C at Natural price of 0.90. BP 614.
CLF (3) 27Aug 21P/25C at Nat of 0.45. BP 265.

TDA is crediting me the 5k I deposited over the weekend, but it's not showing up in Option BP yet. When it does I'll put on new trades to get to 80% invested. My next update will be after tomorrow's close, with a screenshot of EOD NetLiq, and info on any trades opened or closed.
 
Theinkdon said:
Ground rules:
  • Position size 10%*** of NetLiq. Stay up to 80%*** invested
More...

I will add one more rule: DON'T DO IT!! Unless you consider adding protective wings by longing options at reasonable strikes not like with strikes with 0.1 deltas.

Naked short strangle is never worth it no matter how you look at it at every angle. Naked short Strangles are betting on the underlying staying relatively non-moving or with low volatility so your strikes will never get hit but if the volatility of the underlying is low so is the premiums of the options that you are shorting and there is no money in that so you are shorting options on underlyings that have high IV meaning high volatility which means they will move a lot so the possibility of having your strikes being hit will be higher thus the higher premiums to compensate you for that possibility. But the problem is when the underlying moves against you either on the call or put side, the premium that you are earning on the winning side will never be big enough to offset the losses that you are incurring because you could be facing an unlimited loss if the loss is on the short call side and the premium that you have earned on shorting the put will never be enough to offset it because it's fixed. Google James Cordier and see how he liked it when he shorted the call on natural gas and the natural gas price exploded back in 2018. Although I wish this never happens to you, it will eventually when you are doing it long enough, especially when these are high volatility stocks that you picked. https://earlyretirementnow.com/2018/12/18/the-optionsellers-debacle/ I would strongly suggest you to study the payoff diagram in this article to see the potential loss you could be facing on both the short call side and the short put side. I would suggest you to do some scenario analysis to see what happens to your option position and your trading capital given your position size with the underlying's price at different levels. With your investment capital 80% invested, a small move can totally wipe your whole account out even with the position size at 10% of the net liquidation capital. If you don't know how to do scenario analysis, I will be happy to do one with you.

I don't know what kind of videos you watched on TastyTrade but have you watched videos about Karen the Supertrader? Your strategy sounds awfully similar to hers. She ended up losing millions just so you know. This strategy is a losing strategy in the long run. You could be making money, a long stream of them and then in ONE fell swoop, everything that you have earned will be gone and then some.
 
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Oh and one more thing: These ITM probability %'s in TOS does not mean a thing!! Once the underlying is making huge moves, all of these probability %'s go out of the door!! This nice 20% ITM probability becomes a whopping 80% or 90% probability because options are dynamic. They change with everything. Everything that you see now does not stay the same until the DTE; it can change dramatically during the interim and until then and everything changes accordingly.

Consider yourself warned.
 
Agree with JSOP, given the position sizes relative to capital, sooner or later you blow up on some 100%+ overnight gap (which will likely fade, but then you are already liquidated)...

If those 10k are money to play with, that's fine, but dont think of it as a viable long term income strategy...
Market is (mostly) very efficient, even in those meme stocks...
 
You listed a good list of general trading/housekeeping items for anyone to keep in mind, provided it is tweaked for the appropriate asset class. However, I didn't see anything on what pre-trade analysis you do when picking those strikes for the intended underlying?

Going merely based on delta exposure can be extremely naive and, as posters have pointed out, devastating. Selling volatility is by the outset lucrative, so since you posted here, I am hoping with an open mind and with the expectation to be scrutinized on your ideas; here are a few questions from my side; how do you form a view about the future (realized) volatility compared with the instantaneous volatility that you are selling, apart from having a look at the delta, and thinking "it has a 20% chance of ending in the money, so "Inshallah" it will only move within those probabilities"?

Also, since you are doing it on several underlying, all of them are high vol in nature (please don't say that it is from a "diversification" perspective because it would make the whole approach even more troublesome to accept). Now, do you perform any analysis on what happens to the price of these underlying when you have a 5,10... 25% drop in the overall market, or maybe this concept of markets falling is completely superfluous in this day and age? Still, I am asking it as you stated you were 58 years old, so you must have some memory of markets stretching back a few financial cycles :).

Sorry for the long post, but a few concluding remarks, you don't sell options based on the delta; ignoring or "it will never go there"ing... the skew risk can easily become your famous last words.

You sell options based on a fairly solid understanding of where the current volatility is contra its long-term mean, and from there go on to build a view about how long will it take to revert to that; this can depend among many things on how much it has overshoot or undershoot during the last shock that moved it from its long-term mean. From there, you go on about your business of either buying or selling the options and don't bother about the delta. Delta is never a premise for initiating a short option position, volatility is!!!
 
MrMuppet said:
You WILL blow up sooner or later by selling wings but then you're like 62 without a way to earn it back
More...
I'm hoping the OP is viewing this account as pure risk capital with being willing to put such a large percentage of the accounts value into play each week. I'm guessing blowing out a sub 50k account won't have much of an impact on his retirement plan and lifestyle. I dated a divorce attorney once. (not something I'd advise). Anyway she mentioned in financial discovery the only people who ever had any money were engineers and accountants. Everyone else seemed to live the all dash no cash over leveraged middle class dream. I think this strategy can be successful but I think the blow out chances are high as its too much capital utilization.
 
To all, thank you for your feedback, sincerely. It correlates with a lot of the advice I got in my first journal (which I don't think any of you were on), but a new point or two was also raised. I'll be happy to engage in discussions throughout the course of this experiment, but mainly:

Let's first see if it works, without pre-arguing to death why it shouldn't/won't/can't work. I don't mean that to sound harsh, but I came to the Journals section to document an experiment, not to ask if it should work or not. I know that the conventional wisdom is that it "can't" work, and maybe this experiment will prove that. Or maybe it'll show something else. Regardless, I'm committing to posting all my trades, adjustments, and EOD balances. (If it fails, everyone will believe it, but if it succeeds no one will; I can't help with that.)

I'm pretty confident it can work after trading it for many, many months over and over with both 10∆ and 20∆ strikes in TDA paper-money accounts. I know, "It's play money, it's not real, you get better fills, etc," but other than the margin requirements, I think it does trade pretty close to "real," because I was trading our Roth IRAs right alongside my PM trades, often on the same symbols (ICs & PCSs), and they seemed to fill, act, and close the same.

I've learned a lot about how short strangles act, and traded through some pretty gnarly drops and rallies (single stocks, not market-level events), so now I'm ready to try it with real money.

I appreciate the advice to not "blow up," but I'm only doing this with ten thousand dollars. Our net worth is north of 700k, but even if all that were gone, I'll still have a 20-year Federal retirement when I'm 62, plus Social Security a few years after that. So I'm going to be alright, but I appreciate your concern. But *IF* this works, would I scale it up? Absolutely. How much, I don't know; maybe 50k? If you could double that once or twice in a year that would be some nice play money.

And I've seen bear markets. I was one of the "geniuses" in 1999 & 2000 who could do no wrong, and I lived through 2008 with quite a bit more capital than I had in 2000. But I like the prospect of short strangles for even a bear market because of their non-directionality, but that'll have to remain to be seen.

As for my naivete in making these picks, I fully acknowledge that. But you know what? I'm tired of putting a lot of effort into researching a stock, buying or shorting it, then watching it go the other way most of the time. If blindly choosing a high-IV stock and selling way-OTM options on it "works", then I'll take that over the other way. That's what I'm out to prove or disprove here: whether it "works" or not.

To the point of "probability ITM" being just a snapshot in time: of course it is. But is there a better place to start? I've never said that I expect my trades to maintain an 80 or 90% chance of being OTM all the way till expiration, I've just found 10 or 20% to be a good place to start. And with the ability to roll the strikes up, down, or out (like you can with a Cash Secured Put, for example), I've found that they're easy to manage.

So yeah, that's the point of this journal: short strangles on blindly-picked high-IV stocks and let's see how they do. Comments on my trades or their management are most welcome. Any feedback on how to tweak the strategy are especially welcome. And if after a month or two of following this (assuming it works), if you try it yourself please share.

Take care,
Mike in Atlanta
 
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