Just pull out of this thread, dude. He doesn't get the difference between probabilities and expected value either.
Give him a year and he'll be gone while 5 new guys will come up with the same brilliant idea
20-Delta Short Strangles
- Thread starter Theinkdon
- Start date
Give him a year and he'll be gone while 5 new guys will come up with the same brilliant idea
Selling premium (straddles, strangles, iron condors, whatever) can be a profitable strategy.
but to be successful you have to have a view on vol that is different than the market’s view. And then you have to size appropriately to account for the asymmetric payout if you are wrong.
td implied probabilities aren’t a prediction of vol. They are just a calculation of what the market is expecting.
but to be successful you have to have a view on vol that is different than the market’s view. And then you have to size appropriately to account for the asymmetric payout if you are wrong.
td implied probabilities aren’t a prediction of vol. They are just a calculation of what the market is expecting.
JSOP,
Thank you for taking the time to research and lay out that GME hypothetical trade, now I understand what you meant earlier about "scenario analysis." I've actually done some of that with the ToS "OnDemand" feature. And you're right, I HAD already seen that in my paper trading, with AMC. It "only" tripled from when I sold the strangle, and I traded through it just for the experience, but it was painful. So yeah, your GME example (and I watched that happen in real time) isn't something I'd want to face again. (FWIW, I stopped trading GME & AMC after that experience. And now because of the BP multipliers with real money, I've pretty much been forced to stop trading what I think of as second-tier memes: BB, FUBO, KODK, LAZR, MARA, NEGG, RIOT, WKHS, etc.)
And I read the article about the guy in 1987's Black Monday, and did some further reading about that on Wikipedia and other places; scary indeed for a short Put seller. The fairly slow Feb/Mar 2020 sell-off I think one could survive, but like you're saying, not a huge one-day drop like that.
All that said, I'm starting to get it, thanks to you all banging me over the head. At this moment I'm inclined to keep this 10k experiment going just because, but I'm definitely going to rethink the systemic risk side of short strangles.
But what's a guy to do if he's looking for out-sized returns, something in the neighborhood of 30-50% per year? Is that even possible? And I don't mean every single year, but is there some options strategy that in a "normal" year would give you a reasonable expectation of that? I like short strangles a LOT due to their non-directionality, that you collect 2 premiums for 1 collateral, and that naked legs are easy to roll. Are Iron Condors the answer? They share points 1 & 2, but aren't easy to adjust. I've tried them and they did okay, but naked is SO much better for returns. But now that I'm starting to see the real risk of strangles, the catastrophic, wealth-destroying risk, maybe ICs are as good as it gets? I haven't focused on them to the extent that I have short strangles, so I think I'll start a PM account doing just ICs, and I'll do it on the exact same symbols as I'm doing here, so I can directly compare them to SSs.
Yes, I did have a birthday, July 21st, thanks for noticing and for the birthday wish.
You noticed my PDD trade was over earnings, very astute. That was my bad, and I almost mentioned it in yesterday's EOD update, but I thought I might get away with it so I didn't. I'll discuss it in today's EOD update, but that's actually one of my rules (and one I forgot to post here): don't hold these through earnings.
When I put that trade on last Thursday I missed the little "earnings call" symbol that TDA/ToS helpfully provides next to the symbol. When I opened the account yesterday (Monday) morning I saw it and thought, "I need to be out of this trade today." But PDD had a pretty strong run yesterday (gapped up 1.7% at the open, then added another 2.6% on the day), and when I skimmed through the news on Yahoo Finance looking for "why," I saw a headline about a "sales beat," took that to mean that earnings were out, didn't validate that, then paid the price for that mistake today.
So: Don't hold short strangles over earnings. (I've never played LONG strangles on earnings, but this might've been a good one for that?)
MrMuppet says I don't understand a lot of this and will probably be gone in a year, with 5 others replacing me. I freely admit the former and am starting to agree with the latter. Selling premium is just SO seductive though! I'm at least glad I'm not the only one who's fallen for it.
tsznecki says I need to get burned before I'll understand, and that's pretty accurate too. The thing is, I've seen it work with PAPER MONEY on TDA's Thinkorswim platform, and say what you will about the fidelity of that, my (short) experience is that it trades the same as (or very close to) real money. So if it worked for me there at 10-delta and 20-delta (not so much at 30-delta), then I think it HAS TO work with real money too. So I'm determined to try it, hence this experiment.
And honestly, I'm starting to really understand and appreciate how a quick market drop can really kill a Put seller, and how a stock that can 10-times in a day or two can also kill you; but aside from those 2 things, short strangles are very lucrative, they fit my trading personality, and they're easy to manage (if you "believe in" rolling). So more than anything, I WANT it to work. And yes, it might indeed take me getting burned to give up on it.
Thanks everyone for your feedback and insights, I really do appreciate them, even the ones that might hurt my feelings. And I know I must come off as incredibly naive to the veterans here who've seen it all and done most of it, but I'm not un-intelligent, at least as measured by some of the common metrics. I'm just trying to make options "work" for me, better than mutual funds, ETFs, and stocks have.
And I know how frustrating it is to watch others about to make the same mistakes you've either made or seen made over and over (I've raised 7 kids), and that that's where you guys are coming from. But I just feel like there's something "to" these short strangles and I need to suss that out, for better or worse.
I know that systemic market risk is always going to be there, but if a guy:
- stayed away from meme stocks (or stocks below a certain IV or IVR or some other measure of that),
- risked a smallish amount of net worth on these (10%? 5%?),
- kept trade sizes <5%
- stayed <50% invested (or an even lower number?)
Thanks.
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My last cents on this topic, and then I will leave this discussion 
. Mike fundamentally short strangles are the basis of 80% of all premium-selling ideas; in one way or another, you can ratio it in complex combos by owning the closer strikes and being naked short on far-out strikes and build the ratio that way, even for plain simple short strangle it is possible. And people have done it for long enough to accumulate wealth, yes, on the 15 and 20 deltas.
However, you have to know that skew risk is nothing to joke with. Your own psychology will probably devastate you more than anything else during a good and proper vol increase; however, you may not feel too much anxiety if you are risking 10K only.
Some people here are warning you against the way you are attempting to do it, add some basic hedging strategy into the mix, and you will live long enough in the markets to do it as a proper business. Ad some understanding about volatility and proper probability calculations based on the underlying's actual distribution, and you can move serious capital into your account, and you will do very well. You see, the delta probabilities of the broker systems are calculated based on Normal Distribution; if the underlying moved in accordance to the Normal Distribution, then there would never be a need for anything else to bother than 3.5 maximum 4 standard deviations from the mean price. Have a good look at the historical return for any time span on any stock you wish, and tell me if you have one observation that exceeds 4 standard deviations on either side? If yes, then trash the normal distribution and any probabilities calculated based on that assumption for the underlying (you will find that this is always the case!).
Do it the way you are planning to do it, and you will be hooked worse than a pensioner at vegas slot machines feeding in your account with 10K EVERY 8 TO 11 MONTHS THINKING THIS TIME, I WILL NOT MAKE THE SAME MISTAKE AS THE LAST TIME.
In conclusion,...
Get a good understanding of Volatility and its effect on the P&L and derivative prices.
Get a good vol model to get an idea about the long-term vol structure; a basic GARCH 1:1 is sufficient.
Get a good probability calculator if you are going to go with the "it will never go there" approach AKA "the 0.05 to 20 delta strikes" approach, with a probability calculator based on Fat-Tail distributions at least you are not screwing yourself up from the get-go by assuming Gaussian distribution
I wish you all the best, Mike, in Atlanta, and I hope you are going to be successful or at least achieve your objective with this otherwise quite predictable experiment
. Mike fundamentally short strangles are the basis of 80% of all premium-selling ideas; in one way or another, you can ratio it in complex combos by owning the closer strikes and being naked short on far-out strikes and build the ratio that way, even for plain simple short strangle it is possible. And people have done it for long enough to accumulate wealth, yes, on the 15 and 20 deltas. However, you have to know that skew risk is nothing to joke with. Your own psychology will probably devastate you more than anything else during a good and proper vol increase; however, you may not feel too much anxiety if you are risking 10K only.
Some people here are warning you against the way you are attempting to do it, add some basic hedging strategy into the mix, and you will live long enough in the markets to do it as a proper business. Ad some understanding about volatility and proper probability calculations based on the underlying's actual distribution, and you can move serious capital into your account, and you will do very well. You see, the delta probabilities of the broker systems are calculated based on Normal Distribution; if the underlying moved in accordance to the Normal Distribution, then there would never be a need for anything else to bother than 3.5 maximum 4 standard deviations from the mean price. Have a good look at the historical return for any time span on any stock you wish, and tell me if you have one observation that exceeds 4 standard deviations on either side? If yes, then trash the normal distribution and any probabilities calculated based on that assumption for the underlying (you will find that this is always the case!).
Do it the way you are planning to do it, and you will be hooked worse than a pensioner at vegas slot machines feeding in your account with 10K EVERY 8 TO 11 MONTHS THINKING THIS TIME, I WILL NOT MAKE THE SAME MISTAKE AS THE LAST TIME.
In conclusion,...
Get a good understanding of Volatility and its effect on the P&L and derivative prices.
Get a good vol model to get an idea about the long-term vol structure; a basic GARCH 1:1 is sufficient.
Get a good probability calculator if you are going to go with the "it will never go there" approach AKA "the 0.05 to 20 delta strikes" approach, with a probability calculator based on Fat-Tail distributions at least you are not screwing yourself up from the get-go by assuming Gaussian distribution
I wish you all the best, Mike, in Atlanta, and I hope you are going to be successful or at least achieve your objective with this otherwise quite predictable experiment
My last cents on this topic, and then I will leave this discussion
However, you have to know that skew risk is nothing to joke with. Your own psychology will probably devastate you more than anything else during a good and proper vol increase; however, you may not feel too much anxiety if you are risking 10K only.
Some people here are warning you against the way you are attempting to do it, add some basic hedging strategy into the mix, and you will live long enough in the markets to do it as a proper business. Ad some understanding about volatility and proper probability calculations based on the underlying's actual distribution, and you can move serious capital into your account, and you will do very well. You see, the delta probabilities of the broker systems are calculated based on Normal Distribution; if the underlying moved in accordance to the Normal Distribution, then there would never be a need for anything else to bother than 3.5 maximum 4 standard deviations from the mean price. Have a good look at the historical return for any time span on any stock you wish, and tell me if you have one observation that exceeds 4 standard deviations on either side? If yes, then trash the normal distribution and any probabilities calculated based on that assumption for the underlying (you will find that this is always the case!).
Do it the way you are planning to do it, and you will be hooked worse than a pensioner at vegas slot machines feeding in your account with 10K EVERY 8 TO 11 MONTHS THINKING THIS TIME, I WILL NOT MAKE THE SAME MISTAKE AS THE LAST TIME.
In conclusion,...
Get a good understanding of Volatility and its effect on the P&L and derivative prices.
Get a good vol model to get an idea about the long-term vol structure; a basic GARCH 1:1 is sufficient.
Get a good probability calculator if you are going to go with the "it will never go there" approach AKA "the 0.05 to 20 delta strikes" approach, with a probability calculator based on Fat-Tail distributions at least you are not screwing yourself up from the get-go by assuming Gaussian distribution
I wish you all the best, Mike, in Atlanta, and I hope you are going to be successful or at least achieve your objective with this otherwise quite predictable experiment
Thanks for this great advice. Obviously I don't understand most of it, but I'll study in the directions you pointed out.
I think what you said about stocks not actually following a Gaussian/Normal distribution is probably pure gold. And that broker systems use Normal distribution.
I've seen talk of Fat-Tail distributions, so I'll pursue understanding that. And getting "a good probability calculator" intrigues me; I'll have to definitely look into that.
As well as a good volatility model. And I have no idea what "GARCH 1:1" means at this point.
Thank you for taking the time to post all that and your confirmation that with proper understanding and implementation "it CAN be done." That gives me hope.
Thanks for the great link
See this is the problem with demo trading with paper trading accounts is that you have no feeling for the real impact of your trades. If this had been a real account with real trades back on that day, you wouldn't have been able to "trade through" it; your money would've been instantly gone, your $10K trading capital completely wiped out in just a matter of seconds and you would've still owed the brokerage $18K+ and that is just for trading ONE contract as I illustrated to you. You wouldn't have been able to continue to trade not until you would've had to dip into your savings to come up with the $18K+ to make up for the shortfall first and if you refuse, you would've been sued by TDA just like that guy in that article. But since this is just a paper trading account, nothing happens and you think you could still survive it.
And he's only shorting the put that technically does not have unlimited loss and this is what happened to him. Whereas you short the call, and with shorting the call, your loss is unlimited. GME on Jan. 27 only went up to $347.51, what if it went up to $500, or even $1000 as many people were expecting it to do?? If this could happen to GME, this could happen to any stock, any time, anywhere. There is no telling of what, when or where. You just never know and this is a risk that you will always face whenever you short options naked or anything naked, rather.
If you REALLY want to short strangles, the only way to do it is with protective wings at strikes that will produce that you are comfortable with and/or where you think the price will fall/rise to. This way you will still lose but your loss will be limited or controlled. Everything in options trading is not about returns; it's about risk, knowing where the risk is and how to control it.
Yeah @MrMuppet is absolutely correct. Without effective controls in place to control the risk in trading options, all of your profits are not income; they are payday loans that you will have to pay back one day with interest that is lot higher than any loan sharks would charge. Shorting options is very enticing and deceiving but you need to realize there is no free lunch in this world so how is it that somebody is just willingly letting me earn hundreds of dollars week after week after week? If you are winning from your short options, the person who bought your options must be losing so why is he/she so willingly letting you win all the time? They are not Warren Buffet, they are traders just like us so why would they be willing to let you win all the time? This is what all those places that tout shorting options as incomes don't don't make you think about.
YES!!!!! and any forms of NAKED options shorting.
I just illustrated to you how much you can lose by shorting just ONE contract. That's the smallest trade size that you can do in options. And you think avoiding GME can save you? Honestly any stocks, any market, any instrument can become GME in a matter of seconds.
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Well that was a real trading day that really happened in real life. Everything in that trade was real. If OP had really traded GME during that period, he wouldn't have even lasted until Jan. 27. His account would've been wiped out by Jan. 25, just 5 days after he opened the position. On Jan. 25, by 10:30 AM GME had already shot up as high as 158, more than double of his strike of 58 in my example and all of the net liquidation capital of $10K would've been gone. Of course the price came back down a bit so if he didn't choose to get out while the price came back down to take a loss, by Jan. 26, his account would've been gone for good by Jan. 26, or 90% of it.
But honestly like I said before, any stock can become GME at any time. This is why naked shorting is so risky.