20-Delta Short Strangles

[Theinkdon]

Day 2 Update Tuesday, 8/24

A bad day, down 9% from EOD yesterday:

And they still haven't credited me the Option BP from the 5k I deposited over the weekend, so no new trades today (and I'm really only about half invested margin-wise).

PDD was the cause of today's big drop. @JSOP yesterday noticed the position and that it had earnings this morning. One of the rules I have, which I failed to post with the Ground Rules, is: Don't hold short strangles over earnings. I hadn't noticed the earnings symbol in ToS when I put the trade on last Thursday, but I did see it yesterday morning and told myself, "I need to get out of this trade today." But PDD had gapped up 1.7% at the open, then cruised up 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," which I took to mean that earnings were out, and assumed that somehow ToS/TDA was wrong about the timing of the ER. But I didn't validate that, kept the position on, REAL earnings happened this morning, PDD gapped up 12% on the open, then went on to add another 10% for the day. So today I paid the price for breaking that rule.

When I started evaluating the PDD trade this morning at the open it looked like this:

The first column of prices, 1.41 & 1.29, were the trade (sold) prices for the 2 legs. (The Put's credit was really 1.75 due to a roll up last Friday.) The next column is the Mark, or current price. I could see that the trade was losing by more than 3x the credit received, 3.04, so I quickly changed the standing GTC BTC order to Market, and bought it back at 09:39 for 10.91, a loss of 3.6 times the credit received.
(BTC for 10.91) - (sold for 3.04) = 7.87/$787 loss (1 contract). Plus 6 commissions at 0.65 per is another 3.90, so call it a loss of 791. Lesson learned: if you're going to sell short strangles (which you shouldn't), NEVER hold them across earnings.

1. APPS was ITM on the Call side (53.30 on a 45P/52.5C), so I rolled the Put up to ~30∆ (51.50) for 0.63. It's now a 51.5P/52.5C at 1.53 total credit. It closed at 53.05, inside the upper BE.
2. RBLX started today strong and was 88.05 on a 3Sep 75P/90C. Its Put was now at 5∆, so I rolled it up to 20∆ (81) for 0.63. Now an 81P/90C for 3.14. (Maybe I shouldn't have made this adjustment, we'll see if the stock whipsaws back to bite me. But it closed at 89.26, so it's close to breaching the Call side.)

 

[tsznecki]

@Theinkdon The above post ^ is real money?

 

[JSOP]

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

Well the more people I can convince to stay away from this absolutely destructively risky trading strategy the better. It's kinda my way of giving back, helping people to see the real risks of trading options. At the same time, it also improves the reputation of the trading industry. Now when and if they don't listen and still choose to believe in themselves and engage in this naked shorting strategy and lose everything they have and some, they can't turn around and accuse the industry of being unscrupulous, greedy and taking advantage of inexperienced investors etc. etc.

They have now been warned and warned amply about the risk of what they are doing and if they still get wiped out, they know who to blame.

 

[JSOP]

Day 2 Update Tuesday, 8/24

A bad day, down 9% from EOD yesterday:
View attachment 266571
And they still haven't credited me the Option BP from the 5k I deposited over the weekend, so no new trades today (and I'm really only about half invested margin-wise).

PDD was the cause of today's big drop. @JSOP yesterday noticed the position and that it had earnings this morning. One of the rules I have, which I failed to post with the Ground Rules, is: Don't hold short strangles over earnings. I hadn't noticed the earnings symbol in ToS when I put the trade on last Thursday, but I did see it yesterday morning and told myself, "I need to get out of this trade today." But PDD had gapped up 1.7% at the open, then cruised up 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," which I took to mean that earnings were out, and assumed that somehow ToS/TDA was wrong about the timing of the ER. But I didn't validate that, kept the position on, REAL earnings happened this morning, PDD gapped up 12% on the open, then went on to add another 10% for the day. So today I paid the price for breaking that rule.

When I started evaluating the PDD trade this morning at the open it looked like this:

The first column of prices, 1.41 & 1.29, were the trade (sold) prices for the 2 legs. (The Put's credit was really 1.75 due to a roll up last Friday.) The next column is the Mark, or current price. I could see that the trade was losing by more than 3x the credit received, 3.04, so I quickly changed the standing GTC BTC order to Market, and bought it back at 09:39 for 10.91, a loss of 3.6 times the credit received.
(BTC for 10.91) - (sold for 3.04) = 7.87/$787 loss (1 contract). Plus 6 commissions at 0.65 per is another 3.90, so call it a loss of 791. Lesson learned: if you're going to sell short strangles (which you shouldn't), NEVER hold them across earnings.

1. APPS was ITM on the Call side (53.30 on a 45P/52.5C), so I rolled the Put up to ~30∆ (51.50) for 0.63. It's now a 51.5P/52.5C at 1.53 total credit. It closed at 53.05, inside the upper BE.
2. RBLX started today strong and was 88.05 on a 3Sep 75P/90C. Its Put was now at 5∆, so I rolled it up to 20∆ (81) for 0.63. Now an 81P/90C for 3.14. (Maybe I shouldn't have made this adjustment, we'll see if the stock whipsaws back to bite me. But it closed at 89.26, so it's close to breaching the Call side.)

APPS and RBLX are getting close to be your next PDD's. Both of the stocks are poised to break higher imo if there is no negative news. Oh well, at least your 5K of your deposit will be credited soon, that should ease your pain a bit.

 

[Magic]

You are selling strangles because you think they are priced above fair value, which means you are expecting to make money over time doing this. Do you think a counterparty is willing to overpay (vs. fair value) for the strangle you are selling most of the time when there is no news, but they no longer buy for rich prices when there is a known risk event (earnings release) in the expiry? If so, why do you think that?

 

[Theinkdon]

@Theinkdon The above post ^ is real money?

@tsznecki Yes, real money. If it was paper money it would show "Simulated Trading" in the upper-left corner, like this screenshot from my first journal that was using paper money:

 

[Theinkdon]

APPS and RBLX are getting close to be your next PDD's. Both of the stocks are poised to break higher imo if there is no negative news. Oh well, at least your 5K of your deposit will be credited soon, that should ease your pain a bit.

@JSOP I don't try to predict stock price direction. I trend-follow though, and APPS does look like it's trending up. That would've been visible yesterday morning when I placed the trade, if I had looked at the chart. But I don't, not at this stage in my testing. I HAVE recognized though that I should be giving the charts at least a cursory glance, a qualitative review of price action. If I'd done that for APPS I might not have taken that trade, or might have skewed it to the Call side.

The appeal to me of selling calls and/or puts (ie, separately or together as a strangle) is using the 'probabilities' (imperfect as they may be) to earn premium from unlikely scenarios.
Don't we do that when we sell Cash Secured Puts? I suspect that most people who sell those don't REALLY want to be assigned the stock, they're just betting that the price "won't go there." And if they get assigned they're okay with owning the stock at that price. Same with covered calls: we usually don't WANT our stock called away, we're just using it as bait to attract premium, betting that the price "won't go there."
If APPS and/or RBLX break out I'll adjust the trades per the plan.

 

[Theinkdon]

You are selling strangles because you think they are priced above fair value, which means you are expecting to make money over time doing this. Do you think a counterparty is willing to overpay (vs. fair value) for the strangle you are selling most of the time when there is no news, but they no longer buy for rich prices when there is a known risk event (earnings release) in the expiry? If so, why do you think that?

@Magic This will elicit howls of derision, but I'll say it anyway: I don't think anything about the values of the strangles. I've observed that selling strangles on high-IV stocks out at 10 to 20-delta is profitable. Period. Maybe that's because volatility tends to revert to the mean (a theory I subscribe to), but it doesn't really matter why, as long as they are profitable. (Excluding the systemic or single-name risks we've talked about.)

As for counterparties thinking that buying my strangles is a smart move, I don't think there ARE any counterparties buying my strangles. A single stock, yes, there's a counterparty, and we have differing views about owning that stock. Maybe the same for a single option, but you've got the MM in the middle providing liquidity, so maybe he buys it before passing it along to someone who has an opinion on the fair value of that option.
Surely if I was selling Iron Condors we wouldn't be talking about who was buying THAT particular condor at THAT particular moment? We'd NEVER get filled if we had to wait for a customer looking to buy our particular product. Don't all the individual options that make up the IC I'm selling just go into "the market" and get bought or sold, maybe even on different exchanges? Am I wrong about that?

 

[Magic]

The market maker fills your strangle simultaneously most of the time. He is buying it for the credit you receive. Unless you are hitting a resting order.

Suppose that’s your prerogative to dismiss theory and trying to understand market dynamics but I’ve always found it helpful to think about the mechanics in addition to referencing trailing statistical data.

There is an entity paying real money to own your strangle when your put your order in. Understanding what he is doing and why will help you, I think.

And you’ve decided to avoid earnings for some reason, either just because you feel like it or because you believe they are less rich than non-earnings vol, for a reason you can’t articulate.

It’s fine to be a hobbyist and I am with @tsznecki , trading these things with a disposable amount of capital is a fine learning endeavor. It’s just a little funny when you come in asking for feedback when the reality is more like you have decided what your experiment is going to look like already and you just want to showcase it to us. Fair enough though, the peanut gallery is playing along because why else are we here most of the time?

For some reason I feel mildly investing in you understanding at some point that options are priced around an amount of variance by market consensus, and that is the PnL driver here regardless of your breakdown of ITM/OTM expiry and your delta but there’s only so much we can do when you aren’t really trying to advance your understanding in the face of constructive criticism and instead mostly just replying with rebuttals over and over.

You mentioned hurt feelings before so please know I’m not trying to get on your case. Every once in a while a newcomer has a little extra something that draws people in even though we’ve already played this game many times.

 

[qlai]

but there’s only so much we can do when you aren’t really trying to advance your understanding in the face of constructive criticism and instead mostly just replying with rebuttals over and over.

I actually like his attitude. He is trying to learn. He is just not giving up on his experiment just because people telling him that it's futile.