20-Delta Short Strangles

[Theinkdon]

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?

@Magic You've hit the nail on the head. I didn't come in asking for feedback (I re-read my opening posts), and I had decided already what my experiment would look like, and I did just want to publish/showcase it publicly, to put my money where my mouth was as it were.

But not to say, "Oh look at this great new strategy I've synthesized from various places, it's the greatest thing ever and you should switch to it immediately." But more to say, "Hey, this has been working for me with TDA/ToS paper money, so I want to do it publicly with real money and let's see if it works. If it does, maybe someone can explain why, and/or together maybe we can tweak it to make it better."

That was my intent in starting this thread, and maybe I should've made that more clear. Don't get me wrong, I do appreciate the feedback, and I'm learning a lot, especially the catastrophic risk aspect of naked options that I need to really evaluate. And probably I'm out of place here as a small retail trader who's brand-new to options, but I didn't realize that coming in, so apogies for that. But I am indeed listening to everyone, and just yesterday purchased Sinclair's book Positional Option Trading, and have started trading strictly ICs in a PM account, which are of course short strangles with protective wings, to get the protection aspect I was missing, and to see if I can get them to perform on par ROI-wise with naked strangles.

So yeah, if going forward we could treat this as my experiment that I want to run this way, that would be best for me. If that doesn't interest anyone, I get it, but having started it I don't want to change the rules/methodology right off the bat. Or I could stop it and/or go away, but my OCD won't let me stop it, so since I'm going to run it anyway I might as well post it publicly and hold myself accountable.

And I know it's off to a poor start, but it should turn around and be okay (barring major market drops or stock explosions to the up-side).

As for earnings, I've read/heard almost everywhere that you don't want to hold SHORT strangles or straddles over earnings. LONG straddles (and maybe strangles?) as earnings plays, sure. Am I wrong in that? Because PDD sure gave me a spanking yesterday. I'd definitely sell strangles GOING INTO earnings because of the typically juiced-up premiums, but I thought we didn't want to hold them overnight when the earnings calls were being made. Please set me straight if I'm off-base.

I'm sorry if I come off sounding like I'm rebutting all the time, that's not my intent and I don't feel like I have, but I'll work on that. Some of it must come from this being my experiment that I simply wanted to run this way, but I think I've been hearing and often agreeing with the advice being given, and when I say, "But what about this....", it's either to further my understanding or challenge someone else's, like a debate.

Speaking of which, you're probably right, some*one*, whether a MM or his computer, is likely buying my strangles, but you didn't speak to my IC example: do we really think someone is going, "Oh thanks for offering this for sale, I was just looking to buy one with those exact strikes!" Maybe, maybe not. But what about a 12-leg Calendar Ratio Inverse Broken Wing Iron Lizard Fly, or some of the other crazy stuff people come up with? Is the market maker on the other side of that trade going, "Yeah, I'll take that bet with you."?
You were probably a MM and know, so you can school me on this, but I gotta believe in this day and age where almost all trading is done by computers (from what I've read), that that "package" of options goes into "the system" and gets parsed out option-by-option, at whatever their market prices are. I mean heck, I see it when my short strangles get filled: ToS gives me separate notifications with different prices for the Put and the Call; I don't get one "your strangle was sold for $x.xx." Correct me if I'm drastically mistaken about this, and then I'll start thinking about why someone would want to buy my strangles at a given price.
(And don't get me wrong, I do that when I go to buy a stock, play Devil's Advocate with myself and ask why someone is willing to sell it to me at that price. I just suspect that for options that buyer:seller / winner:loser interplay or psychology isn't very significant.
Peace,
Mike

 

[Theinkdon]

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.

@qlai Thank you for that. I AM just trying to learn. And call me stubborn if you will (it wouldn't be the first time), but I'VE SEEN THIS WORK several times over (granted, in paper money, but I've stated my views on that). I haven't harped on it b/c it's "only PM" in most people's eyes, but I had a 10∆ SS account double in 13 weeks and 2 days. And concurrent with the tail-end of that I had a 20∆ account double in 4 weeks. Then I did the 10∆ AGAIN and it was on track to double in 15 weeks before I stopped it and first came here in July to run it publicly. And I've done the 20∆ AGAIN and had it double in 5 weeks.

So I KNOW in my heart of hearts that this works, and I came here to prove (or disprove) it with real money and maybe find like-minded people to help me understand WHY it works and then how to make it better. But I've learned a lot here about the real portfolio-level risks of selling naked options, so I know I need to work on that. To that end, just yesterday I started PM-trading strictly Iron Condors (which I'd "done" before, but not with the lazer-focus I've applied to short strangles) to see if I can get them to give similar ROIs to what I've been seeing with SSs. I'm not ready to share any of that yet of course, but the 8 trades I've put on so far offered similar ROIs (Premium÷BP) as a lot of the strangles.

And besides all that, I read things like, "Yeah, with my super-whamodyne options strategy I'm making 20% a month." Or Jack Schwager's book Stock Market Wizards, where fund managers like Stuart Walton in the 1st chapter had average returns of 115% per year, audited, over 8 years. And just this morning I was reading a 2011 thread here on ET and a guy said he knew someone "who doubles his money each month trading Fx."
I just want THAT, all that. I don't need 100% per month, but 100% per year would be nice. And I know it seems like a pipe dream and people say it can't be done, at least not year-after-year, but it CAN be done, people are DOING it! And I've always said, "If *someone* can do it, then *I* can do it." (I don't apply that to things like art or music, where you probably need the innate talent, but maybe that's the same for investing: some guys "have it" and some just don't.)
But I'm trying to "get it," trying to learn HOW to do it, even if I don't end up being good at it.
So thanks again for the thumbs-up on my attitude.
Mike

 

[JSOP]

@JSOP
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.

Key word: Covered. Your positions are not covered. Anyway I've said all that I needed to say.

 

[JSOP]

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.

We are NOT telling him his "experiment" is futile. We are telling him it's downright dangerous and unnecessary. Plenty of people who have done exactly what he's doing have lost everything and even more, plenty so this experiment has already been proven and doesn't really need to be repeated again. He's even seen it happening while demo trading with his paper account so he knows the risk. It is like sticking your hand into a pot of boiling water of 100 degrees Celcius to test to see you will get 4th-degree burns. Its effects is already known and it's already been proven; plenty of people have lost their hands and even their entire arm and even died but no you still want to experiment it to see if it will be different with you because you are sticking your hand into the pot at a certain angle. It's not enough that you have already read about it and have even seen the effects in the computer simulator but no it's not enough, you really want to experiment it with your own hand.

He's not learning as much as what he says. He's already learned everything that he needed to learn by what everybody is telling him and what he's experienced from the paper trading account. He's not adding more to the learning by risking his real money except to maybe experience something grand like loss porn which I absolutely do not wish that upon him as much as I disagree with him.

Anyway...

 

[qlai]

It is like sticking your hand into a pot of boiling water of 100 degrees Celcius to test to see you will get 4th-degree burns

That’s a good analogy but maybe a bit extreme. How about an analogy at the other end of the spectrum:
Driving is dangerous. There are thousands of accidents daily and many are fatal. Yet we are all driving our cars without a second thought. Maybe we feel like we are in control and we know what we are doing, but the probabilities are there for us to get into an accident.

But I agree that selling naked options on meme stocks and expecting 50-100% returns is not something that one can build a trading career on, imho.

 

[JSOP]

That’s a good analogy but maybe a bit extreme. How about an analogy at the other end of the spectrum:
Driving is dangerous. There are thousands of accidents daily and many are fatal. Yet we are all driving our cars without a second thought. Maybe we feel like we are in control and we know what we are doing, but the probabilities are there for us to get into an accident.

But I agree that selling naked options on meme stocks and expecting 50-100% returns is not something that one can build a trading career on, imho.

No driving is something that we do for our day-to-day living and is necessary and is NOT dangerous if we drive prudently. Short strangle is not something that we need to do for our day-to-day trading and is far from necessary. There are plenty of other strategies that one can use to earn positive returns in their trading.

Both of his short strangles on APPS and RBLX are ITM btw and the one on APPS is already producing losses despite his rollup of the short put.

 

[tsznecki]

And besides all that, I read things like, "Yeah, with my super-whamodyne options strategy I'm making 20% a month." Or Jack Schwager's book Stock Market Wizards, where fund managers like Stuart Walton in the 1st chapter had average returns of 115% per year, audited, over 8 years. And just this morning I was reading a 2011 thread here on ET and a guy said he knew someone "who doubles his money each month trading Fx."
I just want THAT, all that. I don't need 100% per month, but 100% per year would be nice. And I know it seems like a pipe dream and people say it can't be done, at least not year-after-year, but it CAN be done, people are DOING it! And I've always said, "If *someone* can do it, then *I* can do it."

I think we found why OP is doing this.

So @Theinkdon the bigger question is why you feel you need to make those kinds of returns. You mentioned you are what 58 with a retirement fund of 700K? Seems like you are looking good for retirement.

 

[Theinkdon]

I think we found why OP is doing this.

So @Theinkdon the bigger question is why you feel you need to make those kinds of returns. You mentioned you are what 58 with a retirement fund of 700K? Seems like you are looking good for retirement.

Fair enough question, but I'm a little puzzled by it: aren't MOST of us on a website like this out to make a lot of money? Is there a figure for "too much"? My retirement "fund" isn't 700k, my net worth is 700k. Slightly more than half of that is in the house, but our payoff is in the neighborhood of 70k, so barring this housing bubble collapsing before I can sell it and move, my net worth IS essentially my retirement fund. But I'll also have a 20-year Federal retirement, plus SS, so I don't even really NEED a retirement fund.

But to get down to brass tacks, I want to retire early. But to do that I'd need to replace much of my 126k salary. And we want to retire to Spain. That will happen in 4 years at 62, but if I could make it happen sooner, then so much the better. So when I paper-traded 10-delta short strangles and found them doubling in 13 weeks one time and on track to double in 15 weeks in a different campaign, I thought, "Hmmmm, this could be it. 50k invested, double it 'just' twice in a year, and there's most of my salary replaced."

And beyond that, I have 7 grown kids (5 natural, 2 adopted from foster care), and it would be cool if I could give them some kind of system to follow so maybe THEY could retire early, like real early. So those are the 2 main drivers behind looking for those kinds of returns this late in life.

 

[caroy]

And we want to retire to Spain.

Cafe con Leche, Jamon Iberica, Manchengo Queso, El Sol. Te deseo exito! Planeo visitar vistiar a menudo.

 

[Theinkdon]

I've been convinced,
so I'm stopping the experiment!​

Thanks most of all to @JSOP for being the first and most persistent, finally getting "unlimited risk" through my thick skull. [Edit: really meant to say something like "life-altering", "portfolio-busting", or "lose-it-all" risk here.] But also thanks to @MrMuppet, @tsznecki, @W-M-A, @Magic, and any others I might've missed. To @caroy and @qlai who were following along, sorry to disappoint you.

Tbh, it wasn't the risk of a single stock like GME exploding upwards that scared me off, because I'd already sworn off it and AMC. And contrary to JSOP's contention (sorry in advance), I don't think/believe that *any* stock can become a GME at any time. Some, yes, as in buyouts, but those tend to be small and I wouldn't be trading them anyway. Something like TSLA is volatile, but doubling in a day? I can't really argue it beyond that, but just wanted to say that it wasn't the upside risk that persuaded me.

It was the downside risk that did it. Specifically when JSOP posted the article about the guy who "lost it all" in Black Monday, 1987. I read that, then I read the whole long Wikipedia article on Black Monday, which was scary enough, but THEN, at the end of that was a link to a list of the largest daily changes in the DJIA. Scroll down a page and look at the red table, the largest daily percentage losses, 20 of them. Black Monday tops the list, a 22% drop in one day. Okay, yeah, but that was 34 years ago for Pete's sake. But sort by date and the top 3 are from 2020:

• March 9th (Monday) - 8% #13 on the list of 20
• March 12th - 10% #5 on the list of 20
• March 16th - 13% #2 on the list of 20

The short strangle strategy might have survived the 8% Monday drop, if "only" invested at 50%, especially given Tuesday's rebound, but I don't think it would've survived the bloodbath that was the rest of that week and the next. (I may go back and analyze that with the ToS OnDemand feature using the trades I had on this week. If I do I'll post that here.)

And anyway, having truly undefined and unlimited risk in either direction is just plain dumb, which you guys were trying to tell me all along.

I think I mentioned in this thread that I would revisit Iron Condors to see if I could get them to "work" for me like short strangles had. To that end, late yesterday and into this morning I loaded up a PM account with 8 of those, 10% trade size, 80% invested, just like here, and while it's still very early and this could just be a fluke, that account gained 2.4% just today.

If that pans out I'll start a new Journal on it.

Thanks for all your help, guys, I really do appreciate it. Of course I'll stay active on this thread if anyone wants to chat.