20-Delta Short Strangles

Theinkdon said:
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.
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First of all thank you for listening and not take offense when sometimes what we (mostly me) say may sound too harsh and direct. And I am really happy for you that you have chosen to stop this experiment with the naked short strangles.

Yes you are right that 100% of the traders aim for high returns when trading and really that's what trading is for. Nobody says I want to trade to just earn T-Bill returns. And it's not the downside risk that we are concerned about. In fact it's the downside risk that gives you the higher returns. Like I said before, there is no free lunches in this world especially in the financial world; every single % of return is compensating for possible downside/upside risk. Without these risks, then your return will be pretty much like investing in T-Bills. What we are most concerned about is the uncontrolled exposure to these downside/upside risks by engaging in naked short selling. Short selling options or in any instrument by itself is not too bad of an investment strategy but naked shorting is. If you still want to short options, short them covered, either with underlying or protective longs in options. Many have suggested iron condors. It's a great strategy that can easily produce decent returns but it's certainly not the only ones. Here is a website that I find is pretty comprehensive in describing all of the option strategies that are out there. https://optionalpha.com/handbook/strategies And for each strategy, it actually goes into quite lengthy detail in describing their formation, their structure, their breakeven point(s), their profit/loss potential at different price levels and etc. I refer to this website from time to time when I am exploring new strategies and I find it quite useful.

Bottom Line: Anytime when you want to short something, not just in options but in any instruments, make sure it's covered in a certain way and you will be fine. Options is certainly not the only instrument out there that can produce decent returns. With your $700K potential investment capital, you should be able to earn enough for you to retire in Spain comfortably.

Looking forward to your new trading journal of safer shorting in options and your perhaps photo or travel journal of Spain.

Good luck and good trading!!
 
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qlai said:
Not to get personal, what percentage returns would you consider realistic and from what percent of total capital at risk? I doubt very much anyone can make a living (in US or Spain) selling premium on low volatility stocks and/or indices.
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My average ROC is around 14% for the last 5 years with approximately 86% win rate. Its matched the buy and hold of SP500 index but with a smaller drawdown.
 
Retief said:
He has a couple of more blog posts that might interest you:

Selling Naked Strangles: The Math; and
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It is strange that he's heard of Victor Niederhoffer who blew up his entire investment business and still had to mortgage his house, borrow money from his children and sell his antique silver collection to pay back the losses from shorting naked puts on SPX in 1997 and yet he still concluded that doing naked short strangles on indices is ok and even more wrongly concluding that it's not the strategy that blows up accounts but the position size and leverage. All those calculating of the risk/reward of the naked shorting strategy for stocks was all for nothing then? And somehow he thinks it's different when it comes to indices?

He is correct in quoting Nassim Taleb at the very end though: “The problem with experts is that they do not know what they do not know.” But I will add that some experts still do not know even when they do know.
 
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swingtrader123 said:
5% of capital. 2020 did skew the result but not by much.
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5% of capital in short strangles is earning you 14%/yr on a portfolio level?? See, that's what I'm talkin' about: I see that and go, "Heck, if I could do that at 50% utilization that would be 140% per year!" Too much risk? Then back off to only 25% and make 70%/year. That's surely not too much risk, is it? I gotta think that would survive March 2020, and maybe even Black Monday 1987.

@swingtraderf123 You've apparently been trading short strangles for 5 years. With those kinds of returns, and based on your experiences with how they behave, have you thought about scaling them up? If you have and decided not to, why was that?
Thanks.
 
qlai said:
You are generating 14% returns on 5% of capital trading low IV stocks. Sorry, I don't buy that. Where do you think your edge is? What kind of stocks are we talking about?
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Forgot that piece. Waiting to hear also.
 
qlai said:
You are generating 14% returns on 5% of capital trading low IV stocks. Sorry, I don't buy that. Where do you think your edge is? What kind of stocks are we talking about?
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I knew that was going to be your response. First, low IV does not mean no IV; IV less than 30% is want I am talking about. You think you can't get good credit on the SPX, ADBE, CMG etc.? How I achieve it is my secret sauce, but i mainly has to do with stock selection and trade management: when to exit and/or adjust. It took me decades to figure out what works for me. Whether you believe me or not it does not matter. In fact it is good that you don't because I need a counter part to my trades. After all, options is a zero sum game.
 
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