Ever a good time to sell option premium on S&P 500?

[Magic]

Sell option premium, especially the overly expensive OTM puts, when the VIX is 25+ and buy option premium when the ViX is flatlining between 10 and 12. Pretty simple.

You’d think so, wouldn’t you? But backtest a continuous front month short strangle for example over the past dozen years and check out what VIX levels it suffered the highest drawdowns and what levels it has the most attractive return metrics and I think you’ll be surprised.

Short vol is a little more nuanced than newcomers think. They can look at a chart of the VIX and come to the conclusion that buying long-dated VIX puts when it’s 30+ is a free win. But actually the world already knows it has mean reverting tendencies so steep decay is priced into those options. You need to be right on the timing of the logical reversion to make profits and that part isn’t so easy as shorting a high number.

Again, @short&naked , you shouldn’t be looking for a high premium number in order to have less leverage and be safe. The times you’re less “leveraged” vs. value of UL very well might be the times when you’re taking the most risk w/ amount of vol realized beyond your short strikes. IV isn’t just a number that fluctuates while the market characteristics remain unchanged. It’s the consensus option on what we’re actually going to realize within the time period. Start looking at IV vs. RV within a subset of options and see if you can start isolating the times when the two are most dislocated. Then you’ll be one step closer to answering your question.

 

[zenostiffler]

"You’d think so, wouldn’t you? But backtest a continuous front month short strangle for example over the past dozen years and check out what VIX levels it suffered the highest drawdowns and what levels it has the most attractive return metrics and I think you’ll be surprised."

Agreed. It is NOT the way VolSkewTrader thinks it is. Hence the vital importance of good back testing. Try permanently holding around 15% Vix Puts with a strike at the level of cash Vix (OTM as regards futures on which the options are based) around 5% deep OTM calls and simply roll every month. Use the longest dated expiries. Invest the 80% balance in Shy or further out if you want the interest rate risk.

VolSkewTrader will be surprised by the results.

My software here:

 

[rallymode]

Contrary to popular belief you should be selling vol when the vix is low and the market is dead. There’s some exceptions but if you run your stops and hedges properly there is usually a nice premium to realized vol that can be “collected”.

 

[newwurldmn]

Contrary to popular belief you should be selling vol when the vix is low and the market is dead. There’s some exceptions but if you run your stops and hedges properly there is usually a nice premium to realized vol that can be “collected”.

Shhhh! Stop giving away the secret!

 

[Magic]

Contrary to popular belief you should be selling vol when the vix is low and the market is dead. There’s some exceptions but if you run your stops and hedges properly there is usually a nice premium to realized vol that can be “collected”.

It’s hard to find good discussion about hedging and risk management. I do things un-hedged for the most part but scale size to a level I feel I can absorb risk including tail risk. But tails are so far away from the usual distribution of outcomes that the idea of hedging them away so I can re-adjust size is appealing.

But to do that I end up paying a fair price for the hedge and it ends up kind of defeating the purpose. It’s almost like you need expectancy on a separate strategy that’s also negatively correlated to the first one. I’ve thought about partial hedges and trying to model where you get the most bang for buck via cost vs. risk reduction? But haven’t developed crystallized any ideas that seem to be a material improvement yet.

Any broad comments about the process of getting utility out of stops and hedging?

 

[zenostiffler]

" I do things un-hedged for the most part but scale size to a level I feel I can absorb risk including tail risk. But tails are so far away from the usual distribution of outcomes that the idea of hedging them away so I can re-adjust size is appealing."

I know exactly how you feel. I managed my trading in XIV in much the same way and fortuitously put on the hedge (deep OTM calls on SVXY) before the big vol spike earlier in the year. I emerged with a year's worth of profits on XIV unscathed. I was also hedging with the ten year Treasury ETF.

I then made an ass of myself in cryptocurrencies assuming the boom would last a little longer and tried to flip ICO's right at the top of the market. Unhedged as regards ETH.

I'm currently re-assessing my entire attitude to the markets. I spent quite a while looking at Quantopian and was asked by Two Sigma to co-operate on something. But frankly this outsourcing for peanuts really does not get my vote.

Its the modern form of slavery - get a whole bunch of experienced and bright people to compete as gladiators for no reward whatsoever and then maybe the lucky winners gets his algo hired for a few pence.

Hmm......Looking for inspiration.

 

[rallymode]

It’s almost like you need expectancy on a separate strategy that’s also negatively correlated to the first one.

Any broad comments about the process of getting utility out of stops and hedging?

Actually, that's pretty spot on. It runs along the lines of what i do every day. I would take correlation risk over delta risk any day. Tails are hard to predict and also very hard to hedge. The best hedge is to not have a position during the event. However, you can hedge most market downside very well, the first few sigmas at least. In broad terms, i like being long more convexity than i am short and/or having long vol closer to spot than the vol i am short. If i can't find any of that at a good price, i turn to short deltas and lean on the assumption that delta usually leads vol.

If i can't find a decent hedge i won't trade. A lot of vol traders make the mistake of having positions on 100% of the time. Trading your personal account allows the flexibility to have no positions. Use it.

 

[Magic]

Actually, that's pretty spot on. It runs along the lines of what i do every day. I would take correlation risk over delta risk any day. Tails are hard to predict and also very hard to hedge. The best hedge is to not have a position during the event. However, you can hedge most market downside very well, the first few sigmas at least. In broad terms, i like being long more convexity than i am short and/or having long vol closer to spot than the vol i am short. If i can't find any of that at a good price, i turn to short deltas and lean on the assumption that delta usually leads vol.

If i can't find a decent hedge i won't trade. A lot of vol traders make the mistake of having positions on 100% of the time. Trading your personal account allows the flexibility to have no positions. Use it.

Thanks! Much appreciated, I will have to digest this in light of the current ideas I have to work with. As of late it’s been getting easier to work out the minutiae once I have an idea of the right way to think about things.