How to manage risk if I am picking up coins before running trains?

[4ever_911]

Just to check out the premise of selling premium before earnings, I ran a few backtests with FAANG stocks... sell the X/Y delta strangle nearest to 7 DTE, 5 days before earnings and close the trade 1 day after earnings. All data based on EOD. Doesn't look like a good idea. Maybe only with FB... but still iffy.

Facebook, http://tm.cmlviz.com/index.php?share_key=20171114063014_bF53ra9eZ6xYM5YB

Apple, http://tm.cmlviz.com/index.php?share_key=20171114062930_auv5ziPM5Ffk45SX

Amazon, http://tm.cmlviz.com/index.php?share_key=20171114062853_6o6KM29PMoCwHaSi

Netflix, http://tm.cmlviz.com/index.php?share_key=20171114062822_6gJFTgGeOwmutL8U

Google, http://tm.cmlviz.com/index.php?share_key=20171114062737_ni46GQ1Zm39pS1Gc

7 DTE, theta decay is almost nothing, you have to deal with gamma risk as well, and the rising VOL is also do harm to your position.

In my own opinion, this strategy is more like rolling a dice. You are gambling on the Earnings.

I usually short 45+ days far OTM options, so it's almost delta neuture, I earn from theta decay, hopfully IV declines or don't move too much.

So, the most risk i guess is during a fast crush...IV get extremely high and the BID/ASK spread are so much that I cannot even easily get out of my position. That's what I want to discuss with eveyone here what we can do to deal with this situation.

 

[d08]

individual equities in general are a bad idea , individual equities might have 12+ standard deviation moves while in indexes, commodities, currencies you might see 4SD

Also the commission cost + slippage will really add up.

liquidity + low commissions > diversification

Good example of why you shouldn't listen to people on ET. I smell a "trading guru" who has never actually traded. Before you start talking about standard deviations, understand that position sizing is what determines the portfolio risk. Indexes would never sized equally to individual equities unless it's some sort of an arbitrage scenario.

 

[spindr0]

... I know that Selling naked options is like picking up coins before a running train. So, what I can do to lower the potential risk during a rapid crush in the future?

What I am thinking:

1. Lower the leverage, trade small.
2. Spend some money to buy some insuracne, say long volatility products, VXX/UVXY..
3. Deversify my portofolio, decrease the correlation, not only sell US equities, but also index ETFS of other countries, commodities...etc.


I haven't been through crushs like 1987， but from the history data of crushs like 1998/2011, although the volatility reaches to a really high value, it still takes time, and it didn't get there in one day, so I wonder on that situation, do i have time to exit the market if i set a stop loss? say 3 times my premium? Or do i have enough time to play defense during a rush crush? Or any other suggestions to lower the risk?

In 1987 it didn't get there in one day, until it did. From mid August until expiration Friday on 10/16/87, the market dropped about 18%. But 10/19 was a whole nuther animal, dropping 22+% in one day. Market makers walked away from their posts. Stock and option B/A spreads were Holland tunnel wide (several dollars). You couldn't transact and as a result, you were tied to your positions. Stop losses would have killed you (the spreads as well as gaps down).

The market has changed significantly since then (circuit breakers, etc.) so I'm not suggesting that the next crash will be similar but one commonality is that if it does, price will move so fast and IV will skyrocket and you may very well still be penalized if you transact. The only risk management for a crash (not a bear that takes 18 months such as 2000 and 2008) is to have some downside protection already in place. In that vein, I'd suggest spreads so that you have defined risk and you eliminate Black Swan events. Diversification will not save you. Almost every traditional long gets crushed in a crash.

I'm not fear based but things looked pretty bad that afternoon (Black Monday) so I took $1,000 out of the bank because who knew how bad it was going to get in subsequent days and could that spill over to banking (Limit on cash available for withdrawal?)? But thankfully, none of that occurred.

Protect your cities :->)

 

[tomorton]

In 1987 it didn't get there in one day, until it did. From mid August until expiration Friday on 10/16/87, the market dropped about 18%. But 10/19 was a whole nuther animal, dropping 22+% in one day. Market makers walked away from their posts. Stock and option B/A spreads were Holland tunnel wide (several dollars). You couldn't transact and as a result, you were tied to your positions. Stop losses would have killed you (the spreads as well as gaps down).

The market has changed significantly since then (circuit breakers, etc.) so I'm not suggesting that the next crash will be similar but one commonality is that if it does, price will move so fast and IV will skyrocket and you may very well still be penalized if you transact. The only risk management for a crash (not a bear that takes 18 months such as 2000 and 2008) is to have some downside protection already in place. In that vein, I'd suggest spreads so that you have defined risk and you eliminate Black Swan events. Diversification will not save you. Almost every traditional long gets crushed in a crash.

I'm not fear based but things looked pretty bad that afternoon (Black Monday) so I took $1,000 out of the bank because who knew how bad it was going to get in subsequent days and could that spill over to banking (Limit on cash available for withdrawal?)? But thankfully, none of that occurred.

Protect your cities :->)

I don't accept that downside protection is the ONLY risk management for a crash. I have been busily posting elsewhere that most price-negative Black Swans come out of a bear pattern, not out of a clear cloudless blue sky in a bull market.

October 1987 follows the pattern, and the two essential sell signals printed well before the 22nd.

The first was when price closed below the 50EMA on 04 September. Admittedly, it recovered the following week, but respecting that simple exit rule would have secured most of the gains accumulated since the summer.

Whether you would have gone long again as price re-bounded is up to the individual, but a final sell signal occurred on the 12th when the 20EMA crossed below the 50. For me, that would have taken all buys off the table (until well into 1988).

 

[spindr0]

I don't accept that downside protection is the ONLY risk management for a crash. I have been busily posting elsewhere that most price-negative Black Swans come out of a bear pattern, not out of a clear cloudless blue sky in a bull market.

If the odds are 1 in 100 that something bad will occur and you're the ONE then the odds were meaningless. You may be right that MOST price-negative Black Swans come out of a bear pattern but MOST implies that SOME do not.

You have every right to place your bets as you see fit. I retired young and have no plans to return to work, EVER. So risk management is my priority because at this point, keeping it is far more important to me than making it. Even if MOST was actually ALL, I'd still bet on not being the first ONE.

 

[tomorton]

If the odds are 1 in 100 that something bad will occur and you're the ONE then the odds were meaningless. You may be right that MOST price-negative Black Swans come out of a bear pattern but MOST implies that SOME do not.

You have every right to place your bets as you see fit. I retired young and have no plans to return to work, EVER, so risk management is my priority because at this point, keeping it is far more important to me than making it. Even if MOST was actually ALL, I'd still bet on not being the ONE.

Yes, some still occur out of the blue. Of the 20 worst daily price falls on the Dow since 1900, only 4 came in like that, the other 16 came out of bearish patterns, by which time no trader should have still been long. So the risk of being caught out is reduced by a factor of 5. I do call that risk management, I don't day its a miracle cure for all problems.

 

[fyretrading]

Do you ever buy vol, either as a hedge or as a standalone position? If so, care to get into it? Cool YouTube page, by the way.

nope, the best way to hedge higher vol is just staying mechanical, taking the hit and then rolling into the higher vol


but A LOTTT of ppl like to play around buying vix calls or selling vxx puts , If i were to play that game I would just add more call spreads and maybe manage them independently.

Theres no magic to this; its all priced in trying to be fancy will only cost $$

 

[fyretrading]

Hi, fyretrading, i guess you didn't read my post carefully, it's not about single trade management, it's about overall portofolio risk management.

just giving you some quick tips bro cuz ur on the right path, and if someone told me the 21 DTE rule way back when i'd have more money today.

Single trade management is the same as your portfolio cuz when the vix spikes all correlations go to 1 so all those "independent" trades will all go the same direction.

the way I look at leverage is just look at your theta that will determine how much leverage you got going on and using the TROC model + some other tools you can get an idea of what your returns and drawdowns will look like.

 

[Niten Doraku]

nope, the best way to hedge higher vol is just staying mechanical, taking the hit and then rolling into the higher vol


but A LOTTT of ppl like to play around buying vix calls or selling vxx puts , If i were to play that game I would just add more call spreads and maybe manage them independently.

Theres no magic to this; its all priced in trying to be fancy will only cost $$

Ah. Another Tastytrader.

 

[fyretrading]

Ah. Another Tastytrader.

pretty much , but I have my own thoughts on sh1t

tastytrade wants everyone to be trading everything all the time and imo its retarded they know it too but dont want to admit it cuz theyre revenues will go down