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

[tradermaji]

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.

I ran some backtests for the last three years on the FAANG stocks using 45DTE, selling short strangles and NOT trading earnings. All of them had positive returns. However, the whenever I added a stop loss, the returns deteriorated significantly. To me, one needs gonads of steel to hold on through the drawdowns and trade these, if trading unhedged and without stops.

Truthfully, the naked shorts are not very margin efficient, and maybe short condors are more efficient.

Good luck.

 

[R123]

. I get around 10% percent returns each month recently. The positive return days is around 80%.. But 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.


Good luck to you.

 

[R123]

You answered your question in point 1.
If your getting 10% returns a month in this LOW volatility market, your risking a big hit on volatility expansion alone on a black swan event.

In addition the same low penny spread your used to, will disappear before your eyes to absurd levels as no one wants to step up and make a tight market during the chaos.

If the move starts on or before the open, by the time your "options pit" opens with stable quotes the damage can be unbelievable.

Of course I am guessing your are at around 50% maintenance margin or more with these returns. If so you maybe taken out by your broker on margin liquidations by rapidly expanding option values, before you even have a chance to plan your exit.

I know this may all sounds like paranoia to you, but I have experienced the shock and big losses of each one, so writing from my own experience of being stupidly over leveraged and getting caught more than once by a "black swan event".
I still write some short options but at much lower leverages, the return is less but I stay in the game this way.

 

[lindq]

Or any other suggestions to lower the risk?

You lower your risk by sizing your positions such that you can survive a worst-case-scenario.

You can't ignore the 800-pound Gorilla in the room. Some day he WILL sit on your face.

If you can't predict the impact of worst-case-scenarios on your portfolio - and if you can't size for them and still create a profit stream - then you need to find another way to produce profits.

It's that simple.

 

[ironchef]

I ran some backtests for the last three years on the FAANG stocks using 45DTE, selling short strangles and NOT trading earnings. All of them had positive returns. However, the whenever I added a stop loss, the returns deteriorated significantly. To me, one needs gonads of steel to hold on through the drawdowns and trade these, if trading unhedged and without stops.

Truthfully, the naked shorts are not very margin efficient, and maybe short condors are more efficient.

Good luck.

Is your positive returns net of risk adjusted compared to holding the underlying?

Regards,

 

[Kim Klaiman]

I ran some backtests for the last three years on the FAANG stocks using 45DTE, selling short strangles and NOT trading earnings. All of them had positive returns. However, the whenever I added a stop loss, the returns deteriorated significantly. To me, one needs gonads of steel to hold on through the drawdowns and trade these, if trading unhedged and without stops.

Truthfully, the naked shorts are not very margin efficient, and maybe short condors are more efficient.

Good luck.

We did some backtesting for FAANG stocks. some of them show good results if you hold till expiration. For me, it's way too risky. When setting the parameters "close 14 DTE", the only one that showed consistently good results was FB.

The Volatility Option Trade After Earnings in Facebook

 

[beerntrading]

I ran some backtests for the last three years on the FAANG stocks using 45DTE, selling short strangles and NOT trading earnings. All of them had positive returns. However, the whenever I added a stop loss, the returns deteriorated significantly. To me, one needs gonads of steel to hold on through the drawdowns and trade these, if trading unhedged and without stops.

Truthfully, the naked shorts are not very margin efficient, and maybe short condors are more efficient.

Good luck.

Try the same test in 2011. It was a particularly bad year for premium sellers from what I've seen. The last three years are not a good sample for projecting future returns.

 

[Kim Klaiman]

Try the same test in 2011. It was a particularly bad year for premium sellers from what I've seen. The last three years are not a good sample for projecting future returns.

This is why you need to mix premium short strategies with long vega and long gamma trades.

 

[beerntrading]

This is why you need to mix premium short strategies with long vega and long gamma trades.

You're probably about the best person to answer this--got any reading on such strategies you could point us to?

 

[Kim Klaiman]

• How We Trade Straddle Option Strategy

We are trying to always maintain about 20-30% exposure to those straddles. In addition to consistent money makers, they also serve as excellent black swan insurance.