Is selling options before earning Good Strategy?

[Kim Klaiman]

It's to Vendor's credit he adds this disclaimer on that page:

Q: Can you achieve similar performance with $1,000,000 portfolio?
A: Most likely, NO. It is a well known fact that achieving very high performance numbers becomes more difficult as your account grows, for various reasons. One of the issues is liquidity, and this is why I don't recommend allocating more than $100,000 to SteadyOptions.

Yes. And here is another disclaimer from the same page:

Q: Will I be able to replicate this performance if I subscribe to SteadyOptions and/or Steady Condors?
A: That depends. If you just started trading options, then most probably the answer is NO. It will take time. I know this is not what people want to hear, but that's the truth. If you have some experience and spend the time to learn our strategies, then I see no reason why not. In fact, some of our members do better than our official performance.

Q: What is the impact of commissions on performance?
A: As you can see, even with cheap broker, I still paid over $16k in commissions in 2015, which reduced the performance by ~20-25% per year. Commissions is the cost of doing business, but you should do whatever is possible to reduce them. Brokers and Commissions discussion can help you to pick the right broker.

It is very important to maintain realistic expectations. We would never promise to "double your money every month with no effort" or some other absurd claim.

 

[ironchef]

Not really. Matter of scalability. As we mention on our website, our service is suitable for accounts in 10-100k range (we have other services for larger accounts). So once you reach 100k, it becomes more difficult and the results will be much lower.

Why may I ask.

Thanks.

 

[ironchef]

I am not a fund manager, just a lowly vol arb PM. However, the investor in this fund (its a single investor) as well as investors in the funds I’ve worked for before are large institutional investors who knew the business and understood the risks. Could you say that about your clients, especially the ones that have a 10k account?

I only get paid when my trades make money. Is that true for you with respect to your clients’ trades?

A big portion of my compensation is reinvested into the fund, so I have skin (even foreskin) in the game. All fund managers/founders have at least 50% of their net worth invested in their fund. Is that true for you?

If I have a down year, I get fired. If I blow up, it’s unlikely I’ll find another job. Is that true for you?

My track record for the last 10+ years is audited and available to any prospective employers. Besides that, I am known within the industry via former colleagues, employees or employers. Could your prospective clients get the same due diligence?

Lastly, I don’t know if you are truly qualified to provide people with “education”. That’s my personal opinion. I realize that this is your living and you will defend it adamantly. So I am not going to argue further and leave this thread alone.

sle,

I am mom and pop retail, trading my own money full time "for a living". I don't understand why a good professional trader has to trade other people's money?

 

[TrustyJules]

Why may I ask.

Thanks.

This seems obvious to me - you cannot execute large orders in the same way as retail orders. Institutional investors often have awful execution because of liquidity.

 

[Kim Klaiman]

This seems obvious to me - you cannot execute large orders in the same way as retail orders. Institutional investors often have awful execution because of liquidity.

Correct.

Also some options are simply not liquid enough to execute hundreds of contracts. What is possible for 50-100k account sometimes becomes very difficult for multi million dollar account.

 

[ironchef]

This seems obvious to me - you cannot execute large orders in the same way as retail orders. Institutional investors often have awful execution because of liquidity.

Correct.

Also some options are simply not liquid enough to execute hundreds of contracts. What is possible for 50-100k account sometimes becomes very difficult for multi million dollar account.

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Yes. I just realized most equities have low volumes so a large institutional trader will have difficulty with this strategy.

Then it begs the question who is on the other side, most likely it will be the MM? If so, they are not dumb (like me), why would they make the trade for me to make money?

 

[spindr0]

I'm not going to pass judgement on the performance claimed since I have no clue if the numbers claimed were real time and factual. What I will say is that I have looked at the concept of buying straddles pre earnings many times and there are far too many losers. Perhaps someone with an edge can do better.

To see what this looks like, set up some near the money straddles for a stock about to have an EA. Include some with strikes that were near the money a week and two weeks ago. Then graph the two week straddles (intraday, not closing prices). Not many achieve anything. It's a tough road to hoe,

 

[Kim Klaiman]

I'm not going to pass judgement on the performance claimed since I have no clue if the numbers claimed were real time and factual. What I will say is that I have looked at the concept of buying straddles pre earnings many times and there are far too many losers. Perhaps someone with an edge can do better.

To see what this looks like, set up some near the money straddles for a stock about to have an EA. Include some with strikes that were near the money a week and two weeks ago. Then graph the two week straddles (intraday, not closing prices). Not many achieve anything. It's a tough road to hoe,

As I mentioned, you cannot just do it randomly. It won't work. You need to enter at the right time and the right prices. And when you compare ATM prices, you ignore gamma gains, which are responsible to significant chunk of the gains.

 

[ironchef]

No, I don't think so. You, and others on this thread, seem to believe that there is a generalized, tradeable vol ramp ("Vega gains" to be had!) prior to earnings. There is not. What you perceive as an "increase" in IV is just an artefact of how vol components are annualized. IV for an options contract spanning earnings has two components; base vol (diffusion) and anticipated earnings spike (jump). Suppose an option spanning earnings has 5 trading days to expiry and earnings come out at noon on the last day, and that vol expectations remain steady at 1% daily base-vol and 10% anticipated spike for days eod 0 through 4. Apparent IV "increases" from 72% to 159%:

>>> import math as m
>>> m.sqrt(252 * (0.1**2 + 4 * 0.010**2)/5)
0.7239889501919211
>>> m.sqrt(252 * (0.1**2))
1.5874507866387546

This "vol ramp" of 87% (159 - 72) is a mirage, it is not tradeable as nothing about anticipated vol has actually changed.

If you are making money on these trades its likely from movement in the underlying (Delta gains), not from any Vega gains. There is no vol edge here. "Educating" your clients to believe that there is suggests that you might be unqualified to teach this subject.

I am not smart enough to know who is right and who is wrong but your analysis is gold to me. I have been puzzled over this a long time and thanks to you this is the first time I understand the logic.

So, if I can calibrate the base vol and earning spike vol, I can track the vol ramp. If it deviates from the "theoretical value", it is tradable. Perhaps that is how steadyoptions make the trades profitable?

I appreciate any further comments.

Regards,

 

[Kim Klaiman]

Yes. I just realized most equities have low volumes so a large institutional trader will have difficulty with this strategy.

Then it begs the question who is on the other side, most likely it will be the MM? If so, they are not dumb (like me), why would they make the trade for me to make money?

MMs always hedge their bets and make money mostly from the bid/ask spreads. If you win, they don't necessarily lose.

You can ask the same question when you sell covered calls. If your position wins, does it mean the guy who bought the calls from you lost? Not necessarily.