Is selling options before earning Good Strategy?

[Kevin Schmit]

Really? Then please explain this:

Are you being deliberately obtuse? I was specifically referenceing the phantom vol ramp due to IV math. The IV expansion in QCOM the morning of Oct. 31st was either market participants repricing anticipated earnings spike, or maybe it was all your subscribers piling in, bidding up the straddle. If the former it is a 50/50 bet as that repricing can go either way and with your trading costs (slippage and comms), your subscribers have to win even money bets 70% of the time just to break even.

I realize it is impossible to argue with you. You'll just keep posting until I, and your other critics, get tired of arguing. You'll bury us with an unending barrage of posts that ignore the substance of the criticisms.

I won't post any more in this thread, but I leave you with one final thought: Where are the options signal services from 18 years ago? Or from 11 years ago? These services, claiming un-audited returns usually of around 5% per month, seem to proliferate in mature bull markets. Major bear markets clear them all out. We'll see if you survive the next NBER recession.

 

[TrustyJules]

It's an interesting question, does the market price the earnings move as a multiple of the ambient volatility or does it price it as an outright move. My experience is that it's the latter, since the earnings move is idiosyncratic to the stock, while the ambient volatility is largely explained by the broad sector/market volatility.

See bold and underlined remark; you are making my point. To make the moves comparable and draw conclusion about the (un)desirability of a trade you should calculate in SDs. The OP (and I really mean the OP whom I was reacting to) pointed out that JnJ tended to move only 2.4% - this may or may not be meaningful in terms of option pricing. My converting it to SDs you get a better idea of the move in relative terms and can decide how much risk you want to take - in principle 3 SDs encompass all movements however its also known that empirical study has proven these basic statistical models do not correctly encompass all moves otherwise anytime options would be priced at 3SD or higher you'd have a free lunch

 

[srinir]

I think the 10% slippage that I said was based on the official prices that SO posts... I don't think it is 34% of the total account as you posted...

That is the definition of slippage. If you can not get filled for what ever reason at the posted price, then that is a tracking error from the signal service.

If you take all the signals, then these tracking errors accumulate.

From my first month's experience, 5% return per month on capital, after all expenses seem reasonable. I will take even 1/2 of that on a regular basis anytime. However, the problem is the inability to scale up the operation.

One month (even one year) outstanding return is one thing, but maintaining Sharpe Ratio of above 2 is different matter all together for 5+ years.

If you are comfortable answering could you tell us what is your typical number of contracts that is traded per trade. I am assuming 2 per trade for typical $10,000 account size, but i think it is too low.

 

[srinir]

He was a system vendor from the early 80's, pre-Futures Truth era. I am not sure whether he was talking about his own track record, or other vendors' track records in the quote. If the current incarnation of Futures Magazine has a searchable historical archive of articles, you can probably find reference to him there. Or if old issues of "Club 3000 News" are online, look there.

He sold an ATR breakout system he lifted directly from a Richard Bookstaber book for $1500. Astoudningly, another system vendor sued him over it, claiming sole ownership of a model neither one of them had any actual rights to.

Larry has had a good bit of litigation with ex-partners, you can find numerous references in California judicial records. His current LinkedIn profile lists him as an analyst or researcher at some firm I have never heard of.

Very interesting.

These type of scams returns in every bull market in some form or the other. That is why behavioral economics is such a hot topic now.

 

[srinir]

and if you faced 10% slippage in entry and exit, your results would still be good provided you pay low commissions.

Are you really getting 10% slippage? That seems really high.

That means for 344 transactions, assuming consistent slippage then total slippage is 3440% not 34.40% as i posted earlier

 

[Kim Klaiman]

If you had told me “35-40% win rate and 0.6 information ratio” I would not be arguing. I know event trading well, but maybe you you have a really smart selection process. However, once you pitched 2+ IR, 75% win rates and 80+ ROC, on a long risk premium strategy is really too good to be true. I know enough about vol markets to smell a fish.

In fact, let’s disregard what you promised on your site for a second. If, in real life, your clients manage to hit 0.5 Sharpe and 40-50% win rates based on your trade suggestions, you are providing a great service to them.

You continue calling it long risk premium strategy. I mentioned several times that straddles are only 20-30% of our model portfolio. The rest are various selling premium strategies and volatility trades. We maintain a mix of strategies to balance portfolio risk.

 

[ironchef]

Well, like anything, it’s only partially true. Yes, you can and will lose big on some trades, but you can diversify that problem away. Selling the earnings straddles is a statistical strategy that favors a smaller player. If you can afford to trade only a few contracts per event, you have like two thousands companies in your universe and get to play in about eight thousand events per year. That’s a pretty reasonable set of events.

The crux is to develop a model that predicts the magnitude of the earnings move better than the market does. That’s where the alpha comes from.

How can a small retail player search the 2000 companies and be able to predict better than the market? I go single directional if I can predict better than the market.

As a small mom and pop retail players we do have the following advantages:

1. We can pick and choose when where and how, no need to worry about quarterly results,

2. No boss or company to restrict what we can trade and at what risk level,

3. We can focus on a few companies and know them really well,

4. Few professional/institutional traders care to trade thinly traded instruments...

So, yes if we avoid your playground we do have a chance.

 

[TrustyJules]

10% slippage on straddles would mean that the price change really is due to the piling in of orders. The strategy that I heard of utilising this increased volatility requires the opening to be delta-neutral - so smack on a strike price is the best.

Normally on a straddle sale call/put parity would mean that prices remain stable. However as ever when demand spikes volatility increases and hence the price of a straddle would increase. It doesnt take much to go up 10% particularly on less massively liquid stock options but for larger stocks it shouldnt happen - more likely the stock moved away from the strike price and the purchase is no longer delta-neutral. Just my 0.02$

By chance as I examined this I came across this article that looks at the VIX in earnings season and claims there to be a correlation between a higher VIX and the arrival of earnings season:

https://www.moneyshow.com/articles/optionsidea-41414/#

Just another reflection of a rather plausible phenomenon.

 

[Kim Klaiman]

That QCOM straddle picture pains me... I had tried QCOM straddles based on SO's theory and was just being greedy and did not move my bids and did not get filled. I was late by a few minutes to read the advisory email, and by that time the boat had sailed... most members hit the profit target in a matter of hours. Like I said in my previous post, that is one big disadvantage of trying to follow SO advisory emails blindly.

I don't think Kim should post the trades till they are closed. Many members, including myself, enter trades a day or more later, if the prices pull back and certain criteria are met.

I never recommend following anyone blindly. You always have to understand what you are doing. This way members are able to take advantage of our discussions and also unofficial trades. And as you mentioned, many times it is possible to enter the trades a day or two later.

Here is an example of a member who entered the QCOM trade a day earlier and booked 60% gain while our official recorded gain was 14%.

 

[Kim Klaiman]

Then this is not a useful system for anyone trading for a living?

I am going to try it out on my own using this concept but with some variations based on comments from sle and Kevin Schmit.

Thanks for your posts.

No it's not. I never claimed it is. We have other services that don't have capital restrains, but recommended capital for SO is 10-100k.