Is selling options before earning Good Strategy?

[Kim Klaiman]

Is selling options before earning Good Strategy?

It's good until when it's not good anymore. Majority of the time it would be good but once or twice in a while you are going to get losses. And most of the time when you are good, you are going to become more envious of the huge profit that you missed out if you had bought the options or invested in the underlying.

Reel Ken said it well:

We load a six-shooter gun with one deadly round and play Russian Roulette for $100 per trigger squeeze. The odds are 83% (5/6) that you win. Does that make it low-risk? What would low-risk look like? How about a 13-round Glock where your probability of success is over 90%. For certainly, if one defined risk as favorable odds, we would expect many takers, but I'll bet there wouldn't be any.

The reason is simple: One doesn't define risk by the probability of success. I often see this mistake when pundits promote investing strategies such as selling deep-out-of-the-money-puts (DOTM) on volatile stocks and lauding the low-risk-nature of the trade. "The stock would have to drop over x% (6%,7%, 10%) for you to lose". Well, Facebook reminded us of the real risk in such strategies.

Yes, risk isn't the chance of loss, it is the magnitude of potential loss. Too many simply confuse probability with risk.

 

[TheBigShort]

Reel Ken said it well:

We load a six-shooter gun with one deadly round and play Russian Roulette for $100 per trigger squeeze. The odds are 83% (5/6) that you win.

Kim you do not win 83% of the time with this strategy LOL. How is the market that inefficient.... I spend a lot of time looking for situations in which the events are not priced properly a week or 2 before and let me tell you the majority of them are OVER priced. The ones that are under priced usually don't see the "IV ramp" you claim to capture

 

[TheBigShort]

Reel Ken said it well:

We load a six-shooter gun with one deadly round and play Russian Roulette for $100 per trigger squeeze. The odds are 83% (5/6) that you win. Does that make it low-risk? What would low-risk look like? How about a 13-round Glock where your probability of success is over 90%. For certainly, if one defined risk as favorable odds, we would expect many takers, but I'll bet there wouldn't be any.

The reason is simple: One doesn't define risk by the probability of success. I often see this mistake when pundits promote investing strategies such as selling deep-out-of-the-money-puts (DOTM) on volatile stocks and lauding the low-risk-nature of the trade. "The stock would have to drop over x% (6%,7%, 10%) for you to lose". Well, Facebook reminded us of the real risk in such strategies.

Yes, risk isn't the chance of loss, it is the magnitude of potential loss. Too many simply confuse probability with risk.

Actually Kim could you explain to the viewers how this "IV ramp" works? I have not seen you mention it in your previous posts on this thread

 

[Kim Klaiman]

Kim you do not win 83% of the time with this strategy LOL. How is the market that inefficient.... I spend a lot of time looking for situations in which the events are not priced properly a week or 2 before and let me tell you the majority of them are OVER priced. The ones that are under priced usually don't see the "IV ramp" you claim to capture

You confused 2 strategies here.

My comment was regarding selling options before earnings and holding through earnings. This strategy works well most of the time, but can experience some big losses (similar to Russian Roulette).


The strategy that we are using is buying straddle or strangle 1-3 weeks before earnings and selling before earnings. The gains come from combination of vega and gamma.

Here is statistics from 2017:

• 77 Trades - 61 win, 16 loss (79% win) – Average Gain +5.02%

Breaking down further by hedged and non-hedged:

Hedged – 28 win, 6 loss (82% win), average gain +6.01%
Non-Hedged – 33 win, 10 loss (77% win), average gain +4.24%

(Hedged straddle refers to selling some shorter term strangles against the straddle at certain ratio).

 

[Kim Klaiman]

Actually Kim could you explain to the viewers how this "IV ramp" works? I have not seen you mention it in your previous posts on this thread

IV ramp help you to fight the negative theta.

There are three possible scenarios:

Scenario 1: The IV increase is not enough to offset the negative theta and the stock doesn't move. In this case the trade will probably be a small loser. However, since the theta will be at least partially offset by the rising IV, the loss is likely to be in the 7-10% range. It is very unlikely to lose more than 10-15% on those trades if held 2-5 days.

Scenario 2: The IV increase offsets the negative theta and the stock doesn't move. In this case, depending on the size of the IV increase, the gains are likely to be in the 5-20% range. In some rare cases, the IV increase will be dramatic enough to produce 30-40% gains.

Scenario 3: The IV goes up followed by the stock movement. This is where the strategy really shines. It could bring few very significant winners. For example, when Google moved 7% in the first few day of July 2011, a strangle produced a 178% gain. In the same cycle, Apple's 3% move was enough to produce a 102% gain. In August 2011 when VIX jumped from 20 to 45 in a few days, I had the DIS strangle and few other trades doubled in a matter of two days.

The strategy works, as you can see in our track record which is based on real trades. 6 years of trading history. No academic studies.

 

[El OchoCinco]

I think you need the average loss for more accurate statistics to be fair.

 

[TheBigShort]

IV ramp help you to fight the negative theta.

Kim...where is this extra IV coming from? You are saying buy the IV ramp but can not explain whats actually happening. How do you say "hmmm... I think this IV will increase SO much that my "vega gains will offset my theta loss" ?

 

[OptionsOptionsOptions]

Kim...where is this extra IV coming from? You are saying buy the IV ramp but can not explain whats actually happening. How do you say "hmmm... I think this IV will increase SO much that my "vega gains will offset my theta loss" ?

• I assume IV ramp is increasing IV as earnings is approaching.
• Buy a few weeks before - sell day of earnings.
• Good on tech stocks such as NFLX, TSLA, AMZN.

 

[Kim Klaiman]

I think you need the average loss for more accurate statistics to be fair.

You are absolutely right.

Average winner: 8.7%
Average loser: -10.2%

Biggest loser: -28.7%. Only 3 trades lost more than 10%.

 

[Kim Klaiman]

Kim...where is this extra IV coming from? You are saying buy the IV ramp but can not explain whats actually happening. How do you say "hmmm... I think this IV will increase SO much that my "vega gains will offset my theta loss" ?

What do you mean? Are you disputing the fact that for 95% of the stocks, IV increases as we approach earnings?