Yay! Constructive feedback and comments are always welcome. My apologies to everyone for being on edge. I should probably just hit the ignore button on all the hateful naysayers and not engage them. Thanks for your feedback!
Karen the Supertrader - TastyTrade Hybrid Experiment
- Thread starter Sweet Bobby
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I think there is a soundness to selling premium, just like there is a soundness to selling car insurance.
I basically see it as you are trying to capture theta (and sometimes a crush in vega), meanwhile isolating all other greeks (delta and especially gamma being the ones that kill).
There has been no real black swan since 1987, and I would argue that even that doesn't count as that was a building sell-off that could have been mitigated before the 19th (at least my premium selling model did it in backtesting). A real black swan would be something cataclysmic and unpredictable, and we haven't seen such an issue in modern western markets. It would be something along the lines of financial system doesn't exist tomorrow for whatever reason. It begs the question at that point is reinsurance or short futures etc even going to matter because of the counterparty risk.
My thinking is, can you survive a 1987 event but from a 52 week high the day before? Of course it isn't possible as curbs would end up having us go multiple lock-limit-down days in a row to get there, and I suspect they would just close the market anyway. It does make one wonder about options if say, expiration/settlement occurred in the middle of a market closure period. Do the options mark to market on the last trade before the market closure? If so option buyers would be getting the short end of that stick...
I basically see it as you are trying to capture theta (and sometimes a crush in vega), meanwhile isolating all other greeks (delta and especially gamma being the ones that kill).
There has been no real black swan since 1987, and I would argue that even that doesn't count as that was a building sell-off that could have been mitigated before the 19th (at least my premium selling model did it in backtesting). A real black swan would be something cataclysmic and unpredictable, and we haven't seen such an issue in modern western markets. It would be something along the lines of financial system doesn't exist tomorrow for whatever reason. It begs the question at that point is reinsurance or short futures etc even going to matter because of the counterparty risk.
My thinking is, can you survive a 1987 event but from a 52 week high the day before? Of course it isn't possible as curbs would end up having us go multiple lock-limit-down days in a row to get there, and I suspect they would just close the market anyway. It does make one wonder about options if say, expiration/settlement occurred in the middle of a market closure period. Do the options mark to market on the last trade before the market closure? If so option buyers would be getting the short end of that stick...
It's OK Sweet Bobby, we've already gone insane for you.
Have fun storming the trades! AHahahahHHAHAH! Hahaha...hhaaa....ha....ha?
Baron
ET Founder
I agree. This is your thread.
Since you have Sossy's ear, maybe you can find out why the original threads critiquing TT were taken off this site.
I don't know if you saw those threads or not. If not, it would be a great learning lesson to see.
Just FYI, 80/70 overnight gap cliquets trade actively in the interdealer broker market on both S&P and Stoxx. Apparently, the buyers legal departments feel that these things are worth the money.
In any case, unless you are trading pure gap (e.g. weekly options), your risk is not that it's gonna expire ITM, but a combination of gap and vol spike. The vega convexity will destroy you easily unless you control the size.
sle I've only been around since 2000 in terms of trading, so I'm curious if you have seen before then some oddities I have not. If one isn't selling too deep out of the money (say in the 15-30 delta range), I would (perhaps falsely) assume that it couldn't get too far out of hand simply because you will be getting well ITM pretty quickly if things go wrong, and once you are beyond ATM there would be an arb opportunity to keep things somewhat reasonable should it get out of line.
The question also is for non-naked positions, could one have a theoretical vega that makes no sense, but makes sense on a further out hedge (purchase side of a vertical)? I'm curious if anyone has seen this on something the scale of SPX/SPY. I would think things would be even crazier on your far OTM purchased option than on the closer sold one?
Yes, at some point your delta will start approaching unity and other greeks will be close to zero. Of course, it's gonna hurt oh so much on the way there.
"An opportunity to keep things somewhat reasonable" means that you would trade delta or hedge somehow? In my experience, when the shit is already airborne, it's too late to hedge anything. In fact, any adjustments like hedging your delta in a reactive manner will hurt even more.
In a term structure (or any other spread), you are not really reducing your risk, you are replacing the outright trade with a relative value one. E.g. in case of a vertcal spread, you are trading a whole bunch of relative risks (term structure, forward vol, gamma vs vega etc). In case of a big vol move, you are probably not gonna fare well anyway, because the gamma will hurt more and the vega leg can be a total bitch during a relief rally (if you have a calendar on both vega and gamma will go against your in a relief rally).
In general, if you are converting a single leg trade into a spread purely for risk mitigation purposes, you should simply reconsider the size of the alpha leg and do it standalone.
PS. I am not saying that you should not do it, I am just saying that the best way to avoid a blow up is to (a) size your trades intelligently and (b) make sure you are selling what it makes sense to sell.
"An opportunity to keep things somewhat reasonable" means that you would trade delta or hedge somehow? In my experience, when the shit is already airborne, it's too late to hedge anything. In fact, any adjustments like hedging your delta in a reactive manner will hurt even more.
In a term structure (or any other spread), you are not really reducing your risk, you are replacing the outright trade with a relative value one. E.g. in case of a vertcal spread, you are trading a whole bunch of relative risks (term structure, forward vol, gamma vs vega etc). In case of a big vol move, you are probably not gonna fare well anyway, because the gamma will hurt more and the vega leg can be a total bitch during a relief rally (if you have a calendar on both vega and gamma will go against your in a relief rally).
In general, if you are converting a single leg trade into a spread purely for risk mitigation purposes, you should simply reconsider the size of the alpha leg and do it standalone.
PS. I am not saying that you should not do it, I am just saying that the best way to avoid a blow up is to (a) size your trades intelligently and (b) make sure you are selling what it makes sense to sell.
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I enjoyed following this thread.
I watched a lot of TT in 2013 when I started trading options and even tried to duplicate some of their back testings. I didn't do too well selling options, either calls or puts. perhaps I didn't do it correctly.
Can you kindly comment on some of their strategies that are the ~10% you found useful?
Thanks.
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