Karen the Supertrader - TastyTrade Hybrid Experiment

[Sweet Bobby]

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.

I did learn something from Karen. Try to make this as simple as possible. So if you're watching tastytrade every day you're going to get bombarded with way too much information. Don't worry about learning all the various strategies. Just focus on about two - strangles and straddles and their components short calls and short puts.

Out trades on at about 45 days to expiration, manage winners at 50%, limit losers to 2x the initial credit received. Close trades at about 21 days to expiration regardless of profit or loss. Don't use more than about 35% of your buying power. Try to keep a delta vega ratio of -1/-2. You can Expect to keep about 25% of the premium that you sell on average. Keep a theta of between 1/10 of 1% to 1/2 of 1%.

I deviate from tastytrade in that I primarily sell premium around the S&P 500 and. It much else. I'm not interested in trading 100 different products. I don't want to watch the screen all day. Take 5-10 minutes every day to make your trades, set good till cancelled orders to take your profits at 50% and then do a one cancels the other order to close it at a loss of 2x loss. If you're trading /ES, do a GTC order to take your profit and then set an alert to notify you if it reaches a loss of 2x loss or greater. Then go spend a little time with your friends and family. Don't worry about the markets and where it's going, just trade what it gives you.

I hear there's an active volcano under Yellowstone that could potentially erupt and wipe out 50% of the US population. I'm going to sleep pretty well tonight and so should you.

The present value of future fear is overpriced! I should be thankful for all these stupid idiots that tell me that I'm going to blow my accounts up and that this is going to end in disaster. These folks are the ones that allow us to continue to make money. They buy protection and I'm more than willing to sell it to them. I'm the insurance company and they are driving the Volvo.

Just don't over complicate this stuff. My experiment is evolving but so far I'm pretty happy. Please let me know if you have any questions.

 

[TD80]

Don't use more than about 35% of your buying power.

You aren't even going to come close to blowing up if you are using 35% of buying power (assuming your effective BP is 5x1 naked short selling options). That isn't even 2x1 in terms of the underlying.

The question will be at that leverage rate, are the returns making sense. Even with an ideal tax rate using SPX and not SPY, your combined federal rate should (will eventually) be around 26%. Let's say a decently low-risk asset-allocation portfolio is going to yield 8%, and you never sell it, although there could be some rebalancing that causes modest long term taxable gains (20%).

So you need to be making 11% on your cash balance to be in the same neighborhood as a good asset allocation portfolio. I use (a lot) more leverage than 35% on SPX but I suppose we all roll the dice and we take our chances.

 

[Sweet Bobby]

You aren't even going to come close to blowing up if you are using 35% of buying power (assuming your effective BP is 5x1 naked short selling options). That isn't even 2x1 in terms of the underlying.

The question will be at that leverage rate, are the returns making sense. Even with an ideal tax rate using SPX and not SPY, your combined federal rate should (will eventually) be around 26%. Let's say a decently low-risk asset-allocation portfolio is going to yield 8%, and you never sell it, although there could be some rebalancing that causes modest long term taxable gains (20%).

So you need to be making 11% on your cash balance to be in the same neighborhood as a good asset allocation portfolio. I use (a lot) more leverage than 35% on SPX but I suppose we all roll the dice and we take our chances.

Do you use the analyze tab to stress your positions? I stress up 15% and then down 20% with a 30 point increase in volatility. I am just curious.

 

[sle]

You aren't even going to come close to blowing up if you are using 35% of buying power (assuming your effective BP is 5x1 naked short selling options). That isn't even 2x1 in terms of the underlying.

Do you mind walking me through this logic?

 

[TD80]

Do you use the analyze tab to stress your positions? I stress up 15% and then down 20% with a 30 point increase in volatility. I am just curious.

I just use an option calculator but yes. If the underlying drops 20% it isn't the vol number you will be killed on, I mean you could go from a VIX of 12 to 120 in a straight line and it only increases the pain a fraction since the option will be so deep in the money anyway (at least for the ones I sell), it is mostly the straight leverage and thus the delta that kills.

People selling deep OTM puts though, things would be much, much, much worse, hence I wouldn't suggest doing that...

 

[TD80]

Do you mind walking me through this logic?

Well, with portfolio margin on an index you will (note I am not recommending you do) have the ability to sell up to 5 times the value of your cash holdings.

So if someone has 1,000,000, they could in theory sell options that equate to 5,000,000 notional.

So if he uses 35% of 5,000,000 that gives him an underlying exposure of 1,750,000. Or 1.75 times his cash holdings.

If he is selling something reasonable (not too far OTM, big index), a 20% drop isn't going to hurt him too badly. He's probably picking up 1% or more if it is a strangle, and the put side is likely what, 8% or more out of the money. So a 20% drop puts him 12% ITM with a corresponding vol spike. It wouldn't be pleasant but it wouldn't be anywhere near a death blow either.

 

[Daal]

What I want to know is what will happen if OP gets hit with a 50% drawdown, will he stop trading and quit the strategy or will he continue despite a significant amount of financial and mental capital loss?

Dont give me the bullshit of "a 50% loss wont happen", the index has gotten shredded by 50% twice in the last 15 years, its trading a rich valuation being pushed by the central bank, it could easily do it again. And if the index tanks by 50%, who knows how much options sellers will lose, probably a ton.
If OP will quit the strategy (as I suspect he will try to salvage what will remain of his capital), then there will be another major flaw in it, it will induce the trader to stop when implied returns will be at their highest. The index investor using ETFs (with his low cost and tax advantages) already knows he needs to stick with it and will more than likely make all their money back eventually, the options genius might not do the same

 

[Daal]

Earning risk premium from option selling is another tool in a multitool box. Its nice when its part of multi strategy way to earn returns from the market. To do it as a solo strategy but more importantly, to apply leverage to it, its just asking for trouble. I know some guys who can do that but they do in special situations, in specific stocks, their strategy is more like stock picking but instead of long-term views, they have short-term views on vol. Its short-term stock picking, like swing trading but expressing the idea in options. If they got that picking skill (not necessiraly over what the price will do but what will vol do), they can make money
But I dont know anyone who has gotten rich consistently shorting index options almost regardless of what is going on because 'it only takes 5 minutes and I can enjoy my day'. In theory its possible but I doubt it will be better than what the ETF guy will get

 

[atrp2biz]

What I want to know is what will happen if OP gets hit with a 50% drawdown, will he stop trading and quit the strategy or will he continue despite a significant amount of financial and mental capital loss?

Dont give me the bullshit of "a 50% loss wont happen", the index has gotten shredded by 50% twice in the last 15 years, its trading a rich valuation being pushed by the central bank, it could easily do it again. And if the index tanks by 50%, who knows how much options sellers will lose, probably a ton.
If OP will quit the strategy (as I suspect he will try to salvage what will remain of his capital), then there will be another major flaw in it, it will induce the trader to stop when implied returns will be at their highest. The index investor using ETFs (with his low cost and tax advantages) already knows he needs to stick with it and will more than likely make all their money back eventually, the options genius might not do the same

A 50% drop is not the problem. In fact, it may even be welcome. 1% down moves for 50 days would be bliss. The problem is the velocity of the move and whether or not the premium seller can make adjustments along the way.

 

[newwurldmn]

A 50% drop is not the problem. In fact, it may even be welcome. 1% down moves for 50 days would be bliss. The problem is the velocity of the move and whether or not the premium seller can make adjustments along the way.

Your real problem is a 5% selloff an 10 vol bump. And now you are sitting on a decent loss and the stress of what to do next. Do you delta hedge and watch it rally back 5%, do you not hedge and watch it sell off another 5%?