My approach to selling puts.

newwurldmn said:
how do you sell puts to outperform the market but then also claim selling puts gets into the market at lower prices?

how is a put not a synthetic covered call at the same price?

how is selling a covered call giving up your upside while selling a put does not?

you put way too much importance on skew. What is the difference in dollar terms of a put at its current vol vs if it had no skew? How many points is that worth in the index?
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i'm soooo glad you asked all this cuz the answers are all pretty straightforward and really easy to comprehend so you should be able to follow no problem lol...

selling puts gets you into stock at lower price because, umm, you're selling a put below the current stock price and taking in a credit for doing so? what's going to give you the lower cost basis, buying SPY today or selling an OTM put against SPY today? hint: if SPY is at $421, and you sell the $410 put for idk, say $5.00, then your cost basis is going to be $405.. now which is cheaper, $405 or $421?

a put and a covered call ARE the same! yes! i specifically addressed this had you read what i said..

in equities with put skew, you receive MORE credit for selling the put than the equivalent covered call, BECAUSE OF THE SKEW LOL.. that's literally exactly what the skew is telling you.. that puts are more expensive than calls... so which would you rather be selling, if they're synthetically the same thing? the cheap one or the expensive one? if they are the exact same thing but one is more expensive than the other, there HAS to be a difference in profitability for selling one versus the other.. it's physics..

both cap the upside, duh.. i never said, or even remotely implied anything different.. but one pays you more than the other.. for like the fourth time now... it ain't rocket science man...

what's the difference? idk, why don't you go look at the SPY or IWM or QQQ option chain next month and compare the prices for 30D calls and puts? earlier today the skew difference on a 30D July 16 call and put on IWM was around $1.80.. and considering the call was going for around $3.20 and the put was going for about $5.00, i dare say that $1.80 is a SUBSTANTIAL difference...

idk why you keep responding to me without even reading my posts, but i think it's you underestimating the effects of vol skew, not me placing too much importance on them... skew doesn't tell you which direction to trade, but it DOES tell you how to most efficiently express your directional assumption.. there are bullish and bearish strategies for put skew and bullish and bearish strategies for call skew...

have you ever calculated the expected value of a trade that goes against the skew versus one that takes advantage of it? there's way more to it than EVs, but seriously, have you?
 
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newbie463 said:
So, you are saying your expectation would be that over 20-30yrs PUTW should outperform SP500. not factoring in fees, etc?

do i have that right?
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no... i don't know all the mechanics of how PUTW manages their trades and the criteria they look for on entry... what i'm saying is that if you yourself sell 30D puts on SPY for the next 20-30 years then you should, according to the probabilities that govern derivatives markets, outperform the SP500...
 
daytonabeach83 said:
no... i don't know all the mechanics of how PUTW manages their trades and the criteria they look for on entry... what i'm saying is that if you yourself sell 30D puts on SPY for the next 20-30 years then you should, according to the probabilities that govern derivatives markets, outperform the SP500...
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I figured we would eventually get to that nuance..... timing and strike selection. thanks for the perspective.
 
newbie463 said:
I figured we would eventually get to that nuance..... timing and strike selection. thanks for the perspective.
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yah it's a whole world of market theory in and of itself... it can be very exciting at first, to see how you can manipulate skew to create trades with positive expectancy... the devil is in the details though, more specifically, the position management details... less about timing tho, more about strike selection... like, if you wanted to JUST sell puts, i'd say be consistent.. sell one every month, or every two months, whatever.. don't try to time the market.. timing the market is NOT a prerequisite for selling high vol puts to work.. just be consistent with your strike selection and frequency...

take a game where you flip a coin and win $2 every time it hits heads and lose $1 every time it hits tails... you have a 50% chance of success each trade and you're winning twice as much as you're losing... your average expected return per flip will be $1... seems like a no-brainer...

but what actually happens is that 1/3 of people who play the game go bankrupt, 1/2 breakeven, the rest make a small profit, and then like 0.1% of the players make such insanely huge returns that it skews all the averages to look better than they are...

it's the same reason the average income across the globe is WAAAAY higher than what most people are making - the big outliers at the top overcompensate for everyone at the bottom... mean, median, mode, all that kinda shit...

the way to actually be one of the winners is to understand proper position sizing...
 
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Where is @Wheezooo when you need him :)

daytona, have you backtested the performance of index puts vs calls when you actually hedge them to isolate the vol? You might be surprised at what you find. MAYBE you can make the argument that index vol itself is somewhat systemically rich. However the skew isn’t free money. Many of us have been there before, but when you learn more about options you will realize that the volatility realized in the scenario where your short strikes are local to spot largely impacts fair value.

Puts of any sort have not significantly outperformed the index at any duration or tenor that I have found, and in the places they have a favorable return/PnL vol ratio compared to spot it’s because you are putting up a massive amount of value at risk vs. normal long deltas.

Liquid markets are pretty good at pricing securities.
 
Oh boy....

Yes,Goldman/ Derman had a paper 20 plus years ago that showed selling ATM PUT,and rolling performed better on a risk adjusted basis..

That has not been the case for the last 15 years or so..Ill backtest later.

When you say "selling Puts", are you saying sell 2 Delta .50 puts, or 4 Delta .25 puts, 10 Delta .10 puts as opposed to buying 100 shares of underlying??

If so,we are back to levering up..

If you are saying shorting 1 ATM put and rolling outperforms buying the index,than you are simply wrong :)

And for what it's worth you are not correct on your buy write example vs downside put..are you telling me a short 30 Delta put has outperformed shorting the 70 Delta put ( but write)in the 15 year bull??

You are getting way too caught up in skew and not using your noodle....











daytonabeach83 said:
@taowave

it's all in the metrics of options pricing.. iirc studies have been done showing selling puts on indexes outperforms..

reason being if the probability models that drive derivatives markets hold true, and the data seems to suggest that over the long term they do, then selling puts will beat the market because the puts are overpriced compared to their risk.. yes, you'll not win as much on some big upmoves.. but you'll lose less on the big downmoves.. that risk is priced into the contracts.. but if volatility is skewed to the put side, the puts are more expensive compared to the risk..

one KEY piece of evidence for this is the fact that while there have been studies showing selling puts against an index fund with put skew (like the spiders) will beat the market in the long run, studies done on selling covered calls against index funds with put skew show you lose in the long run, and for the same reason you guys just suggested: you cap your upside too much.. because calls are relative underpriced in put skew equities, you aren't getting paid enough to take the risk..

if shorting a put is just a synthetic covered call, and vice a versa, they should both end up the same.. and if there's nothing to skew, they should both be losing trades in the long run.. but short puts have been demonstrated to win while covered calls have been demonstrated to lose.. because the calls are underpriced relative to the puts.. selling covered calls, thus, will not pay you enough money to compensate for the missed upside potential, whereas selling puts will pay you more than enough to compensate for the missed upside potential..

this means the skew is having the effect on profitability that the probability models project it will.. and if you want an example, go look at the july monthly chain on IWM.. see how much credit you receive for a 30D put vs a 30D call..

also, you're forgetting that if you lose on a put it gets assigned.. you have those shares, now with uncapped profit potential.. so you STILL have uncapped upside potential in your holdings.. i.e., every loss you take on a short put becomes another source of uncapped upside room.. so there's even more of an edge to selling them beyond the skew...

if you build up your index positions by selling puts, over time you will a) be entering the stock at cheaper prices and b) building up a core position of uncapped index shares

if you don't believe the probabilities MMs use to establish derivatives markets are accurate, then no, you probably won't see any benefit to selling puts.. but if you believe the probabilities add up over time, then it's clear that sellings puts becomes a profitable endeavor..
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Dude,you are flat out wrong .




daytonabeach83 said:
i'm soooo glad you asked all this cuz the answers are all pretty straightforward and really easy to comprehend so you should be able to follow no problem lol...

selling puts gets you into stock at lower price because, umm, you're selling a put below the current stock price and taking in a credit for doing so? what's going to give you the lower cost basis, buying SPY today or selling an OTM put against SPY today? hint: if SPY is at $421, and you sell the $410 put for idk, say $5.00, then your cost basis is going to be $405.. now which is cheaper, $405 or $421?

a put and a covered call ARE the same! yes! i specifically addressed this had you read what i said..

in equities with put skew, you receive MORE credit for selling the put than the equivalent covered call, BECAUSE OF THE SKEW LOL.. that's literally exactly what the skew is telling you.. that puts are more expensive than calls... so which would you rather be selling, if they're synthetically the same thing? the cheap one or the expensive one? if they are the exact same thing but one is more expensive than the other, there HAS to be a difference in profitability for selling one versus the other.. it's physics..

both cap the upside, duh.. i never said, or even remotely implied anything different.. but one pays you more than the other.. for like the fourth time now... it ain't rocket science man...

what's the difference? idk, why don't you go look at the SPY or IWM or QQQ option chain next month and compare the prices for 30D calls and puts? earlier today the skew difference on a 30D July 16 call and put on IWM was around $1.80.. and considering the call was going for around $3.20 and the put was going for about $5.00, i dare say that $1.80 is a SUBSTANTIAL difference...

idk why you keep responding to me without even reading my posts, but i think it's you underestimating the effects of vol skew, not me placing too much importance on them... skew doesn't tell you which direction to trade, but it DOES tell you how to most efficiently express your directional assumption.. there are bullish and bearish strategies for put skew and bullish and bearish strategies for call skew...

have you ever calculated the expected value of a trade that goes against the skew versus one that takes advantage of it? there's way more to it than EVs, but seriously, have you?
More...
 
daytonabeach83 said:
in equities with put skew, you receive MORE credit for selling the put than the equivalent covered call, BECAUSE OF THE SKEW LOL.. that's literally exactly what the skew is telling you.. that puts are more expensive than calls... so which would you rather be selling, if they're synthetically the same thing? the cheap one or the expensive one? if they are the exact same thing but one is more expensive than the other, there HAS to be a difference in profitability for selling one versus the other.. it's physics..

both cap the upside, duh.. i never said, or even remotely implied anything different.. but one pays you more than the other.. for like the fourth time now... it ain't rocket science man...

what's the difference? idk, why don't you go look at the SPY or IWM or QQQ option chain next month and compare the prices for 30D calls and puts? earlier today the skew difference on a 30D July 16 call and put on IWM was around $1.80.. and considering the call was going for around $3.20 and the put was going for about $5.00, i dare say that $1.80 is a SUBSTANTIAL difference...

idk why you keep responding to me without even reading my posts, but i think it's you underestimating the effects of vol skew, not me placing too much importance on them... skew doesn't tell you which direction to trade, but it DOES tell you how to most efficiently express your directional assumption.. there are bullish and bearish strategies for put skew and bullish and bearish strategies for call skew...

have you ever calculated the expected value of a trade that goes against the skew versus one that takes advantage of it? there's way more to it than EVs, but seriously, have you?
More...

Long SPY and short the 450C = short the 450P. The difference between a call and a put? Shares.

There isn't any difference in risk between long SPY/short 350C and the short 350P outside of microstructure. You keep contrasting an OTM CC position with an OTM short put. You're defining a risk-reversal, but I don't know why.

They are equal if the strikes are the same.
 
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