My approach to selling puts.

[taowave]

Nice that you are thinking of me..

Am I the fierce nerd or the competitive non nerd??? Or is that you??

Interesting read...

I was thinking about you when reading this earlier:

"The bad news is that if it's not exercised, your fierceness will turn to bitterness, and you will become an intellectual playground bully: the grumpy sysadmin, the forum troll, the hater, the shooter down of new ideas."

source: http://www.paulgraham.com/fn.html

 

[tonyf]

Nice that you are thinking of me..

Am I the fierce nerd or the competitive non nerd??? Or is that you??

Interesting read...

There is probably a bit of both in all of us here... it's a question of how to channel it.

 

[taowave]

DB,I trade in a similar fashion to you as far as ratios along with Split strike flys..

I ran a backtest just now on the SPY,selling puts vs buying the SPY..I only looked at 25 Delta and 50 Delta. Start date was 1/2007...I sold 30 DTE options and rolled,and I also looked at 365 DTE puts and rolled...

The Long SPY outperformed the sale of the Put/s by a decent margin.Sharpe/Sortino were better on Long SPY

The best comp was the 50 delta,1 year put..Returned 4.89% per vs 7.27% for the SPY..
The problem is,Max Drawdown.You just dont take in enough premium to lever a 50 delta put 2 -1..Your Max Drawdown will be over 90%,compared to 62 percent for the SPY...

And for those of you who short 25 Delta puts over 3-1 notional,if you got in at the wrong time,you went the way of the dinosaur..

From a purely directional perspective dont get caught up in the skew noise,it will only blow you out sooner

not saying it's easy money, not at all, not even close.. the increase in tail risk alone from trading skew is enough to make most people who trade it lose epically.. statistical mechanics says something like 1/3 of people will go bankrupt playing a game with a 2:1 profit-loss ratio and a 50% chance of winning..

what i'm saying is that it's something you gotta be aware of when you trade, so you're working with it instead of fighting against it.. also, i don't trade skew directly.. i use skew to enhance the efficiency of directional trades (i.e., ratio spreads instead of risk-reversals)

 

[qlai]

When my sales guys brought in the likes of Tudor and Cohen,not once did they ever ask for a product/structure that capped their upside..

Assymetrical payout or go home

Hey, I'm curious, wouldn't you consider a steady returns if there was an edge there? Sounds a bit prejudice.

I trade in a similar fashion to you as far as ratios along with Split strike flys..

Does this have an assymetrical payout?

 

[daytonabeach83]

From a purely directional perspective dont get caught up in the skew noise,it will only blow you out sooner

chasing skew will do that, for sure.. i just use it to guide my strategy selection.. i approach trading from a statistical mechanics perspective, so it's less that vol skew is god and more a "don't play the game unless the odds are in your favor thing".. success comes from everything else you do around that..

as to the SPY thing, is this assuming you close the puts at a loss or take assignment and hold the shares? i think that's a critical aspect of put selling.. if you just lose the money on a down move, then sure, it's just a loss.. but if you take assignment then as things return you have shares that you paid less for than they were trading at on entry with skewed pricing increase on the premium relative to delta probabilities..

at least the way i've always understood it, the fact you're leaving the trade with shares is what allows the skewed cost basis reduction to actually be relevant in the long run?

to circle back to something you said prior, trading vol dynamics in this way is all about establishing

Assymetrical payout or go home

 

[taowave]

I would and do,and thats why Im not a billionaire....Not sure why,but I didnt think to tell Steve and Paul that they needed to skew if they wanted to be really successful

I never said I trade assymetrical payouts,but at this vol,I better start thinking about it...

Hey, I'm curious, wouldn't you consider a steady returns if there was an edge there? Sounds a bit prejudice.


Does this have an assymetrical payout?

Hey, I'm curious, wouldn't you consider a steady returns if there was an edge there? Sounds a bit prejudice.


Does this have an assymetrical payout?

 

[taowave]

Sell the 30 day put,and in 30 days when the dust settles,sell another..rinse ..repeat..
Same thing with the 1 year put..Hold till expiry..Dont take assignment..

you like to complicate things....

"Take assignment then as things return"?????

Good luck with that

chasing skew will do that, for sure.. i just use it to guide my strategy selection.. i approach trading from a statistical mechanics perspective, so it's less that vol skew is god and more a "don't play the game unless the odds are in your favor thing".. success comes from everything else you do around that..

as to the SPY thing, is this assuming you close the puts at a loss or take assignment and hold the shares? i think that's a critical aspect of put selling.. if you just lose the money on a down move, then sure, it's just a loss.. but if you take assignment then as things return you have shares that you paid less for than they were trading at on entry with skewed pricing increase on the premium relative to delta probabilities..

at least the way i've always understood it, the fact you're leaving the trade with shares is what allows the skewed cost basis reduction to actually be relevant in the long run?

to circle back to something you said prior, trading vol dynamics in this way is all about establishing

 

[daytonabeach83]

Sell the 30 day put,and in 30 days when the dust settles,sell another..rinse ..repeat..
Same thing with the 1 year put..Hold till expiry..Dont take assignment..

you like to complicate things....

"Take assignment then as things return"?????

Good luck with that

you don't believe in holding indexes long term?

 

[taowave]

Only if I want to outperform selling puts...

Im returning this thread to Tony....

 

[tonyf]

Happy to have a look.

Interesting private chat with qlai. After some thinking, I am still against rolling any puts for the following reasons:

1) wide bid-ask spreads, and steep slippage due to large positions I hold compared to the OCC average volumes.
2) liquidity taking when rolling and significant exchange fees
3) a false sense of safety net (in my view). I would rather be forced to re-analyse in full on expiry rather than slipping in a mechanical approach of kicking the can down the road.
4) Disturbing asset allocation plan and requiring rebalancing elsewhere to maintain the same risk profile. Does not suit me as I dislike closing options prior to expiry.

But thanks for bringing this to the forefront and pushing me to revisit this concept. I appreciate it works for others...