My approach to selling puts.

[taowave]

As a deep value trade,it make no sense to roll puts,especially in highly illiquid names.

Bad mix of an Option Weiner(me) breeding with a Value guy..Not going to breed well..

Buffet certainly sells puts,but he sells them to take delivery,except when selling Long Dated Index vol after dislocations...

More to the point,a simple rolling strategy in a highly liquid index doesnt perform well,so why on earth do it in highly illiquid names???

BTW,have you simulated your margin requirements down X percent? Are you reg T or portfolio margin?

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...

 

[tonyf]

As a deep value trade,it make no sense to roll puts,especially in highly illiquid names.

Bad mix of an Option Weiner(me) breeding with a Value guy..Not going to breed well..

Buffet certainly sells puts,but he sells them to take delivery,except when selling Long Dated Index vol after dislocations...

More to the point,a simple rolling strategy in a highly liquid index doesnt perform well,so why on earth do it in highly illiquid names???

BTW,have you simulated your margin requirements down X percent? Are you reg T or portfolio margin?

PM

it is a difficult simulation to run as IB usually tightens margin requirements when VIX spikes, and this is not captured by the simulator.
But I did well back when Trump was pulling his shenanigans and IB raised margins by 50% across the board.

 

[daytonabeach83]

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...

not a fan of rolling either... feels like kicking the can down the road, just like you said...

 

[tonyf]

To bring this conversation back to earth, I will start posting monthly performance charts to reflect (to a certain extend) portfolio volatility/leverage, risk and return.

I appreciate that value investing using options instead of the underlying is not common. I will keep running this live experiment and report here for your benefit and critique (don't hold back but keep it civil).

First chart out in 6 days.

Here is my portfolio's performance for this month. I am posting today and not tomorrow as I have plans this weekend and worry that I will be taken by other things. I am not expecting anything crazy today considering that the pre-market futures are flatish, but one never knows.... a chart to start with:

A couple of points on performance:

*figures are triple-net, as I am not a US resident an pay no capital gains tax, options not exposed to WHT, my operational costs are negligible as I trade from home and do not use any OMS/EMS/data terminals beside what IB offers for free.
*I had to book a one off massive loss this month of 1.04% (3.12% would have been 4.18%) due to a fat-finger error. Utter stupidity where I bought instead of sold a large ticket of a very wide contract. Paid nearly the price of an HBS MBA in a split second. Advice is much appreciated on how you avoid fat-finger errors when inputting trades manually in TWS (and not using the API).
*Peak leverage for the period was 3.3x this month (exposure to underlying) as indicated earlier.
*Benchmarks stated earlier in this post like Nasdaq 100 (QQQ) or Russel 2K (IWM) were flat. 3x flat is still flat. There is alpha here besides leverage.

Tao asked about sharpe ratio, sortino, etc... I personally have my own risk model that is probabilistic in nature and relating directly to my investing approach, but here is what IB spits out if of any interest:

In short, performance is obviously on a downward trend but I feel that 3-4% monthly is a realistic target for me in this environment.

Well thought advice/feedback is welcomed as usual.

 

[traider]

Here is my portfolio's performance for this month. I am posting today and not tomorrow as I have plans this weekend and worry that I will be taken by other things. I am not expecting anything crazy today considering that the pre-market futures are flatish, but one never knows.... a chart to start with:

View attachment 259718

A couple of points on performance:

*figures are triple-net, as I am not a US resident an pay no capital gains tax, options not exposed to WHT, my operational costs are negligible as I trade from home and do not use any OMS/EMS/data terminals beside what IB offers for free.
*I had to book a one off massive loss this month of 1.04% (3.12% would have been 4.18%) due to a fat-finger error. Utter stupidity where I bought instead of sold a large ticket of a very wide contract. Paid nearly the price of an HBS MBA in a split second. Advice is much appreciated on how you avoid fat-finger errors when inputting trades manually in TWS (and not using the API).
*Peak leverage for the period was 3.3x this month (exposure to underlying) as indicated earlier.
*Benchmarks stated earlier in this post like Nasdaq 100 (QQQ) or Russel 2K (IWM) were flat. 3x flat is still flat. There is alpha here besides leverage.

Tao asked about sharpe ratio, sortino, etc... I personally have my own risk model that is probabilistic in nature and relating directly to my investing approach, but here is what IB spits out if of any interest:

View attachment 259720


In short, performance is obviously on a downward trend but I feel that 3-4% monthly is a realistic target for me in this environment.

Well thought advice/feedback is welcomed as usual.

Hi Tony, you can try playing around with settings for options:
Price percentage and number of ticks so that a warning will pop up if your order deviates too much
Another way is possibly to use an IB algo that pegs to mid but I haven't explored this much.

 

[tonyf]

Hi Tony, you can try playing around with settings for options:
Price percentage and number of ticks so that a warning will pop up if your order deviates too much
Another way is possibly to use an IB algo that pegs to mid but I haven't explored this much.
View attachment 259721

I did this earlier but have, on a few occasions, clicked on the confirmation screen mechanically without thinking twice about it. This usually happens the odd day when VIX spikes, news is out and an opportunity flashes all in the same time. I am now pinning a patch on the bid button using DeskPins to avoid pressing it but its a suboptimal solution.

 

[tonyf]

Not sure if anyone is still following this thread - do let me know if you want to see similar posts as the above in the future (reports for June, July, etc...)

 

[iddy]

Hi Tony

Can you shed more lights on how you actually manage the risk of not going into margin default when you sell naked puts with a leverage 3X and you don't roll but take assignment ?

 

[tonyf]

Hi Tony

Can you shed more lights on how you actually manage the risk of not going into margin default when you sell naked puts with a leverage 3X and you don't roll but take assignment ?

Very crudely actually. Maintenance margin is what we are talking about here so I check it out it every morning when premarket vol is flat/low and monitor constantly when vol jumps.

So today my maintenance margin is about 2/3rd of net liquidation value. If I feel that a large OTM position is going ITM and that I can not absorb it, I will trim to make sure the algo does not fire sale uncontrollably.

P.s. this is all work in progress for me...how do you manage yours?
Traider floated the idea of buying OTM SPX puts by way of macro hedge but has not followed up on this idea with any figures...

 

[tonyf]

"“The whole principle came from the idea that if you broke down everything you could think of that goes into riding a bike, and then improve it by 1 percent, you will get a significant increase when you put them all together."

Dave Brailsford on the importance on small marginal gains.

What can this thread's viewership suggest by way of 1% improvement to my system? June's performance is on track but am all ears to test out fresh ideas.

I am hoping this collective reasoning will benefit all of us.