delta, a quick chart analysis, maybe reading some recent news about the underlying, and experience...
Hmm. I think you have not understood the margin requirement thing. It's central to the high success rate of my trading, because it means leverage (ie. the less the marginreq the higher the win, relatively and also absolutely seen)!...
And I think you misunderstand what margin in this context means... It is not what you can borrow, no, it's the part of your cash that you have to give to the broker as a security colleteral...
Ie. you can see the marginreq as your investment amount. PL has to be calculated based on this. And: the margin will be released after the position expires or when it get closed early.
Regarding commission: yes it's negligible when using big money... Hmm. maybe not: b/c it's all releative...
Hmm... Technically Margin or not should not be vital to the strategy (just affects the total outcome of the strategy). But still, how do you determine which stocks will move in your favour? The: 'probability of the option expiring worthless'
Also, when you state 30% every month, are you talking about the total investment size (including margin) or just the base size (ex-margin). I.e.:
1: 30% Return On Portfolio (including 3:1 Margin)
100k CASH, Margin 3:1, giving 300k total investment size.
A 10% increase on 300k would be 30k.
This would then be reflected as a 30k increase on the 100k yielding a 30% return.
2: 30% Return On Investment
100k CASH, Margin 3:1, giving 300k total investment size.
A 30% increase on 300k would be 90k
This would then be reflected as a 90k increase on the 100k yielding a 90% return.
I'm suspecting you mean #1 ? If so, then a 10% return is reasonable, just a higher probability of loss if the underlying does not move in your direction. As mentioned above, would like to understand how you determine: The probability of the option expiring worthless.
Now, the risk:
In a short strangle you sell 1 PUT and 1 CALL.
If the stock nose dives, you end up with the STK in your portfolio which you paid high for, and is now trading low. Or you eat the loss.
1) If you eat the loss, your base amount decreases and the amount you can borrow on margin decreases. Also, since you are trading on margin you may end up eating a bigger loss (because you sold more PUTs than you can cover with cash)
2) If you hold the stock, it can continue to drop (or just remain low). This will decrease your holdings net value and the amount you can borrow on margin. This of course decreases your ability to generate revenue during subsequent trading periods and could lead into a downward death spiral if you can't rebuild quickly enough.
Now, from what I understand, the crux of your strategy depends on determining the: Probability of the option expiring worthless.
Worded differently, but equivalently, you are attempting to price a stock within a specific trading range over a specific period of time.
I.e.: TSLA is trading at 200. I expect it to not drop below 180 or go above 220 by the end of the week.
Now, if we analyze that, what we are getting into is determining the implied volatility of TSLA. What we have in our example is a shift of 20% in either direction. This is an Implied Volatility of 20% with 1 standard deviation (68%).
Now, if you pull up the prices of options you'll notice the IV column of course has the IV computed nicely for us. When it reports 20%, it means the general consensus of the market is that there is a 68% probability that TSLA would be trading between +/- 20% of its present value by the expiration date.
Now, trading prices of Options on the market are based on various factors (greeks, black-scholes model, and of course IV). Which means, the price they are trading on is already based on the IV.
So what does this all boil down to:
A short strangle sells options at a price that the market determines there is a 68% chance of expiring worthless.
So what do we take from this:
1) Your algorithm for determining the probability of an option expiring worthless needs to be more efficient than the market's algorithm in order for you to beat the market (have a tighter strangle).
This is of course possible if you know what you are doing (have specific industry or corporate knowledge for example).
2) If you are as good as general consensus, then you have a 68% chance of success. Which means you have a 32% chance of failure. Which is high.
You can of course widen your strangle and increase the probability of success (sell TSLA PUT at 10$ and CALL at 300$) -- but your profit will be *very* tiny here. (note: Some hedge funds do these to generate profits, but they are shifting 100M+ on a trade paying hardly more than exchange fees to do it)
Now, if my logic is right (and my maths are on par), your entire strategy is basically based on:
I can determine the actual volatility of the stock better than what the market is determining it to be, and can therefore find options that are being sold for far more than they are truly worth.
I.e.: XYZ is showing an IV of 40% and selling at 2$, but I know it's no where near that volatile and will barely budge 10% over the next 1 week so its real value should be 1$, this is a good buy.
Geeze I talk a lot
That stuff is just not easy to pre-determine 