Option selling. Too good to continue?

[DallasCowboysFan]

Go read the book by Taleb: The Black Swan. He made a fortune (he claimed) buying tails. But I am quite sure he didn't buy them blindly.

I never heard of a tail.
Is that a naked put / call ?

 

[Alexpung]

It most certainly does not. Properly priced it is always a zero expected value transaction. You are confusing higher likelihood of winning with expected value. If I roll a die, pick a number, and get paid 6 to 1. I am most likely to lose but the expected value on any individual roll will always remain zero.

Well the underlying is ES so I don't think it is wrong to say shorting the put is +ev, because you are long delta.

 

[Magic]

See post #41.



It most certainly does not. Properly priced it is always a zero expected value transaction. You are confusing higher likelihood of winning with expected value. If I roll a die, pick a number, and get paid 6 to 1. I am most likely to lose but the expected value on any individual roll will always remain zero.

In a place like SPX though, there’s a risk premium associated with selling the down & out vol [^even with delta aside] akin to how long shares have positive drift. Regimes where the options aren’t priced ‘properly’ occur fairly regularly. Single names may differ, I haven’t been through that data nearly as much.

This is what TBS is referring to I think. And the 15% figure is pretty accurate with proper sizing and screening. Although as you say the distribution will have a large amount of negative skewness, which has it’s drawbacks.

This is a far cry from what retails using all their margin to sell puts/condors every day, rain or shine are doing though.

Imo one of the biggest advantage small retail has is being unbound by any prospectus or DD constraints or anything. Why go all-in on any one return factor? Run esoteric stuff like this at smaller size and use returns while they exist to grow a stable portfolio bigger.

The further into the alpha realm you try to go the more the market behaves like a competition. Very few independents can cut it there. And you’re going to be up against way more experience, intelligence, and infrastructure than you likely have.

edit - formatting

 

[newwurldmn]

Thanks. This is the kind of answer I was looking for, with specific numbers as to how much margin is more "optimal" to use. Extraordinary returns will not be achievable if I cut back the exposure though. Would you consider selling calls as a (slight) hedge and a return booster?

You were just looking for corroboration.

I know how your story will end. As a friend of mine (that I met on here) used to say: the best lesson is a spanked bottom.

 

[drcruz]

We used to have a sign up when you came into the office. It said, "Never have so few, taken so much, from so many."

It's nice to finally put names to the 'so many.' Thank you Bobby, Draft, and Dr.

I think we're the few and don't forget James Cordier and Victor Niederhoffer

 

[drcruz]

...Would you consider selling calls as a (slight) hedge and a return booster?

This is why I recommended a ONE subscription. Test 2013 and don't cheat. Pay attention to Sweetbobby's rules of cutting the 2x loss, test without cutting your losses.

For the short puts, test around Aug. 2011, Aug. 2015, Dec. 2015, Feb. 2018, Oct. 2018

 

[Wheezooo]

I think we're the few...

I'm not sure how I reconcile the above with:

"After blowing up 4 accounts... it took decades... and 2019 is my first profitable trading year):"

 

[Wheezooo]

In a place like SPX though, there’s a risk premium associated with selling the down & out vol [^even with delta aside] akin to how long shares have positive drift. Regimes where the options aren’t priced ‘properly’ occur fairly regularly. Single names may differ, I haven’t been through that data nearly as much.

This is what TBS is referring to I think. And the 15% figure is pretty accurate with proper sizing and screening. Although as you say the distribution will have a large amount of negative skewness, which has it’s drawbacks.

This is a far cry from what retails using all their margin to sell puts/condors every day, rain or shine are doing though.

Imo one of the biggest advantage small retail has is being unbound by any prospectus or DD constraints or anything. Why go all-in on any one return factor? Run esoteric stuff like this at smaller size and use returns while they exist to grow a stable portfolio bigger.

The further into the alpha realm you try to go the more the market behaves like a competition. Very few independents can cut it there. And you’re going to be up against way more experience, intelligence, and infrastructure than you likely have.

edit - formatting

Nice to see you, hope all is well. I still owe you a book about the Fed . Hopefully 6-9 more months. I also like the quotations around the word ‘properly.’ I always use that word with a sense of hesitation. I am going to steal that from you. Feels more appropriate.

On a superficial but practical note. There is the fact that ‘leaning’ into that skew, means you better damn well be prepared to carry into expry, because you are never getting it back. As well as external costs related to that such as VAR costs, which no model adds in, but no bonus calculation is without... But addressing the issue more directly. Can I assume this 15% ‘risk-premium’ is something you are attributing to a difference in realized vs. implied strike vol?

Edit: Nevermind, someone else confirmed what I supposed. Please see Thread: Delta hedging questions, post#8.
Was a weak moment that I surprised myself and addressed that. Options have two gammas and two thetas, you are only acknowledging one. It's kinda like teenie delta options going deep on you, when you see the second, oh boy will you never forget it exists.

 

[TheBigShort]

See post #41.



It most certainly does not. Properly priced it is always a zero expected value transaction. You are confusing higher likelihood of winning with expected value. If I roll a die, pick a number, and get paid 6 to 1. I am most likely to lose but the expected value on any individual roll will always remain zero.

Why would someone write a contract with an expected value of 0? Given the imbalance of hedgers vs speculators in OTM puts I dont think I need to get into the implied vs realized distribution to prove that systematically selling OTM puts (especially index) has a positive expected value.

There have been a lot of papers written on the variance risk premium

 

[drcruz]

I'm not sure how I reconcile the above with:

"After blowing up 4 accounts... it took decades... and 2019 is my first profitable trading year):"

Oops, I skimmed too quickly - okay, I'm not worthy