Option selling. Too good to continue?

I agree with you,but the guys are selling puts 3-1 on a notional basis for the cash on their account..

Foy every 100k in cash,they are long apx 300k notional of underlying in a move down..

And this is in a really cheap vol enviorment.The 10 delta put they ate trading is only 9 percent below spot..

Furthermore,there has been an excessive volatility risk premium over time,but the distribution has also understimated tail moves on several occasions.

The studies I have looked at do not sell ten puts with a 10 delta .They sell one put ...

Last but not least,why would anyone take on tail risk at these levels...You aren't being paid to do so,let alone sell 10 options with a 10 delta at 18 vol...Go long 100 shares of the underlying,and if you are dead wrong,at least you will have your wits and powder in the keg to sell the vol that went from 18 to 40...

If your selling leveraged notional down 9 percent,294 strike,you deserve to get scorched...





ffs1001 said:
@draft730 , ignore the haters, and the most sensible responses you've had so far are from drcruz and SweetBobby.

I'm an option seller myself (over 10 years) but I also trade a lot of other things.

Firstly, congrats on your returns - you've more than doubled your account in 3 years.
Secondly, if you can survive Oct-Dec 2018, then you're better placed to handle future meltdowns. That pre-Chirstmas fall was the heaviest for like 90 years and Christmas Eve 2018 was the worst Christmas Eve since the beginning of the time for the SPX.
You admit that you escaped that period somewhat due to luck as opposed to any skill, but luck helps in the game.

Going forward, here's what I would suggest :

- as previously mentioned, limit your exposure (reduce lots sizes). This is THE biggest reason for traders blowing up.
- diversify using countries - sell puts on different countries indexes. Sure, worldwide equities are heavily correlated, but the London based FTSE and Germany's DAX can often diverge from the SPX.
- diversify using asset classes - sell options on currencies, commodities, treasuries, metals etc. However - be VERY careful with commodities, as some can be very volatile (eg NG as mentioned earlier in thread).
- reduce risk using variety of short strategies. You don't just need to sell naked puts - you can do credit put spreads, ratio spreads, diagonals etc. They offer controlled risk.

Tread small, tread carefully and your returns may not be what you have emotionally become accustomed to, but you will make slow and steady gains. And be able to sleep better at night.

Good luck.
More...
 
77 percent on what????

You started with 100k and ended up with 177k?? One year???

2.5x the S and P return selling garbage puts??

You are good..


Cmon bro..



draft730 said:
No I wasn't looking for corroboration. My thinking was as follows... I know tail risk in ES puts is overpriced, so I have an edge selling. People tend to be more scared for black swans than they "should". (Financial media help a lot...). IV is much higher compared to ATM vol.
I made 77%, it's too much. So, certainly, I am taking too much risk. I have to cut my exposure, but by how much? This is basically what I am looking for
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draft730 said:
No I wasn't looking for corroboration. My thinking was as follows... I know tail risk in ES puts is overpriced, so I have an edge selling. People tend to be more scared for black swans than they "should". (Financial media help a lot...). IV is much higher compared to ATM vol.
I made 77%, it's too much. So, certainly, I am taking too much risk. I have to cut my exposure, but by how much? This is basically what I am looking for
More...

Cut your exposure to a level that you can live with a 20-30percent overnight drop in the market for all the reasons everyone on this thread is telling you.
 
traider said:
Is ATM also overpriced? Or only OTM
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I would be cautious taking advice from @Wheezooo. I find his posts very misleading (2 thetas??).

If something pays off in bad times it should have a higher risk premium than something that pays off in good times. Since long gamma pays off during bad times it only makes sense for there to be a risk premium priced into options (especially puts).

@sle posted on here a while back an excel sheet that showed the PnL had you sold variance swaps from I believe 2000. The results are outstanding! Variance swaps would have an implied var of something like the delta 30 puts and constant gamma so it's a little different. But ATM vol is not to far off.

Selling a 30 day ATM straddle and delta hedging will have a positive expected value. That being said, you can improve your results by figuring out a better delta hedging strategy and trying to figure out when tail risk looms so you can step aside.

To counter Wheezo. Imagine if puts were 0 ev. This would mean that every fund manager in the world would be buying these things - They would lose no edge and they would not lose their job in bad times. His reasoning does not make any sense.

Just be sensible with your risk. Aim for 15% annually not 77%!!!!
 
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TheBigShort said:
I would be cautious taking advice from @Wheezooo. I find his posts very misleading (2 thetas??).

If something pays off in bad times it should have a higher risk premium than something that pays off in good times. Since long gamma pays off during bad times it only makes sense for their to be a risk premium priced into options (especially puts).

@sle posted on here a while back an excel sheet that showed the PnL had you sold variance swaps from I believe 2000. The results are outstanding! Variance swaps would have an implied var of something like the delta 30 puts and constant gamma so it's a little different. But ATM vol is not to far off.

Selling a 30 day ATM straddle and delta hedging will have a positive expected value. That being said, you can improve your results by figuring out a better delta hedging strategy and trying to figure out when tail risk looms so you can step aside.

To counter Wheezo. Imagine if puts were 0 ev. This would mean that every fund manager in the world would be buying these things - They would lose no edge and they would not lose their job in bad times. His reasoning does not make any sense.

Just be sensible with your risk. Aim for 15% annually not 77%!!!!
More...

That’s a common job interview question. Make a 1 cent market on an option with a fair value of $1.
 
taowave said:
77 percent on what????

You started with 100k and ended up with 177k?? One year???

2.5x the S and P return selling garbage puts??

You are good..


Cmon bro..
More...
Started with 49 ended with 86.7k. As I said in the first message I sell 10-14 delta puts and roll the position to maintain a minimum overall delta exposure. In the first 4 months alone I was up 40% if that helps
 
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