Option selling. Too good to continue?

[taowave]

IC,IMHO,you hit the nail on the head,and are offering valuable insight.

As we know,the easiest path is seldom the correct path.Selling garbage premium is the "easiest" way to make money.

Markets have become very efficient,vol is very low..In my "younger" years,I was a massive premium seller/delta hedger of the OTM crap.As I have gotten wiser,I have realised that if i am going to be succesful trading my own capital,I have to become a far better directional trader,and employ strategies where I am risking X percent to make 3-20x....

OP made money due to excessive leverage,luck and hopefully skill.I say hopefully as he had 1 mil of underlying notional vs a 49k account..

The OP had 20-1 leverage.He will argue and say on a delta basis,he was only leveraged two - three to one. Thats a fantasy....

The obvious is the OP was leveraged long and massively underperformed the market less leverage.

As you pointed out,a decent directional call would have provided the same return on a fraction of the risk,but the truth is it is very very hard to reprogram premium sellers without Mr market ripping their gonads off...

Imagine in the year 2019, if he bought calls instead, he could easily make 100% and the downside risk was capped. Of course hindsight is 20/20.

 

[taowave]

Not sure exactly what you are saying,but IMHO the paper illustrates that there is no great edge to selling vol.More importantly it illustrates that OTM is no better than ATM,and the skew/OTM isnt some miracle drug...

I thought the paper was very insightful from the perspective of trading dispersion books(when i traded dispersion)

Also, very iffy to analyze options in that manner, as it entirely ignores dynamic hedging. Law of big numbers might make it less terrible, but still a failed methodology. I've had many a days I walked away with a big smile watching my long OTM's go more OTM.

 

[taowave]

Keep in mind that as you go down the option chain,the percentage difference between fixed strike changes increases.

Stock at 10,the 10 strike vs the 9 strike "width" is much less than the 5 strike vs the 4..

Yes, absolutely buy what you posted. My understanding is the relative change in IV (strike to strike) way OTM compared to ATM is larger and can be seen on the skew graph

 

[Wheezooo]

Not sure exactly what you are saying,but IMHO the paper illustrates that there is no great edge to selling vol.More importantly it illustrates that OTM is no better than ATM,and the skew/OTM isnt some miracle drug...

I thought the paper was very insightful from the perspective of trading dispersion books(when i traded dispersion)

I assumed you would. The paper looks at it as sell put. Put expires worthless. Seller collects the premium. It ignores any hedging.
I look at it as I buy put. I buy Underlying. mkt moves I sell, I buy, I sell again, I buy again, and by the time we get to expry I have absolutely no clue as to what I returned on that specific strike. Or a different example... I buy put, I buy hedge. Market goes through the roof tomorrow, you gained your piddly little premium, Vol explodes, and between vol and hedge I ripped the cover off the ball 4 times that. Again no acount of options 'return' for that scenario. Those types of studies make no accounting for dynamically hedged options. Like I have said since day one. I was always a long vol trader (not ATM) and a VERY heavy wing buyer.

...but for reasons I expressed already, no one seems to understand (except, I think, mcguines and dest), and I will never again repeat. There is a reason for skew. It IS NOT an error in mispricing.

For that matter... time to click the lil button to the bottom right.

 

[taowave]

Wheezoo, you are introducing continuous delta hedging which as far as i can tell is not what the OP does...He sells 10-14 delta puts,50 days out and does not trade delta neutral.He is always long,and in the examples he posted taking down 20x the notional if assigned.

The Goldman paper answers all the questions about the theoretical edge that premium sellers may or may not have,as well as providing stats on the relative returns of selling ATM vs OTM..

Not sure why you are talking about delta hedging as the OP trades directionaly via short gamma.

Look at the leverage he took on..1 mil underlying on 49k,selling 10-14 delta puts.

Forget about skew and kurtosis,the Goldman article illustrates that selling options in the market period tested did not produce excess return,It lowered the vol of the returns and increased Sharpe.OTM was not the panacea one thinks it is..Thats where you are 100% correct,and the other side confuses large leverage sprinkled in with good fortune as an edge

I guaranty you most premium sellers who have not been set ablaze would rather sell

5 10 delta options at 18 vol than sell 1 delta 50 option at 12 vol.Its the way they are built until they lose a limb or two in a meltdown

I assumed you would. The paper looks at it as sell put. Put expires worthless. Seller collects the premium. It ignores any hedging.
I look at it as I buy put. I buy Underlying. mkt moves I sell, I buy, I sell again, I buy again, and by the time we get to expry I have absolutely no clue as to what I returned on that specific strike. Or a different example... I buy put, I buy hedge. Market goes through the roof tomorrow, you gained your piddly little premium, Vol explodes, and between vol and hedge I ripped the cover off the ball 4 times that. Again no acount of options 'return' for that scenario. Those types of studies make no accounting for dynamically hedged options. Like I have said since day one. I was always a long vol trader (not ATM) and a VERY heavy wing buyer.

...but for reasons I expressed already, no one seems to understand (except, I think, mcguines and dest), and I will never again repeat. There is a reason for skew. It IS NOT an error in mispricing.

For that matter... time to click the lil button to the bottom right.

 

[Wheezooo]

Wheezoo, you are introducing continuous delta hedging which as far as i can tell is not what the OP does...He sells 10-14 delta puts,50 days out and does not trade delta neutral.He is always long,and in the examples he posted taking down 20x the notional if assigned.

The Goldman paper answers all the questions about the theoretical edge that premium sellers may or may not have,as well as providing stats on the relative returns of selling ATM vs OTM..

Not sure why you are talking about delta hedging as the OP trades directionaly via short gamma.

Look at the leverage he took on..1 mil underlying on 49k,selling 10-14 delta puts.

Forget about skew and kurtosis,the Goldman article illustrates that selling options in the market period tested did not produce excess return,It lowered the vol of the returns and increased Sharpe.OTM was not the panacea one thinks it is..

I guaranty you most premium sellers who have not been set ablaze would rather sell

5 10 delta options at 18 vol than sell 1 delta 50 option at 12 vol.Its the way they are built until they lose a limb or two in a meltdown

I agree with everything you say, and the results are as I expect they would be. But the reasoning for skew is based on how I see options, not how he sees options. When I tried to explain that and why it is now called MODIFIED BSM I got pissed on and confronted idiocy about IV vs realized. Piled on top of the ignorance of risk and everything else I agree with you on such as lazy man trading, and wanting to hold onto your one trick pony despite everyone telling you it is going to kick you in the head, except for me, who is trying to say you don't even have a pony.l, but you're still going to get kicked in the head. This thread has been utterly the most annoying one I have participated in since I have been here. I even almost asked you to stop commenting because I felt you trying to explain to a 6 lot trader what they were doing was a kindness, but beyond that, arguing was demeaning yourself. Imagine if one of the juniors on your desk was watching that. They'd probably be like WTF.
Now the ignore button is my new best friend

I like a lot of people here, happy to help, but not going to argue with stupid. And this thread was a smorgasbord of stupid. Fuck even dest who has a tendency to keep arguing ad infinitum ran away at page one.

 

[draft730]

I agree with everything you say, and the results are as I expect they would be. But the reasoning for skew is based on how I see options, not how he sees options. When I tried to explain that and why it is now called MODIFIED BSM I got pissed on and confronted idiocy about IV vs realized. Piled on top of the ignorance of risk and everything else I agree with you on such as lazy man trading, and wanting to hold onto your one trick pony despite everyone telling you it is going to kick you in the head, except for me, who is trying to say you don't even have a pony.l, but you're still going to get kicked in the head. This thread has been utterly the most annoying one I have participated in since I have been here. I even almost asked you to stop commenting because I felt you trying to explain to a 6 lot trader what they were doing was a kindness, but beyond that, arguing was demeaning yourself. Imagine if one of the juniors on your desk was watching that. They'd probably be like WTF.
Now the ignore button is my new best friend

I like a lot of people here, happy to help, but not going to argue with stupid. And this thread was a smorgasbord of stupid. Fuck even dest who has a tendency to keep arguing ad infinitum ran away at page one.

It is funny how easily you get pissed, because I didn't disagree that 6 lots were too much. I just don't buy the idea you are going to get bankrupt as easily as you think if you are disciplined.

 

[taowave]

Sweet that you realized 6-8 lots was a bit big for your account size..
Just out of curiousity,on a 49k account,how many short options do you think is optimal?

If you are truly disciplined as have an order in to close the position at the market down X percent or at hard stop option price,I dont think you will blow up.If you get cute and roll down/down and out,its a more slippery slope...

Assuming you do have the discipline to close out,when do you get back in??

It is funny how easily you get pissed, because I didn't disagree that 6 lots were too much. I just don't buy the idea you are going to get bankrupt as easily as you think if you are disciplined.

 

[draft730]

Sweet that you realized 6-8 lots was a bit big for your account size..
Just out of curiousity,on a 49k account,how many short options do you think is optimal?

If you are truly disciplined as have an order in to close the position at the market down X percent or at hard stop option price,I dont think you will blow up.If you get cute and roll down/down and out,its a more slippery slope...

Assuming you do have the discipline to close out,when do you get back in??

Up until now, I rolled over once the ratio overall delta/liquidation value reached a specific number. With this rule in place, I never had options with a higher than 25 delta. Then again I will sell the 10 deltas, which by then will be far away due to the vol spiking. With this strategy I "managed" to lose 20% last December...
Truth be told, some people here, including you, have scared me a bit and I have decided to scale back (cut in half the number of puts, sell calls, sell ES future). But again, what scares me is not a last December type market or even the flash crash but an event in w/e or a real black swan event where I will not have time to adjust (let's say Monday opens with the ES locked down 5%)

 

[drcruz]

Up until now, I rolled over once the ratio overall delta/liquidation value reached a specific number. With this rule in place, I never had options with a higher than 25 delta. Then again I will sell the 10 deltas, which by then will be far away due to the vol spiking. With this strategy I "managed" to lose 20% last December...
Truth be told, some people here, including you, have scared me a bit and I have decided to scale back (cut in half the number of puts, sell calls, sell ES future). But again, what scares me is not a last December type market or even the flash crash but an event in w/e or a real black swan event where I will not have time to adjust (let's say Monday opens with the ES locked down 5%)

...or no one on the otherside of the trade to even get out. I too worry about such things