Poor Man's Covered Call vs traditional long stock portfolio

[morganpbrown]

Mark went from 28.44 to 26.97.

Back to the PMCC. I modeled one using today's end-of-day SPY data. Long: Jan 21, 408 call (123 DTE, 70 delta). Short: Oct 22, 435 call (32 DTE, 50 delta). Bootstrapped IV for B-S using a planar fit: IV = A*delta + B*DTE + C.

Here's a steady 3% decline over a month. Actually slightly profitable for 20 days or so. Gamma is mostly negative, as is gamma/delta (though I can't wrap my head around it yet)

Here's the steady 3% increase case. Profitability flat out to expiration. Same gamma, gamma/delta behavior.

I'm probably missing something (more likely many things), but this looks pretty good to me(???). Are these the kinds of diagnostics that the smart kids are using?

I have to confess that I feel dumber since I started posting my "dumb questions". That's probably a good thing. Better too hard than too easy. Natenberg (monotonous) is on my desk and Cottle is on my iPad.

 

[destriero]

The curves are intuitive. Intuitively, you know that your risk is delta as we drop and your vega will not compensate for the delta, so you need to ask yourself why add vols (vega) as it increases your debit?

What would have happened to your vol-position (Dec) if we had rallied? Strike vols would have increased but strip vols (all strikes) drop. Your Dec call gains moneyness and loses vega-sens. So again, all that the trade adds is vol; you lose it on the upside and delta risk exceeds vega on the downside.

You're not going to risk the hold beyond Oct as you'll roll or cover... so why add Dec vol?

The trade is "margin" efficient as you're long the back, but you can see (today) that the vega-pos, as a function of the debit, makes the R/R suspect as a buy-write alternative.

I would not want to be long vol down and out into this delta position. The only diagonal I would choose as BW-proxy would be an OTM LVLD (long vega; long delta) on index. It's the best bull skew trade in vol (long mkt).

Your Dec call gains slightly from skew on the upside but loses from strips, so call it a draw, and the moneyness kills the sensitivity. So look to structure up and out bull spreads. Even if it means, counter-intuitively, to buy OTM call verts hedged small with (short) shares.

Don't add vol unless it's going to work on skew dynamics.

 

[destriero]

I don't like short puts/CC as a rule. People treat them as a unit and that's stupid. It's not a stock proxy because you're going to get called if your right and you're hosed like today if the mkt takes a shit. It's a razor's edge of profitability.

Now, your 420/448(IIRC) diag looked good on the upside, but you don't want to be in down and out strikes in bull positions. If skew was reversed (like in meme single names) then yeah, it's great.

To get back to short puts. If you wouldn't short an ITM put standalone then pass on the CC. I am a big proponent of overwrites as they are simple to model. A strike touch will (almost) always be best case. Even when trading (-)edge stress in SVLD (long spot/short 2 upside calls) you're going to benefit more from delta-pos than you lose on stickiness/contamination. That being stated; it's better to do synthetic straddles (long 100 XYZ; short 2 XXD calls) in shares rather than index mkts due to the (-)risk reversal.

 

[morganpbrown]

Intuitively, you know that your risk is delta as we drop and your vega will not compensate for the delta, so you need to ask yourself why add vols (vega) as it increases your debit?

Yeah, this all makes sense. I can't yet quantify how "vega will not compensate for the delta", but I believe you. I need to improve my understanding of vega.

What would have happened to your vol-position (Dec) if we had rallied? Strike vols would have increased but strip vols (all strikes) drop.

You are correct - I didn't do jack shit to model the change in "strip vols" when the underlying moves up or down. Do people just mine historical data to obtain a cloud of daily price change versus daily IV change (fixing the other variables) and make a low-order fit?

Your Dec call gains moneyness and loses vega-sens. So again, all that the trade adds is vol; you lose it on the upside and delta risk exceeds vega on the downside.

Sorry, what is vega-sens?

The only diagonal I would choose as BW-proxy would be an OTM LVLD (long vega; long delta) on index. It's the best bull skew trade in vol (long mkt).

Roger, I will try to find a OTM LVLD play and model it.

I am probably running (optimistically) at 10-15% uptake efficiency on your knowledge dumps, but they are nontheless appreciated.

 

[destriero]

As an option trades ITM all of its greeks (sans delta) decrease in sensitivity. The problem with the call diag is that it only earns on vol as we drop but loses (more) on delta. You can trade diags, but for LVLD-sake, go up/out.

sens -> sensitivity.

 

[morganpbrown]

I don't like short puts/CC as a rule. People treat them as a unit and that's stupid. It's not a stock proxy because you're going to get called if your right and you're hosed like today if the mkt takes a shit. It's a razor's edge of profitability.

Now, your 420/448(IIRC) diag looked good on the upside, but you don't want to be in down and out strikes in bull positions. If skew was reversed (like in meme single names) then yeah, it's great.

To get back to short puts. If you wouldn't short an ITM put standalone then pass on the CC. I am a big proponent of overwrites as they are simple to model. A strike touch will (almost) always be best case. Even when trading (-)edge stress in SVLD (long spot/short 2 upside calls) you're going to benefit more from delta-pos than you lose on stickiness/contamination. That being stated; it's better to do synthetic straddles (long 100 XYZ; short 2 XXD calls) in shares rather than index mkts due to the (-)risk reversal.

OK, you blew up my brain with that last paragraph, so I will shut up to avoid spamming the board. But I do note that Cottle seems to be teaching these types of trades. Hopefully I will get an intuition as I read.

I got 100 shares of HOOD and started selling CC's as soon as I could. The first few CC's were utterly amazing. $5 OTM calls trading at 55 delta and $10 in premium. My cost basis on the $38 IPO shares is currently $11. It's gotten a lot less lucrative lately.

 

[destriero]

Long 100 HOOD and short two Nov 47C = the synthetic short 47 straddle.

 

[destriero]

Long 100 HOOD and short two Nov 47C = the synthetic short 47 straddle.

View attachment 268233

Yeah, not a great vol-sale here.

 

[E-MiniToGo]

Someone may have said this but I'll say it again if not.

Get a copy of Think or Swim and a TD Ameritrade Account. They have a feature called INDEMAND that allows you to go to any prior date within a year or two and back test your options strategies. It's fun if nothing else.

The real life trading problem I've had when doing a SPY DCS is the spread on the calls getting in and back out. Sometimes they're over a $1. even on the SPY depending on how the price moves as the trade unfolds, leaving the profit margin very slim. They were also very boring trades. When I trade S&P, it's with UPRO, MES or SPXL and yes, I sell ITM covered calls on them as a staple.

 

[getthatintoya]

The curves are intuitive. Intuitively, you know that your risk is delta as we drop and your vega will not compensate for the delta, so you need to ask yourself why add vols (vega) as it increases your debit?

What would have happened to your vol-position (Dec) if we had rallied? Strike vols would have increased but strip vols (all strikes) drop. Your Dec call gains moneyness and loses vega-sens. So again, all that the trade adds is vol; you lose it on the upside and delta risk exceeds vega on the downside.

You're not going to risk the hold beyond Oct as you'll roll or cover... so why add Dec vol?

The trade is "margin" efficient as you're long the back, but you can see (today) that the vega-pos, as a function of the debit, makes the R/R suspect as a buy-write alternative.

I would not want to be long vol down and out into this delta position. The only diagonal I would choose as BW-proxy would be an OTM LVLD (long vega; long delta) on index. It's the best bull skew trade in vol (long mkt).

Your Dec call gains slightly from skew on the upside but loses from strips, so call it a draw, and the moneyness kills the sensitivity. So look to structure up and out bull spreads. Even if it means, counter-intuitively, to buy OTM call verts hedged small with (short) shares.

Don't add vol unless it's going to work on skew dynamics.

Hey Dest so what you are saying is say sp500 trading at 4400 buy Nov 4450 sell Oct 4500 for example??
I seem to remember in another post of yours saying taking a bearish position on the index would be to sell Oct 4400 buy Nov 4450 for a credit would be better than buying an otm put calendar??

Thanks