RWM ok to hold longer than a day?

wxytrader said:
Look at the P/L chart then look at the expected move in 21 days.
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So, what do you see as the expected move in 21 days?
Can anybody know that? :)
Ah, I guess you mean the "ExpectedMove(.)" formula. Forget it! It has this funny name, but means in fact something different! :)

You have to be precise: expected outcome in 21 days for which Sx and IV? (Sx means "current stock price", ie. that in 21 days).
FYI: IV at expiration does not play any role anymore, but not so with the stock price, as now everything depends on just on the stock price alone.

You say you know what the PnL chart is and how to read it, but it really does not seem so... :)
 
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@wxytrader, it seems you are misinterpreting the so called "ExpectedMove" formula
See also https://optionshawk.com/calculating-expected-moves-using-options/

To clarify:
It calculates a from...to range where the stock price should be after that time,
ie. the stock price should be somewhere between the calculated two boundaries for -1SD and +1SD.

For example when volatility is 30 for a stock with price 100, then after a year the stock price should be between 100-30 and 100+30, ie. between 70 and 130.
(This is the simple NormalDistribution variant. A more correct variant is the LognormalDistribution variant.)

And remember to use the ATM IV for all and any strike of an option when using this function, not the IV of that strike itself.
I hope you are not too much confused :)
 
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Quanto said:
@wxytrader, it seems you are misinterpreting the so called "ExpectedMove" formula
See also https://optionshawk.com/calculating-expected-moves-using-options/

To clarify:
It calculates a from...to range where the stock price should be after that time,
ie. the stock price should be somewhere between the calculated two boundaries for -1SD and +1SD.

For example when volatility is 30 for a stock with price 100, then after a year the stock price should be between 100-30 and 100+30, ie. between 70 and 130.
(This is the simple NormalDistribution variant. A more correct variant is the LognormalDistribution variant.)

And remember to use the ATM IV for all and any strike of an option when using this function, not the IV of that strike itself.
I hope you are not too much confused :)
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Code: 
Using NormalDistribution:
ExpectedMove for S=100.0000 Vola=30.00 nDays=365.00 rPct=0.00 qPct=0.00 z=-1.0000 : -30.0000(-30.00% --> Sx=70.0000 )
ExpectedMove for S=100.0000 Vola=30.00 nDays=365.00 rPct=0.00 qPct=0.00 z=+1.0000 : +30.0000(+30.00% --> Sx=130.0000)

Using LognormalDistribution:
ExpectedMove for S=100.0000 Vola=30.00 nDays=365.00 rPct=0.00 qPct=0.00 z=-1.0000 : -25.9182(-30.00% --> Sx=74.0818 )
ExpectedMove for S=100.0000 Vola=30.00 nDays=365.00 rPct=0.00 qPct=0.00 z=+1.0000 : +34.9859(+30.00% --> Sx=134.9859)
 
wxytrader said:
I've been setting it up various ways but the problem is the expected move 21 dte is about 9, so roughly high of 20 and low of 12...so you are smack in the middle of the loss zone.
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How do you then get 12 and 20? 16.50 - 9 gives 7.50, and 16.50 + 9 gives 25.50
Here's more exact values:
Code: 
Using NormalDistribution:
ExpectedMove for S=16.5000 Vola=242.00 nDays=21.00 rPct=0.00 qPct=0.00 z=-1.0000 : -9.5777(-58.05% --> Sx=6.9223  )
ExpectedMove for S=16.5000 Vola=242.00 nDays=21.00 rPct=0.00 qPct=0.00 z=+1.0000 : +9.5777(+58.05% --> Sx=26.0777 )

Using LognormalDistribution:
ExpectedMove for S=16.5000 Vola=242.00 nDays=21.00 rPct=0.00 qPct=0.00 z=-1.0000 : -7.2660(-58.05% --> Sx=9.2340  )
ExpectedMove for S=16.5000 Vola=242.00 nDays=21.00 rPct=0.00 qPct=0.00 z=+1.0000 : +12.9834(+58.05% --> Sx=29.4834 )

See "Step 2": it's intended to "close the gap" by buying cheap LPs after some time-decay.
Do your test also after adding or activating the K=14 leg in the example (see there).

Here's the result after activating LP.K=14:
After_adding_cheap_LPs.png



This is why I prefer to sell calls versus buy puts because they have priced in just right to f you up.
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That's ok as long as you get a good/better/improved PnL chart.
But shortselling requires some collateral (margin req or cash req). Don't forget in your tests...

It looks like running the wheel daily last year would have returned well for SAVE if you ignored the break evens.
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Hmm. daily? Ignoring B/Es ? Just explain pls.
 
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Shorting 230 vol; buying 73 vol. Why not? Time decay! Or we’ll arrive at a figure which results in no loss on the stress. Easy!










dirtfloors
 
Quanto said:
How do you then get 12 and 20? 16.50 - 9 gives 7.50, and 16.50 + 9 gives 25.50
Here's more exact values:
Code: 
Using NormalDistribution:
ExpectedMove for S=16.5000 Vola=242.00 nDays=21.00 rPct=0.00 qPct=0.00 z=-1.0000 : -9.5777(-58.05% --> Sx=6.9223  )
ExpectedMove for S=16.5000 Vola=242.00 nDays=21.00 rPct=0.00 qPct=0.00 z=+1.0000 : +9.5777(+58.05% --> Sx=26.0777 )

Using LognormalDistribution:
ExpectedMove for S=16.5000 Vola=242.00 nDays=21.00 rPct=0.00 qPct=0.00 z=-1.0000 : -7.2660(-58.05% --> Sx=9.2340  )
ExpectedMove for S=16.5000 Vola=242.00 nDays=21.00 rPct=0.00 qPct=0.00 z=+1.0000 : +12.9834(+58.05% --> Sx=29.4834 )

See "Step 2": it's intended to "close the gap" by buying cheap LPs after some time-decay.
Do your test also after adding or activating the K=14 leg in the example (see there).

Here's the result after activating LP.K=14:
View attachment 330885



That's ok as long as you get a good/better/improved PnL chart.
But shortselling requires some collateral (margin req or cash req). Don't forget in your tests...
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I had glanced at tos (beer) and read it as a total range not as 1 SD :)
For 1SD (21 dte) price targets I get $6.88 down and $25.90 up with 242% IV.

For your logorithmic method you are using the atm IV for contracts expiring today, or take the IV for the contracts 21 days out?


Quanto said:
Hmm. daily? Ignoring B/Es ? Just explain pls.
More...

The parameters:
  • Pick any stock you want. I ran TSLA, NVDA, SAVE.
  • Sell daily -1 ATM puts. When assigned sell +1 ATM calls.
  • Calculate the realized losses when shares called away below assigned strike.

I ran the entire year based on starting the wheel Jan3 2023 to Dec29 2023
I am using the current -1 atm +1 atm option premium for the calculations. If you have access to actual option prices for 2023 then use those #'s.
With this method, you will be realizing losses, but will be offsetting those losses with premium.

Then run it again, but this time sell the calls at +1 the assigned strike, or the assigned strike to break even...up to you. With this method you won't realize any losses, but will be collecting less premium.

Or just do the month of DEC 2023 manually.

I did this on a spreadsheet, you can code it or do however.
 
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wxytrader said:
I had glanced at tos (beer) and read it as a total range not as 1 SD.
I had the wrong volatility so I now get 1SD price targets of $6.88 down and $25.90 up with 242% vol.

For your logorithmic method you are using the atm IV for contracts expiring today, or take the IV for the contracts 21 days out?
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ATM IV is normally calculated using today's Bid/Ask prices for days till expiration (DTE), ie. your 2nd case.
The easiest/simplest method uses precalculated IVs (if available):
Code: 
ATM_IV = ( IV_of_nearest_Call_strike_to_stockprice  +  IV_of_nearest_Put_strike_to_stockprice ) / 2
Other more accurate methods exist, but require much more computing work.
 
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