Sell daily SPX straddles?

A

ajensen

In Positional Options Trading (2020), Euan Sinclair says on p110 that "short-dated options had the highest variance risk premia" according to the study Which Index Options Should You Sell? and that "returns from shorting OTM put options were concentrated in the few days preceding their expirations" according to the study The Timing of Option Returns.

Since there are now daily options trading on SPX, a plausible strategy would be to sell 1-day straddles every day. Has anyone backtested this? If so, what was your data source?
 
How would that strategy have worked out this past week? I suspect the strategy works most of the time, but produces some big losers that wipe out most if not all of the more frequent smaller gains.
 
ajensen said:
In Positional Options Trading (2020), Euan Sinclair says on p110 that "short-dated options had the highest variance risk premia" according to the study Which Index Options Should You Sell? and that "returns from shorting OTM put options were concentrated in the few days preceding their expirations" according to the study The Timing of Option Returns.

Since there are now daily options trading on SPX, a plausible strategy would be to sell 1-day straddles every day. Has anyone backtested this? If so, what was your data source?
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Before the covid, I would say that strategy may have worked but post covid, no that strategy is financial suicide or market donation depending on how rich you are. Shorting straddle is basically a volatility-shorting strategy. With volatility that has increased ten-fold since covid?? Well one should know the answer. I bet you these articles/books were all written pre-covid.
 
TheDawn said:
Before the covid, I would say that strategy may have worked but post covid, no that strategy is financial suicide or market donation depending on how rich you are. Shorting straddle is basically a volatility-shorting strategy. With volatility that has increased ten-fold since covid?? Well one should know the answer. I bet you these articles/books were all written pre-covid.
More...

I'd expect that the volatility market responds very quickly -- within a day -- to reprice options when realized volatility increases.
 
I'm not saying selling 0DTE straddles is a good idea, but if you do, then I would recommend buying far OTM wings for 0.10 each, to make it an iron fly - thereby, massively reducing the margin requirement.

Also, close the trade when a pre-set low %age profit is achieved, often in a few minutes, esp if trade is opened within the first half an hour of the market open when the vols are high.
Eg, if a straddle is sold for 28, then close it for 24 db when that price hits.

I've done this a few times, and ended up positive overall, but I don't like the risks for this trade, and now trade other structures.
 
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