Sell daily SPX straddles?

[MacBookProHo]

daily options trading on SPX, a plausible strategy would be to sell 1-day straddles every day.

If that genius idea printed money.....it would have been exploited big time by people much more inclined and smarter than you by now.

There is no fixed, flat, method to making market money. If you want to make money...you have to reasonably know the future, and have good trade management as well. And balls, courage, intelligence, foresight, faith, conviction and Leverage/options.

 

[TheBigShort]

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?

IIRC Bouchaud also wrote a paper explaining the correlation between return distributions of a strategy and PnL - the more skewed the strategy, the higher the PnL (you get paid to take risk).

With a 1 day short straddle, its going to be hard to size the position and tcosts might eat into that PnL quite a bit. If you buy wings, that cost alone might eat away most of your expectancy.

Quick example: A 1 day straddle on SPY has 20 vegas. If on average SPY VRP for that one-day straddle is say 2 vol points, thats $40/edge per straddle. Total tcosts might be $10 round trip. So you are left with $30 edge/per.

If you stress your position to a 5% gap down, you are out of pocket $2000/per.

There definitely is a business to hold short gamma risk but your PnL won't be huge since your sizing has to be sensible.

 

[Matt_ORATS]

Here's a backtest of 2022 YTD trading the day before near end of day (14-minutes before the close). Ugly -18.1%

However, here's trading the last 14 minutes and letting the options expire and exercise to cash, a respectable 3.6% (return divided by index price) and Sharpe 1.01

 

[ffs1001]

@Matt_ORATS , thanks for the backtest. The problem with all automated backtesting is that there is no allowance for discretion. I did 0 DTE straddles a few times, and the trade was never held till the end of the day. It was usually closed within an hour. Similarly, entry was never done at a fixed time - it depended on how much the SPX had gapped at the open, and when the underlying seems to calm down a little, then I would open the trade.

 

[TheDawn]

I'd expect that the volatility market responds very quickly -- within a day -- to reprice options when realized volatility increases.

Exactly, very quickly!! And that means death if you are shorting straddles.

 

[TheDawn]

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.

No a better strategy to employ in a high-volatility environment is long straddle and not short straddle. The volatility is high, why go against the flow to short it? Closing the position early is meaningless. You are still facing the same risk while cutting your profit way way short. For the same amount of risk, you might as well leave your position fully open to get the full premium. If you don't dare that means that strategy is not supposed to be employed in the first place. I can't believe these articles supposedly written by all those highly educated scholars would recommend one of the riskiest and most inappropriate strategies to deal with high volatility.

 

[ffs1001]

Closing the position early is meaningless. You are still facing the same risk while cutting your profit way way short. For the same amount of risk, you might as well leave your position fully open to get the full premium.

Seriously?

Let's say that two traders sell a 0 DTE straddle at the same time and for the same credit. One closes his position within 15 minutes for a small profit and the other holds on to his trade for 6 hours.

Are you saying they are both taking the same risk? For the first 15 minutes they are, but after that, the picture totally changes.

 

[TheDawn]

Seriously?

Let's say that two traders sell a 0 DTE straddle at the same time and for the same credit. One closes his position within 15 minutes for a small profit and the other holds on to his trade for 6 hours.

Are you saying they are both taking the same risk? For the first 15 minutes they are, but after that, the picture totally changes.

Are you able to guarantee that the first 15 minutes will guarantee the trader a small profit and holding the position open for the next 6 hours will always land the other trader in losses? If no, then the timing of the position closing is meaningless and irrelevant. Yes, the longer one holds the position open, the more chance for volatility increases in general but to say that being able to close a position early is a justification for taking on a strategy that's completely ill-fitted to the volatility environment is just plain wrong. And even if you feel volatility-shorting strategies are still plausible in market with increased volatility, short straddle is the worst strategy to employ imo. There are far more prudent volatility-shorting strategies one can take that would give comparable profit by maximizing variance risk premiums.

 

[ffs1001]

Are you able to guarantee that the first 15 minutes will guarantee the trader a small profit and holding the position open for the next 6 hours will always land the other trader in losses?

Who said anything about guarantees.
There are only two guarantees in life - death and taxes. Trading has no guarantees, just probabilities. You know that. You're a smart guy. So why the negativity?
You seem to be in a confrontational mindset of arguing just for the sake of arguing, so any kind of logical discussion is pointless.

You trade what suits your personality. You don't need to prove you are "right" or others are "wrong".

To each, his own.

 

[dorietrading]

What do you use to run those backtest?

I use self written software (java based)