IV can be thought of as the expensiveness of an option due to the expected volatility of the underlying stock. The underlying stock always has the same resultant volatility, regardless of the exercise price of an option, but for reasons unrelated to volatility, options of different strike prices are priced as if there could be varying price movements for the same stock that irrationally depend on it's option's strike price. For this reason, on ETF's, OTM puts are overpriced and OTM calls are underpriced. I would prefer to short options that are overpriced. Shorting ATM and especially ITM calls will have a higher expected return than shorting OTM calls; and with puts, just the opposite is true - the further out, the better to short. Always, and most important, you must use prudent money management: short too many, and no matter how good your expected return, you will eventually be bankrupted.
Selling ATM options with hedge better than selling naked OTM?
- Thread starter short&naked
- Start date
Based on a visual examination of SPX charts going back many years, it would appear that selling 10 Delta weekly call and buying the call 2 strikes higher (same expiration) would be quite profitable.
i.e. selling 2765/2775 spread for $1 on $900 margin.
The only caveat would be to avoid trading it after a very large down week.
Anyone able to backtest something like this?
i.e. selling 2765/2775 spread for $1 on $900 margin.
The only caveat would be to avoid trading it after a very large down week.
Anyone able to backtest something like this?
I prefer to buy the occasional steamrollers hoping to catch someone trying to pick up pennies in front of my steamroller so I can collect from whats in his wallet
So show me a week that didn't follow an atypically down week where 10 Delta call was breached. I couldn't.
Most option strategies have an equivalent "twin" option. The two part "combo" of shorting SPY and selling a near term ATM put has a "twin." The "twin" is simple - selling a near term ATM naked call.Most traders familiar with options probably recognized this immediately. Those that don't should look it over and discover this "twin" relationship.
CBOE came up with their PutWrite index in June 2007, so does have some out-of-sample going into GFC. They calculated the daily prices of PUT back to June 1986 which gives you some idea about Black Monday. Actually looks pretty good long term and outperforms the S&P 500 total return index in both Sharpe and Sortino. However, these indexes don't assume transaction costs.
The strategy basically sells one-month SPX puts that are ATM. No hedge, but the remainder of cash goes into a money market account holding 1- and 3-month T-Bills. It sells only so many puts such that the T-Bills are equal to the puts' max loss potential.
The strategy basically sells one-month SPX puts that are ATM. No hedge, but the remainder of cash goes into a money market account holding 1- and 3-month T-Bills. It sells only so many puts such that the T-Bills are equal to the puts' max loss potential.
You have to reduce the annual earnings by 20-40percent in the PUT index because it genrates 12 taxable events/year. The SPTR generates one at the end of period and benefits from the growth on thes deferred taxes.
I have backtested an asset allocation portfolio involving the SP500, bonds, tbills, and the putwrite index. I asked the computer to come up with great % allocations in a portolio from 1987 to 2016. the putwrite index added little to no value. and that was before taking tax considerations in which would make it worse
There are some ETFs that aim to replicate the put-write index. Those or other vehicles might help with tax considerations depending on your jurisdiction.
For long term portfolios, I find these ideas interesting: https://www.etf.com/sections/daily-etf-watch/putwrite-etf-family-planned
I.e. you apply the put-write strategy to corporate bonds and other indexes. This may give you free leverage, if not excess returns from the premiums. Leverage that pays for itself would be really useful for a better balanced stocks/bonds portfolio, like risk parity.
I prefer to buy the occasional steamrollers hoping to catch someone trying to pick up pennies in front of my steamroller so I can collect from whats in his wallet
Someone tried to pick up some pennies in front of my steamroller on monday.
*EDIT* Price of KO is $48.73 as of close today.
