Selling delta 3-5 ES Puts with 40-57 days left

coolraz said:
Im


I'm curious how you manage ATM puts? Yes the theta is very high but your delta to start is .5, so if market trends against you it will go ITM and your theta disappears?
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Let's use real life examples. The July ES is at 2040. The July ATM straddle can be sold for 95 handles. The theta disappears (as you put it) maybe if we get a 150 handle move against you which we have have one or two of in the last two years. You "want" the delta to go to one. Why? Because when the delta goes to one and gamma goes to zero, the hedge is easy and clean, you lock in the loss and move on. There is no panic buying and selling and taking off hedges and getting margin calls. If and when the big move happens, you take the loss, lock it in and move on. All the other months pay off 10 to 20 times the amount the 5 delta puts pay off. Again this can be shown quite clearly using excel and if I have some time this weekend I'll build an excel sheet showing the p&l distribution. Trust me, the upside is 10x.

Now this does not mean this a risk free strategy or free money, it simply shows the degree of how bad selling 5 delta puts are. it's a relative comparison. It's much cleaner and involves much less stress. If I'm getting paid 5k per one lot on a straddle vs selling 20 lots to make $200, the difference in stress is night and day. You won't enjoy the margin call you get when those 20 lots start generating gamma and you are running out of margin in your IB account. They have fun ways to close these positions.
 
trilogic said:
what is your view on sellin spreads, not ATM but not way OTM either , possible Iron Condors
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Not a fan. I think a lot of people result to these ugly methods because like the OP said, he finds it too hard to trade. Look, my harsh advice to the OP is he should NOT trade period. If one can't trade properly, stay out and just invest for the long term. I can't practice medicine so I don't. I also don't practice law. Trading is very hard and it should be very hard. But selling naked puts or selling spreads is not the way to bridge that gap. Just one man's opinion.

The truth is selling spreads is one's way to try to sell vol but my question would be to you, how you are modelling this decision. If you are doing what the OP is doing and just selling options with impunity regardless of forecast, then why? If you are modelling vol, how are you doing that, what is your edge? There is nothing inherently wrong with selling spreads, I'm just asking what is driving that decision. A prediction always has to be made. You either are forecasting price or forecasting vol and the adept trader knows that both are really the same thing.
 
I agree with you that if you're looking to get the same premium, it IS safer to trade ATM vs DOTM if a big move is about to come against you. This can be illustrated with selling ATM put vs 5 delta put Aug 21. You would need 20x of the 5 delta put to equal the premium of 1 ATM put. And the loss on Aug 24 would be a little over 2x on the DOTM position vs the ATM position. So I'm not disputing there. What I'm still not clear on though is that once that big move happens, you can't just "wait it out" when you're sitting with an ITM put. Because taking that example again, the "loss" on the DOTM put will fade away with theta, whereas the ATM loss stays unless the market rebounds all the back past where you sold it at. In other words, DOTM may have bigger "paper losses", but ATM has more actual losses.

EVEN if you let's say sold the puts Aug 25th, for 1 ATM you'd need 20 DOTM to match premium, but on the REBOUND, the DOTM position will have made more money (b/c it also benefits from volatility drop more than an equivalent ATM position). I'm not disputing of course you can trade ATM sucesfully, but I'm not seeing where it's "safer". Except as you said in the margin call situation where it is true that the 20x DOTM put will have higher margin requirement than the 1x ATM. But I think that tradeoff is better for having positions that are a lot less likely to not be closed at a loss
 
coolraz said:
Except as you said in the margin call situation where it is true that the 20x DOTM put will have higher margin requirement than the 1x ATM. But I think that tradeoff is better for having positions that are a lot less likely to not be closed at a loss
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I believe that is the rub...Mentally you won't be prepared to close out a position 20x the size, especially if you are so certain that it couldn't lose...OTOH, selling it ATM requires you to take a stand on direction...Granted this is a bit off the topic of which is statistically a better bet...
 
coolraz said:
I agree with you that if you're looking to get the same premium, it IS safer to trade ATM vs DOTM if a big move is about to come against you. This can be illustrated with selling ATM put vs 5 delta put Aug 21. You would need 20x of the 5 delta put to equal the premium of 1 ATM put. And the loss on Aug 24 would be a little over 2x on the DOTM position vs the ATM position. So I'm not disputing there. What I'm still not clear on though is that once that big move happens, you can't just "wait it out" when you're sitting with an ITM put. Because taking that example again, the "loss" on the DOTM put will fade away with theta, whereas the ATM loss stays unless the market rebounds all the back past where you sold it at. In other words, DOTM may have bigger "paper losses", but ATM has more actual losses.

EVEN if you let's say sold the puts Aug 25th, for 1 ATM you'd need 20 DOTM to match premium, but on the REBOUND, the DOTM position will have made more money (b/c it also benefits from volatility drop more than an equivalent ATM position). I'm not disputing of course you can trade ATM sucesfully, but I'm not seeing where it's "safer". Except as you said in the margin call situation where it is true that the 20x DOTM put will have higher margin requirement than the 1x ATM. But I think that tradeoff is better for having positions that are a lot less likely to not be closed at a loss
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No, this analysis is all wrong and it comes from a very flawed understanding of how options work. You are making assumptions after the fact that you are not privy to before hand. You can't just "sit" on your DOTM puts. Buddy your account is blowing up. The house is burning down. You can't tell your family to stay put because it will eventually burn out, you have to get out of the house. Both positions have to be closed. The DOTM put loss will be substantial, the ATM loss will be moderate. You can't "wait" for the market to come back. That makes this entire argument moot. Hell, if you are simply going to sit on risk and do nothing you are waaaaaaay better off just being a long only investor. You can sit tight on the corrections and enjoy the bull markets.

I just don't get the logic. You don't get to be a forecasting wizard after the fact and before the fact claim to sell options precisely because you can't forecast. Not saying you in particular, but one in general. You have to pick which cake you want to eat, either you are a genius that can predict or not. By sitting on your naked puts in a correction, you ARE implicitly making a forecast. So what makes you so wise in the middle of a selloff that doesn't make you wise the other times. I just want you guys to think through this logic step by step.
 
I never said "sit on the OTM puts". Of course I would adjust/roll etc. I might even close SOME positions at a loss if I have to in order to get the margin back in line. But I am not making assumptions, I am looking at actual option pricing data and the p&l that various positions cause so these are real numbers.

Also, the forecasting you speak of yes it is implicit in ANY trading by definition. However, to be "right" on a DOTM put vs to be right on an ATM put you don't need to forecast as accurately (again by definition since that is the probabilities of each option).

Obviously you are very successful with ATM selling, I'm not criticizing your method. What I'm trying to understand is how you make up the losses that you "lock in" when you are wrong (because again statistically you will be wrong much more often with ATM than DOTM). Because that's the key difference is if ATM is wrong, you lose the theta advantage. But if DOTM is wrong, you have Theta working for you every day that the market doesn't keep going against you.
 
There is no advantage of selling ATM options compared to selling (D)OTM options for "premium". Even though the risk:reward is significantly different when the trades are opened over time and multiple trades the risk:reward will even out.



:)
 
Look, there is no such thing as "theta" working for you. That is crap that gets sold in books and seminars. Theta is a 2nd derivative to time. It's not something you "earn", it's calculus. LOL. Also, there is no such thing as being "wrong" in the sense you are using the term. If I sell an ATM straddle for 100 pts and the market closes at exp 80 pts down, you still make 20 pts, which is probably 20 times what you are making on the 5 delta OTM puts.

Also get rid of this notion of rolling out (refusal to take a loss) and hedging. When the shit hits the fan you are going to be out of options, no pun intended. And there is also no such thing as "forecast as accurately". LOL. The forecast is what it is. And the probabilities have nothing to do with the forecast. The probability is just a function of the standard deviation which you are "suppose to be forecasting", either you get that right or you don't. There are not levels to being wrong. LOL. Although I wish there were. I'll say the same to you as I said to the OP, there is just a fundamental lack of understanding of how options work and math in general. I know ET doesn't need no stinkin math to make money but with options, it's kind of helpful.
 
Pardon my interruption gentlemen and thank you for this insightful discussion, especially Maverick74.

Trading options appears to be an exercise in probabilities and statistical analysis in order to expect consistent and sustainable profits in the long-term. Selling ATM clearly lowers the probability of profitable trades, but is compensated for by the larger winners. Selling OTM significantly raises the probability of profitable trades and arguably takes advantage the skew, but the net profitability is lower.

Regardless of the approach, it appears you have to set a strict exit criteria that mathematically makes sense to ensure positive expectancy. I believe Maverick74 is making the point that exiting an ATM strategy is better than dealing with the OTM strategy - margin calls and hedging at a delta of 1.

If you're a full-time trader, then the ATM strategy appears the way to go with respect to net profitability, but if you can't sit in front of your trading desk everyday during market hours, then the OTM strategy appears more feasible as you deal with fewer losers and can take advantage of the skew.

No question here, but trying to summarize Maverick74's advice. Please do correct me if I'm mistaken as this thread did start off as a potential troll thread, but the discussion at this point appears sincere.
 
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