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

[kcgoogler]

You need to have a clear answer. Edge has to be quantified. If you don't know what your edge is, there is a good chance your counterparty who you just traded with does know.

Totally agree. It has to be quantifiable; but you also need to watch out for the erosion of the edge. Also, even if you have a quantifiable edge, you also need to understand the underlying reason for which the edge is manifesting - if possible. And there lies the rub.

For derivatives, possibly theta, gamma.. etc. Arguable either is an edge; and maybe neither is. Forecasting - either price or volatility; but most forecasting and any modeling is again very prone to failure due to modeling constraints. So in the end its not such a simple answer - but a very good question.

 

[Maverick74]

Totally agree. It has to be quantifiable; but you also need to watch out for the erosion of the edge. Also, even if you have a quantifiable edge, you also need to understand the underlying reason for which the edge is manifesting - if possible. And there lies the rub.

For derivatives, possibly theta, gamma.. etc. Arguable either is an edge; and maybe neither is. Forecasting - either price or volatility; but most forecasting and any modeling is again very prone to failure due to modeling constraints. So in the end its not such a simple answer - but a very good question.

Theta and gamma are calculations, not edges. Same with Vega. Volatility can be an edge if you can forecast it better then others. It's kind of like saying earning interest at a bank is an edge. I give the bank money and they pay me interest on my money. And that interest is my edge. One way to get your arms around this is to ask yourself this question, can other people do what I'm doing? That kind of disqualifies theta as an edge because everyone who sells an option has a theta output. An edge cannot be available to everyone at the drive thru window.

 

[newwurldmn]

It happend in Asia in 2008 with the autocallables market : basically selling knockout puts in lots of size.

There is the infamous story, I think from McMillan, of the popularity of selling teenies during the 1980s bull market. Month after month, year after year, traders collected their premiums, selling deep OTM index puts.

It must have seemed like free money to them.

Then came the Crash of '87. Options sold for 100s were now worth 10,000s. Traders went bankrupt. Some brokers went bankrupt. And option margins were raised substantially.

The years of profits were wiped out and then some.

During 2002 and 2008-2009 we saw ES limit down more than once. When that happens the options markets go berzerk, because the UL cannot trade. They essentially cease to function, except for the folks forced to trade out.

 

[OptionGuru]

You need to have a clear answer. Edge has to be quantified. If you don't know what your edge is, there is a good chance your counterparty who you just traded with does know.

• "Edge" is an overused ET buzzword. It gets peppered throughout ET posts regularly.
• "Counterparty?" You initiated the trade so who cares about the counterparty.

 

[Maverick74]

• "Edge" is an overused ET buzzword. It gets peppered throughout ET posts regularly.
• "Counterparty?" You initiated the trade so who cares about the counterparty.

Overused does not change the facts. Sorry.

It's possible the only reason the counterparty is there to take the other side of the trade is because he/she has the edge and you don't. When you run out of capital you won't have to deal with him/her anymore. LOL.

 

[Windlesham1]

Hmmm you cannot know the counter party's risk as you may have sold puts that another trader was looking to buy to close out or add to a position-it's not just 2 blokes at a table. I never trade naked these days but straddles are an interested trade as the losses will be awful if you can deal with that,and the wins will be modest. I know many traders who sell naked, get trashed and spend the next 3 years catching up-by doing the same trades! Statistically it might be safe until it isn't. I think it is highly valuable to run a test portfolio alongside real trades-and my own personal favourite folder- the 'Missed Trades' and why, in my opinion, backtesting is such fantasy

 

[trilogic]

I found this book to be outstanding. It's very heavy lifting (in weight that is), but man alive, this book takes away all the bullshit and throws shitloads of data in your face on the efficacy of every strategy alive and gives you the cold hard numbers, both good and bad. It basically helps understand what works, what doesn't and why. It does NOT say, here go do this and make a lot of money. To capture the alpha in these strategies is very difficult. It is simply saying there is where the alpha is if one has the ability to capture it. It's VERY data heavy. I have to forewarn you. It does not read like a children's book with lots of pretty charts. It has tons of black and white data. This may be the best book on trading ever written that nobody has read. Partly because it's just not easy to chew, lacks charts, and if you can't tell by now, there are no easy paths in this business. Much easier to skip on over to "tasytrade" and swallow that. But if you are "serious" and you truly care about being successful in this business, you will read this book.

Why? Look, the first question every trader has to answer when they think about putting on any position is "why" am I doing this? What is my edge? What do I know about this particular structure on this product at this time that NOBODY else knows. You need to answer these questions.

So you have an edge ?

here is a excerpt of book review:

In conclusion: if you want a book with (not to detailed) descriptions of various academical papers on investing in various asset classes you can give this book a try. If however you want more in depth research on one or two asset classes or investment styles I would look for another book. If you're a trader who might be thinking to backtest the methods presented in this book, give this one a pass. You won't find it over here.

 

[Maverick74]

So you have an edge ?

here is a excerpt of book review:

In conclusion: if you want a book with (not to detailed) descriptions of various academical papers on investing in various asset classes you can give this book a try. If however you want more in depth research on one or two asset classes or investment styles I would look for another book. If you're a trader who might be thinking to backtest the methods presented in this book, give this one a pass. You won't find it over here.

The book is "not" a how to book. It's far more academic. It will tick off the Johnny Back-Testers from Trade Station who are searching for coded they can copy and paste into their software and run back tests. It's much more about "understanding" why these trades work. For example, there is a section on premium selling. They actually explain to you the economics of why premium selling works and doesn't and talks about the embedded risk premium in the market that has to be there to induce others to come in and offer price insurance. He explains why the premia is fatter in indices then in individual equities. He also gives numbers both pre and post 2008 so you can understand how outliers affect the results. No, this book is not a step by step guide to financial freedom. Before you can trade the markets, you really need to understand them. I know it's more fun to skip this step but there is a cost in doing so.

 

[justrading]

I must say I have enjoyed reading this whole thread immensely. The people who have been there and done that, and take the time to post and explain.....!

One time a couple or more years back, I was having a discussion on similar lines with a buddy, thread in the options forum.

The great Atticus, a man of very few words, chipped in with this sage piece. I still keep it to remind me of what really matters.

"None of this amounts to a hill of d*cks if you can't forecast price or vol with some degree of accuracy."

 

[coolraz]

Maverick, you are truly an asset to ET and your patience taking time to answer questions and educate the newbies is awesome and very appreciated.

We are going to disagree on some things clearly.

I do want to leave you with one thought. As you said everyone wants a cookbook automated money making system that they can just blindly follow and get rich. Sucesful traders like you know there is no such thing. I'm sure you have a plan and stick to it but you also tweak it and use some discretion within it to adapt to different markets.

The biggest mistake I see is people look at the p&l graphs for options and assume that is it. Just like you would not buy a stock and just hold on to it blindly the same is true for options. It took me years to get a good sense of those but they key to options is actively managing the positions especially the losing ones. Unfortunately it's very difficult to model and illustrate this. It takes me hours to blackest even small tweaks to my strategy because I really cannot program it (well I probably could a large part of the basics but I would need to hire a programmer)

So all I can do is leave you with this. Yes there is a risk I will blow up. Because of this I have 10% of the capital in a negative Beta asset that will explode in value of market conditions materialize that would wipe me out. It will feel terrible but I will be able to rebuild from it.

In the meantime I manage risk constantly. Sometimes it sucks because I feel like I'm leaving profits on the table but I know if 2008 comes I will be ok. The best illustration I can give you is January of this year which someone brought up. According to my strict risk model (assuming no adjustments) I would have been down 1.5% to the bottom of the January move. I was actually down 0.3% because we didn't just sit on positions but actively move them out of danger precisely to avoid being killed by gamma.

That is my edge.

Good luck with your trading and honestly thank you for the discussion (it cost me one sleepless night trying to prove to myself I couldn't get a better return on risk with your method because you raised some serious doubts in my mind!