Selling Premium on ES

[tnatrader]

It's been a while since I wrote in my previous journal thread and enough things have changed to warrant starting a new journal instead of resurrecting the old one. In this post, I will lay out my methodology and current positions. Future posts will have trades in real time and my thinking behind it. I welcome all feedback and exchange of ideas with my fellow traders.

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The concept of the strategy is to participate with the upside as much as possible while leaving flexibility to add exposure on dips. Market outlook will determine deltas of each option sold, what I call target delta (TD), and will start with 1 unit (35-50% notional exposure). Every short put is to be assigned if itm and thus count the same. This is my take on the Wheel strategy in which I start with a short put which transforms into selling covered strangles in deeper pullbacks.

Instead of laying out my entire flow chart of how I would trade every hypothetical situation, I will go along with one of my portfolios in real time.

On 5/14 (Fri) at the close, ES was ~4175 and I sold the 5/17 4170 puts for 11.5. This is already a fuckup as my TD called for 40d, but I was already checked out ready for the weekend and absentmindedly sold the ~50d. Didn't realize until some time Sunday (don't invest with me LOL) and decided to just stick with it. Monday at expiration, it was solidly in the money at 4160 and I sold the 4165 calls exp 5/19 for 15.75. Of course it instantly went to 16.5 so I knew right there it was real life and I wasn't dreaming.

I picked the 4165 strike by taking half of the premo from the original put (5.75) and subtracted it from 4170. This got me 4164.25 which means that if the 4165 call got assigned, my overall profit would be half of the prem from my put and 100% of the prem from the call. If we dipped hard and the 4165 calls were <15d, I would have most likely sold the 30d Jun 18 put, then take half the prem from that put, subtract it from 4165 and then sell that call, also exp Jun 18. If that still is below 15d, I won't sell the call and just wait for a bounce. Of course I don't do this in prolonged bear markets, but this is how I play pullbacks in bull markets. Shit I wasn't supposed to get into hypotheticals...

Most likely no more trades until the 19th at cash close, but might sell another put if the call goes >~80d in the interim.

 

[qlai]

The concept of the strategy is to participate with the upside as much as possible while leaving flexibility to add exposure on dips.

So you are averaging down using puts?

Every short put is to be assigned if itm and thus count the same. This is my take on the Wheel strategy in which I start with a short put which transforms into selling covered strangles in deeper pullbacks.

Why limit upside by selling calls (unless you plan to roll them up)?

On 5/14 (Fri) at the close, ES was ~4175 and I sold the 5/17 4170 puts

You are selling 3DTE slightly OTM puts? To me, it’s like placing limit buy order slightly below current price just to collect the rebate. Why not just try to buy the underlying at turning point if you are timing the market anyway?

I am not criticizing here, just trying to understand conceptually what you are doing. I appreciate you starting this journal, should be interesting.

 

[tnatrader]

So you are averaging down using puts?

Yes, but where I average down is dependent on my thesis. If I think it's a normal pullback in a bull market, my next put won't be too far away from market. If it's a deeper one, I may do a spread or go to a much lower delta.

Why limit upside by selling calls (unless you plan to roll them up)?

I never sell them naked, always as a covered call when my short put gets assigned. It just saves me a commission to not get rid of the underlying and selling another put.

I do so because it smoothes out my gains and in return I give up the big gains to whoever buys my calls. My psychology is better suited for it. Typically when the delta on these calls get close to 80, I just sell another put and that's essentially my roll.

You are selling 3DTE slightly OTM puts? To me, it’s like placing limit buy order slightly below current price just to collect the rebate. Why not just try to buy the underlying at turning point if you are timing the market anyway?

My first tranche is 1-3 dte. If I get assigned, first I try to sell a call 1-3 dte that can make this whole trade profitable + has a delta no less than 1/2 of my target delta (TD). If not, I try to answer the question of what kind of pullback this is and structure the trade accordingly. Typically, it essentially turns into a covered strangle, so let's say if I think it's a routine bull market pullback, I might do something like sell a 45 dte 35d put (2nd tranche). Then immediately sell a 45 dte call so that my profit from this whole string of trades is half of the prem from all previous trades beginning from the first assigned put plus the entire prem from the call.

I sell prem instead of buying the underlying or doing risk reversal etc, to give myself a bigger margin of safety. Of course, by doing so you leave chips on the table, but at this point in my trading career, that makes sense to me.

I am not criticizing here, just trying to understand conceptually what you are doing. I appreciate you starting this journal, should be interesting.

You're doing me a favor actually. We all got blind spots with our own strategies and need other people examining them.

 

[tnatrader]

At cash close today, my calls expired otm and the 4160 calls were hovering right at 15d, which is my cutoff, as below 15d I would have rather added a short strangle expiring next month. Sold the 4160 calls for 4.4. If assigned, this string of trades from 5/14-5/21 would profit ~1100. B/E is ~4140. Let's see what happens the next two days.

 

[tnatrader]

Quick recap: my 4160 calls expire otm. Still holding 1 ES and sold the 4160 calls again, this time expiring Mon for 11.25. B/E around 4125 and looking at an overall profit of $1645 for these string of trades since May 14 if we close above 4160. If we close below, but don't shit the bed, then I'll look to sell the 4150 calls.

Not sure if "that was it" for the correction. Baseline scenario calls for SPX to continue to grind upwards with the usual 5-10% corrections for rest of the year. Let's see how Monday unfolds.

 

[tnatrader]

Nice rally today and sold the 4185 put expiring on Wednesday for 12.25 at around 11:40 EST. The previous series of trades(5/14-5/24) have been closed and booked an official profit of $1645 for an annualized return of ~11%.

Not sure where else to post this since this is more just my musings than anything, but re: bitcoins and crypto. What's getting lost in the sauce is distinguishing the blockchain technology from the coins, which is an implementation of this technology. As an analogy, think of blockchain as gunpowder. There is no doubt that the invention of gunpowder massively influenced the direction of humanity, but the first inventors of gunpowder did not do much with it in the grand scheme of things. It was not until using gunpowder as the propulsion system for weaponry did that actually change history. There is no doubt that blockchain as a technology is the way forward as it removes middlemen from transactions. The question that remains is that out of all these random coins out there, which one of them are fireworks, which are cool, but ultimately not life-changing vs gunpowder for weapons, which will change the world?

An easy bet would be to create your own etf and buy the top 10 coins by market cap, equal weight them in dollar terms, and rebalance every 6 months. Ultimately, think of these coins as the entry tickets to the technology and use cases that are backing these projects. Like Minsky said (paraphrasing), it's easy to make money, hard part is getting other people to accept it. If any of these projects can do 1/10 of what gunpowder in guns did, that's the tickets that I want to hold to be a part of that show.

 

[tnatrader]

SPX did diddly squat for 2 days which is just fine by me. Puts closed otm and sold the 4190 put (50d) expiring Fri for 16.75. Looks like we want to retest the old highs and we might have a bunch of volatility but should grind higher into year end.

 

[tnatrader]

Another lazy Saturday...Except it's Friday, but it sure feels like the weekend. Remember volatility or volume? Maybe all the crackhead gamblers are in crypto now. Oh well, looks like the 4190 puts I sold will expire way otm and I sold the 4210 puts this morning expiring on Tue for 10.25.

Have a good Memorial Day weekend all! To all the other vets out there: WAR IS A RACKET. I'm gonna go re-read Smedley Butler.

 

[tnatrader]

ES having a hell of a time trying to retest old highs, which is fine by me. My 4210 put expired slightly itm yesterday and I sold the 4205 calls at the close. It looks like we are closing above it and that will be $600 profit from 5/28-6/2.

From 5/14 (start of this journal) to end of May, I had a profit of just over 3k. Let's see if we can hit 10k for the month of June.

If we can close above 4205, I will sell another atm put. if not, I will sell another 4205 call. If the bottom falls out, I will re-assess and see if I want to load up.

 

[tnatrader]

Another smooth week due to the VIX being on lithium. If vix goes to 10, no more vacations for the family...

Sold the 4220 put at around 11:40 today for 11.5 expiring Monday. I will be spending the weekend praying for volatility.