Selling Premium - Strategy Never Discussed

[Sig]

Hi all, about a year since my last post. I see there's a bit to catch up on in this thread, seemingly some interesting posts to read in more detail. I've not been trading as actively of late or as at my last post, as I started a new job some time ago, it's been keeping me pretty busy.

I'm still here though, and long run return remains roughly about the same as before.

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Some people were wanting Sharpe and Sortino. My long run Sharpe is currently about 0.55, Sortino about 0.89 (FundSeeder's Sortino/sqrt(2) = 0.63). I have some quibbles with Sharpe and Sortino blindly applied, it can get torpedoed by what is actually meaningless volatility and the actual value of Sharpe also vary a lot over time depending on periods employed. Meaning if you look at e.g. shorter run rolling average Sharpe then it is between 1 and 4 for example relatively regularly. Yet this is of course invisible when just looking at the long run Sharpe.

An additional pertinent example, I was subject to some pricing anomaly on something I held on 14/04/2020, some peanuts long options (don't quite remember what it was) but in any case that for whatever reason was priced at some silly amount but with no liquidity so not realizable, this showed up as a massive bogus spike in my account valuation and was of course corrected the next trading session when the market repriced/corrected etc.

The consequence of this was however that I ended up with this seeming massive equity curve spike in the data and consequent drop in Sharpe, with being "underwater" since then, because hey, for a brief moment my account equity was at some allegedly really high value so of course I'm now underwater etc. Bogus nonsense.

Further digression, about a decade ago I experimented and used Sharpe, Sortino and friends quite extensively doing my own trading research/models on directional strategies and using these measures as sole or part of evaluation/fitness functions. I mention this only to say I'm not a complete neophyte re Sharpe, and have quite a bit of hands on experience and feel for Sharpe and other quant measures. Sharpe is not some silver bullet and only one of many potentially useful measures. A really high Sharp for example looks really good when you see it, and seems to, by its very definition, imply safety and wonderfully higher returns for the risk taken. But in practice it can very easily merely mean the risk is not reflected properly/seen/quantified. E.g. I get suspicious of really high Sharpe ratios, in my experience that can actually be a warning sign and end with some massive blowout out of the seeming blue. E.g. it's much better to have a slightly lower "noisy" Sharpe implies the punches the market throws at you are therefore "seen" and accounted for regularly enough in the data that you can actually more or less trust it not to be too optimistic, rather than with the really high Sharpe ratios where there's "hidden" rare extinction events that is interspersed by super long periods of "all is well", so to speak... Sorry I'm rambling apologies if that doesn't make sense.

Pretty accurate summary of the limitations of blindly applying Sharpe ratios. The Sortino ratio should have taken care of the issue you mentioned of counting upside volatility as bad. Additionally, you can certainly throw outliers out like that when calculating your ratios.

 

[ITM_Latino]

Jumping in way late,but I sincerely doubt selling a .10 call reduces margin..No way

Yeah, I know the margin calculations are somewhat quirky with IBKR, but that sounded odd to me too. FWIW I couldn't replicate the suggestion with success in my account.

 

[PriceJuggler]

Too lazy to go thru the thread,but it appears that Magic bought the Apr 16 20 puts and sold the 3/5 25 for a .70 credit?? Thats a pretty bullish trade,sweet spot at 25 on expiry

If he let it go to expiry on the 5th,stock closed at 23.95,,Short put =1.05...Vol was super pumped in early March, IV 30 close to 100,so his long put was worth apx 1.50 plus...Today,the same 20 put trades at .27 as they crushed vol....

With any luck,he got out for a credit

Yes -- I parsed his comment similarly to you, basically a diagonal spread, where he had the fortune of getting in for a credit and also getting out for a credit, due to the spread flipping in between him entering and exiting. That's great if you can get it to play out that way, but not typical IMHO, though of course at least a possibility with a diagonal spread. -- Starting out with a diagonal does give you, er, more options .. .. for management than putting on just a straight vertical spread, at the cost of collecting less premium initially.

It's always a tradeoff of risk vs reward: take on less risk and/or gain more flexibility up front, then you will be paid/collect a smaller reward. Take on more risk up front and with less flexibility, then all else equal you should expect to collect a larger reward/premium.

It's your job to manage that process, and ensure you always collect enough to make the risk worth your while, and ensure you have the flexibility you desire.

 

[taowave]

Whats interesting is "everyone" is buying calander type spreads at super jacked vols,assuming/hoping they can keep on rolling the shorts at crazy high vol...

Never thought I would be buying calanders at with the long wing trading over 250 vol

 

[Same Lazy Element]

Some people were wanting Sharpe and Sortino. My long run Sharpe is currently about 0.55, Sortino about 0.89 (FundSeeder's Sortino/sqrt(2) = 0.63). I have some quibbles with Sharpe and Sortino blindly applied, it can get torpedoed by what is actually meaningless volatility and the actual value of Sharpe also vary a lot over time depending on periods employed. Meaning if you look at e.g. shorter run rolling average Sharpe then it is between 1 and 4 for example relatively regularly. Yet this is of course invisible when just looking at the long run Sharpe.

Well, all of these metrics are subject to statistical significance. In fact, the best way to think about long-term performance is by multiplying both by sqrt(time) - that gives you rough t-stat of the strategy and that's your "staying power". For example, if you were running a 0.55 Sharpe for 1 year, that's a T-stat of 0.55 which is equivalent to random noise, but if you were running it for 100 years that's t-stat of 5.5 which is "very significant".