Selling Premium - Strategy Never Discussed

[Sig]

It's not the same position. If I'm at 31 now and roll to 30, that's a different position.

You lost your first bet. You're making an second statistically speaking independent bet. One would be fooling oneself if they are in denial of this and act as if they're somehow just "extending" their original bet by calling it a "roll".

I've mentioned this before when it comes to the subject of "rolling" options. It seems to be a common self-delusion, aided by the fact that "rolling" a futures position actually is in general (ignoring the implied interest rates) simply extending the position very much unlike "rolling" options, so it's easy to internally mis-classify them as the same kind of animal when they are in fact very different.

 

[Quiet1]

VIX is calculated backwards through the Black-Scholes option pricing model, which should give you the arbitrage-free pricing for an option.

VIX isn't calculated this way anymore, not since 2003 anyway. The VIX is calculated directly from option prices not implied volatilities.

 

[smallfil]

You sound like a novice

Why are you an expert? If you do not like my opinion, put me on ignore. Stop being a worthless troll!

 

[smallfil]

maximumpossiblesuffering gets it: "One of the keys, which you are adhering to is avoiding the use of leverage. It is hard to blow up an cash only account." I also agree with your other points.

Those who compare my approach to James Coudrier of OptionSellers.com or Karen the SuperTrader are missing the point entirely. They lost everything when they no longer had the capital to cover their positions and were liquidated for margin requirements. In Karen's case, she tried to conceal the disaster with outright fraud. I will never receive a margin call because I set the cash aside to cover the position when I open it.

Karen was using short strangles with unlimited risk potential. Vomma was exponential whenever her position experienced volatility in either direction. I don't do that stuff.

Neither is my approach a martingale strategy. Martingales are exposed to open-ended risk. I am not. Every time I buy a put back for more than I received and sell a new one, I am actually mitigating my loss compared to an outright stock holder, with the possibility of closing at a small loss or even a profit while the stock owner must wait for full recovery.

But yes, I have losses. If MSFT goes to zero tomorrow, I'll lose a lot. But how many dire warnings do you see for stock investors, "it could go to zero and you will lose everything"? It's just a knee-jerk reaction so many people have when the word "option" is brought up. Options were invented to manage risk, and that's what they do if used properly.

I probably do have an irrational bias about going long. I'm just more comfortable receiving my profit up front and then seeing how much of it I can keep, rather than hoping for a large enough move before expiration to counter the eroding time value before I can make a profit. Going long does have a lot more profit potential. It just suits my temperament to hit singles and doubles. I usually struck out when I swung for the fences.

Selling equity options instead of the index helps me diversify. I do have stock-specific risk, but it's spread out over several different stocks. How would I diversify if I had everything in the index? Then I would have index-specific risk.

The problem with most stock traders is they are not approved for options trading. Not even to buy calls and puts which is level 2 approval. If they were, they can also, hedge their positions especially, if they have huge profits but, do not wish to sell their shares. They can just buy inexpensive put options to hedge their positions for say a week, a month, etc. If the stock goes higher, they add to their gains. They can roll up their options and buy the higher strike prices. Of course, this cuts into their profits. However, if the stock suddenly, gaps down, they have a measure of protection guaranteeing they can get out at the strike price of their put option, say $70 put option. That is the married put strategy that probably, very few traders use which could protect their positions from huge, adverse moves!

 

[Longshot520]

Hi Robert

Thanks for starting this thread, I also sell iron butterflies and strangles monthly for a consistent return, and so far it's been working well (so far being the key word). I do appreciate where you're coming from with regards to minimizing your risk. The consistent theme on this board (that I've seen anyway) seems to be when it comes to selling premium/shorting volatility, one is exposing themselves to massive risk that, on a long enough timeline, will break your account.

I have found the "trade small, trade often" approach, while closing the trade at predetermined profit targets, has produced a consistent profit even with some large losses. Also, rolling the losers for a credit (and only a credit) has turned a good potion of my initial losers into small winners, tilting the odds of consistent profits in my favor even more. Lastly, ONLY betting 3-5% of my total portfolio, but diversifying multiple trades across multiple sectors, has caused my losses to not be catastrophic to my account. As long as I never bet more, they never will be.

The only difference in my approach is I always roll the position forward a month with the same strike prices, thereby keeping the same risk profile. Sooner or later market cyclicality usually kicks in, and I'll get a chance to exit my position at a profit, or at the very least, a much smaller loss than I initially took. I've been doing this for over a year now and am up about 22% YTD, and I've never had to roll a trade more than 3 months before getting out.

I am glad to see that there are others who are defying the conventions of what we're doing being the inevitable way to ruin. Please keep sharing thoughts.

 

[smallfil]

Hi Robert

Thanks for starting this thread, I also sell iron butterflies and strangles monthly for a consistent return, and so far it's been working well (so far being the key word). I do appreciate where you're coming from with regards to minimizing your risk. The consistent theme on this board (that I've seen anyway) seems to be when it comes to selling premium/shorting volatility, one is exposing themselves to massive risk that, on a long enough timeline, will break your account.

I have found the "trade small, trade often" approach, while closing the trade at predetermined profit targets, has produced a consistent profit even with some large losses. Also, rolling the losers for a credit (and only a credit) has turned a good potion of my initial losers into small winners, tilting the odds of consistent profits in my favor even more. Lastly, ONLY betting 3-5% of my total portfolio, but diversifying multiple trades across multiple sectors, has caused my losses to not be catastrophic to my account. As long as I never bet more, they never will be.

The only difference in my approach is I always roll the position forward a month with the same strike prices, thereby keeping the same risk profile. Sooner or later market cyclicality usually kicks in, and I'll get a chance to exit my position at a profit, or at the very least, a much smaller loss than I initially took. I've been doing this for over a year now and am up about 22% YTD, and I've never had to roll a trade more than 3 months before getting out.

I am glad to see that there are others who are defying the conventions of what we're doing being the inevitable way to ruin. Please keep sharing thoughts.

A good honest discussion benefits both option sellers and option buyers. The market has risks one has to take into account each time one puts on a trade. I have learned from discussions with other ET posters. Good luck to you guys as well as other serious traders.

 

[ajensen]

I've been selling premium for about 3 years, and I have a data sample of a couple of thousand trades. My returns so far are between 25% and 35%, but I think I can improve going forward, since I have learned a few lessons and abandoned a few strategies that were not profitable.

The conventional wisdom seems to be that premium sellers are collecting pennies in front of a steamroller, unwittingly setting themselves up for the inevitable catastrophic loss that will wipe them out. Rolling is usually dismissed as loss avoidance, but I have never seen anyone discuss the approach that I use.

First, I sell weekly puts that are cash-covered. I never use leverage. I trade volatile stocks with high IV, so that I can collect between 1% and 3% per week. I typically sell fairly close to the money, often the next lowest strike, so many of my options move into the money. How do I deal with this?

Thanks for presenting your strategy. Here are a few comments and questions.

It's been mostly a bull market. If every time you sold an option contract you instead bought 50 shares of the underlying stock, would your results have been better or worse?

What has been your beta to the SPY, and how does your Sharpe ratio compare to that of SPY? Is something like QQQ a better benchmark?

Maybe your strategy has an edge. If it does, great. Answering the questions above could help you determine how big it is.

 

[TheBigShort]

@smallfil Having just found out you blocked me, I want you to know, you have 0 clue on how to trade options. You only buy options because you do not have enough dry powder in your account. What you keep talking about on this forum is how limited your risk is. You are the definition of scared money.

If you ONLY buy or ONLY sell options, you are doing it wrong. Options are a game of relations. If you sell expensive premium, you want to look to offset your risk by buying cheaper vol somewhere else, or hedge with the underlying.

@smallfil you are a chart reader who trades options. That is a recipe for disaster.
Keep buying those options bud.

 

[ironchef]

If you ONLY buy or ONLY sell options, you are doing it wrong. Options are a game of relations. If you sell expensive premium, you want to look to offset your risk by buying cheaper vol somewhere else, or hedge with the underlying.

[USER=38552]@smallfil you are a chart reader who trades options. That is a recipe for disaster.
Keep buying those options bud.[/USER]

[COLOR=#000000]Can you expand on your comments please, especially the statement about game of relations and offsetting risks.

I too buy/sell single leg options, and try to time my entry/exit reading charts. We poor retails do not have the math skills to analyze complex situations and so make our decisions based on some simple forecasting tools.

I do overlay fundamental analysis on chart reading. Perhaps in the end it is just illusion and voodoo. :(

[/COLOR]

 

[TheBigShort]

[COLOR=#000000]Can you expand on your comments please, especially the statement about game of relations and offsetting risks.

I too buy/sell single leg options, and try to time my entry/exit reading charts. We poor retails do not have the math skills to analyze complex situations and so make our decisions based on some simple forecasting tools.

I do overlay fundamental analysis on chart reading. Perhaps in the end it is just illusion and voodoo. :(
[/COLOR]

Hey @ironchef , first I would like to say, math is not something exclusive to institutions, neither is programming. Actually many people in institutions do not know math!! I think @Daal posted a thread where mutual funds are finally starting to switch out fundamentalists for quants.

Nothing is voodo if you can prove it. I think that's where the saying "technical analysis is voodoo" comes from. If you ask a technician, why? They will usually tell you a story rather than showing you proof. I'll share something with you that will hopefully, change the way you think about trading forever. If I had inside information and told you, GE (general electric) will beat earnings this quarter. What would you do? Most likely buy right? Here is a graph on how GE reacts after its earnings announcements. X axis is earnings surprise and y axis is stock move after announcement.

What you can see is, even if GE does beat earnings, there is no evidence, that the stock will go up. That is what is wrong with chart reading. "We have a break out from a tight base with good volume" is equivalent to saying " A Lamborghini is a fast car with leather interior". It tells us nothing about how we should value the stock, and most importantly, it does not show evidence on why we should make a trade.

In regards to relationships (on a very basic level), lets say implied vol on the S&P 500 is 1 for 1 correlated with the Nasdaq implied vol. All of a sudden, there is quite a big spread between the two implied vols. What you could do is sell the expensive implied vol and buy the cheap implied vol and wait until the spread goes back to normal levels, you have just made a statistical (not pure) arbitrage. Because options give you a ton of leverage, this is how they should be traded (unless you have a directional edge like @smallfil).

I hope this makes sense.