Selling Premium - Strategy Never Discussed
- Thread starter robertSt
- Start date
You are both correct.
Over the last 25 yrs, SPY Sharpe was ~ 1.
https://6meridian.com/2017/11/could...for-the-sp-500-be-a-signal-of-things-to-come/
Over the last 90 years, ~ 0.4
https://seekingalpha.com/article/4134189-recent-s-and-p-500-returns-excessive-part-iii
Here is a look at the returns of mechanically selling ATM puts over a 32 years time frame:
On a risk adjusted basis, it is superior to buy and hold SPY but nowhere with an absolute return of 25%-30%.
On the other hand, you have a method which is different from blindly selling puts. So perhaps you do have an edge. If I were you, I would run some analysis to see if indeed over a long period, such method can eliminate losses and enhance gains. How to do that is beyond my pay grade.
Thank you for sharing.
It says MECHANICALLY. This is why an individual can make 25 to 30% return selling premium because they are not blindly selling at a fixed strike OTM regularly but they adapt and adjust based on how they read the market. A fund is like a giant dinosaur making mechanically brainless trades based on their model. So don't take what a large dinosaur fund does mechanically as a limitation to what a retail trader can do with more agile decision making powers than a fund trying to go in and out with 1000s of contracts on illiquid strikes.
I'd agree that they're largely equivalent; since you can essentially just lever up the SPY 2x and get the same result. Now if it's an equivalent risk adj strategy to SPY yet uncorrelated to it now we're talking; since you can combine the two and produce an aggregate return superior to either by itself via diversification.
Regarding the 2nd/3rd; in a nutshell I'd take as much risk as you feel is sustainable for very long timeframes. The more risk the more return if you've got time to absorb volatility. Take risk off when path dependency starts to matter more. But too much risk and you're starting to introduce a real chance of failure.
Trading, at least in the distinction I was trying to make, is not like investing. It's an active venture, not a continual one. So the goal should be to find spots where you can take on a lot of [apparent] risk, for a short window of time, and actively manage it. I read a quote from some finance professor once that stuck with me: "We've found that the most successful individuals in business/finance either take the most risk or the least risk out of everybody, and we're still debating which it is."
Interesting you said that. According to one academic study, that was how Buffett made his outsize returns:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3197185
http://docs.lhpedersen.com/BuffettsAlpha.pdf
As many people have missed the point, CSP is a conservative strategy, esp. if you diversify your target across several stocks. You can also buy index puts with lower vols to further reduce your systematic risks. I am an index option seller since 2003 to trade Taiwan index options. Here in Taiwan we have only one weeklies which prevents us from rolling down our ITM upfront weeklies to the next week.
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I mentioned that I had sold Dec 7 WLL 31 puts on Tuesday as an example of what might happen when a trade moves against me. I thought it might be useful to update throughout in real time. When I opened, the stock was at 32.01 and I received a premium of 67 cents. By the end of day, the stock had dropped below the strike to 30.82.
WLL is an oil stock, and it has been subject to the incredible gyrations in the oil market this week as well as the amazing whipsawing we have all seen in the general market. On Thursday (market was closed Wed.) WLL traded as low as 27.50, a full 3.5 points below my strike. Had the stock remained there, I could have rolled down one strike for even credit at around 28. Below 28 and I would have had to pay a small debit, still retaining plenty of my original premium.
As it happened, oil went up on Friday, responding to news of possible OPEC cuts, and WLL rallied. I bought to close yesterday afternoon with the stock at 30.05 for a premium of 1.00. I simultaneously sold Dec 14 30.5 strike for a premium of 1.72. WLL closed at 29.90, 60 cents below the new strike.
So I have now collected 1.39 (.67 - 1.00 + 1.72). I have moved my original entry point down to 30.5 from 31. So my break even point if I'm assigned at that price is 29.11, 79 cents below the current stock price. If WLL closes above 30.50 next Friday, I have a $1390 profit on a $31000 investment for two weeks (4.5% or 116% annualized). If it stays below 30.5, I'll roll down and out again, collecting more premium, until I am underneath it.
Surely some of you are beginning to see this is an attractive prospect for a trade that moves against you. Had I simply bought the stock at 32.01, I'm now down $2110 and must either take the loss or wait for recovery. I think many of the traders here would have advised me to buy the puts back at 1.00, take the $330 loss, and move on to the next trade. I prefer the rolling down method.
Oh, and as an added bonus, the cash I have "invested" to cover the trade, $30500, is still in my account, collecting interest, about half the T-Bill rate.
The trade is still open, we'll see what happens.
The key is to trade volatile stocks that have enough premium to allow you to roll down with a credit.
WLL is an oil stock, and it has been subject to the incredible gyrations in the oil market this week as well as the amazing whipsawing we have all seen in the general market. On Thursday (market was closed Wed.) WLL traded as low as 27.50, a full 3.5 points below my strike. Had the stock remained there, I could have rolled down one strike for even credit at around 28. Below 28 and I would have had to pay a small debit, still retaining plenty of my original premium.
As it happened, oil went up on Friday, responding to news of possible OPEC cuts, and WLL rallied. I bought to close yesterday afternoon with the stock at 30.05 for a premium of 1.00. I simultaneously sold Dec 14 30.5 strike for a premium of 1.72. WLL closed at 29.90, 60 cents below the new strike.
So I have now collected 1.39 (.67 - 1.00 + 1.72). I have moved my original entry point down to 30.5 from 31. So my break even point if I'm assigned at that price is 29.11, 79 cents below the current stock price. If WLL closes above 30.50 next Friday, I have a $1390 profit on a $31000 investment for two weeks (4.5% or 116% annualized). If it stays below 30.5, I'll roll down and out again, collecting more premium, until I am underneath it.
Surely some of you are beginning to see this is an attractive prospect for a trade that moves against you. Had I simply bought the stock at 32.01, I'm now down $2110 and must either take the loss or wait for recovery. I think many of the traders here would have advised me to buy the puts back at 1.00, take the $330 loss, and move on to the next trade. I prefer the rolling down method.
Oh, and as an added bonus, the cash I have "invested" to cover the trade, $30500, is still in my account, collecting interest, about half the T-Bill rate.
The trade is still open, we'll see what happens.
The key is to trade volatile stocks that have enough premium to allow you to roll down with a credit.
That's gamma risk. Aim to get out around 21 days before expiration to limit it. (IMHO, IME)
Interesting stuff. Almost a risk parity-esqe style. FWIW A business partner and I opened a portfolio in June and have been levered between 3 - 4.5x all year. I like the idea of finding the asset mix you like best and levering it up to a risk target. If you're holding risks for the long-term more or less blindly there's better ways to go about it than 100% long stocks imo.