Selling Premium - Strategy Never Discussed
- Thread starter robertSt
- Start date
It's also been pointed out previously that the graphic represents a purely mechanical method, measuring results at expiration - living and breathing traders can improve on those results.
But I don't insist that 25% or 30% is the norm. Maybe they'll be a few bad years when it only does a little better than the indexes.
It's only safer if no leverage is involved. What's your -5% index stress? If you lose more than 5%, then...
From your first post "First, I sell weekly puts that are cash-covered." Just basic math here, if you sell $100 of cash covered puts and the company goes bankrupt you have lost $100....full stop. You can't "roll" that over or claim that it's "opportunity cost". You certainly can't claim "you need never lose money", that's simply incorrect. Is it "safer" then selling the stock short? Perhaps, there is a lot of nuance you're not addressing to risk adjusted return. But is most certainly isn't something where "you need never lose money".
Very interesting thread!
I agree it would have caused a drawdown... and the drawdown would probably have been much larger than the index itself since you're trading volatile stocks with high IV. It's tough to recover from a 20-30% drawdown... it would be devastating to recover from a 60-70% drawdown or more. Many people would walk away and never come back.
I absolutely agree with @destriero in this case: the time to evaluate this bullish strategy is not when we're in a bull market. Since you have never traded this through a bear market, you don't know. All we're left with, then, are the stories from professional traders who talk about picking up pennies in front of a steamroller and seeing comrades get blown out of business doing the same. Most professionals I read would never be net short contracts for this reason.
When it comes to CSPs, no leverage means a notoriously low ROC (on Reg T margin). You trade high IV issues, which boosts that a bit. You also trade ATM, which boosts it farther. However, both of these will hurt you exponentially when the market really tanks (the former because the underlying tends to move more and the latter because you have no MOS compared to trading OTM).
I agree it would have caused a drawdown... and the drawdown would probably have been much larger than the index itself since you're trading volatile stocks with high IV. It's tough to recover from a 20-30% drawdown... it would be devastating to recover from a 60-70% drawdown or more. Many people would walk away and never come back.
I absolutely agree with @destriero in this case: the time to evaluate this bullish strategy is not when we're in a bull market. Since you have never traded this through a bear market, you don't know. All we're left with, then, are the stories from professional traders who talk about picking up pennies in front of a steamroller and seeing comrades get blown out of business doing the same. Most professionals I read would never be net short contracts for this reason.
When it comes to CSPs, no leverage means a notoriously low ROC (on Reg T margin). You trade high IV issues, which boosts that a bit. You also trade ATM, which boosts it farther. However, both of these will hurt you exponentially when the market really tanks (the former because the underlying tends to move more and the latter because you have no MOS compared to trading OTM).
In another response, you said: "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. "
Why do you think it's easy to beat the mechanical benchmarks? How many actively traded funds succeed? Few, which is one of the core arguments to passive investing.
You have, indeed, described a discretionary trading plan. It's hard--sometimes impossible--to backtest discretionary approaches for performance metrics that can be compared with other systems. I think you're left with a pipe dream, which may or many not work out.
So what is everyone else doing to make 25%-30% while waiting for the crash? There are so many things that could happen - a nuclear war would probably reduce my return too.
Sig is certainly right that if the underlying suddenly goes bankrupt, that would cause a loss.
Drmark27 asked "Why do you think it's easy to beat the mechanical benchmarks?" It is not uncommon to buy back my options for 50%-90% profit the day of sale or the next day. I can then use the freed funds for another trade, instead of waiting for expiration on the original, which may have moved against you by that time. I probably buy to close more than I allow to expire, which gives me a tremendous advantage over the mechanical.
As for the bear market, I have traded a lot of underlyings that lost 20%-50% of their value, with still-profitable results, given enough time. I'm sure there are scenarios where I might need to take a loss, but it wouldn't be anything like 50% of the stock value had that been my position.
So after 3 years and more than doubling my account, many of you are at pains to imagine situations where I might lose some money. My Sharpe ratio so far this year is 1.89, out of 40 closed trade sequences (hundreds of leg rolls) 38 have been profitable, and the two losses were opportunity choices.
No matter how much the underlying goes down, I can sell another option to recapture the intrinsic I had to pay for, plus more time value. I don't think the power of this is fully appreciated.
Sig is certainly right that if the underlying suddenly goes bankrupt, that would cause a loss.
Drmark27 asked "Why do you think it's easy to beat the mechanical benchmarks?" It is not uncommon to buy back my options for 50%-90% profit the day of sale or the next day. I can then use the freed funds for another trade, instead of waiting for expiration on the original, which may have moved against you by that time. I probably buy to close more than I allow to expire, which gives me a tremendous advantage over the mechanical.
As for the bear market, I have traded a lot of underlyings that lost 20%-50% of their value, with still-profitable results, given enough time. I'm sure there are scenarios where I might need to take a loss, but it wouldn't be anything like 50% of the stock value had that been my position.
So after 3 years and more than doubling my account, many of you are at pains to imagine situations where I might lose some money. My Sharpe ratio so far this year is 1.89, out of 40 closed trade sequences (hundreds of leg rolls) 38 have been profitable, and the two losses were opportunity choices.
No matter how much the underlying goes down, I can sell another option to recapture the intrinsic I had to pay for, plus more time value. I don't think the power of this is fully appreciated.
That's far beyond anything I can achieve. Have you shared your method?
I have a bunch of journals. I am not stating is repeatable, certainly my best year (notional gain). The best day I've ever had: https://www.elitetrader.com/et/threads/dests-everything-journal.332136/page-13#post-4861667
I trade direction in vol. A lot of OTM flies and diagonals.