Selling Premium - Strategy Never Discussed

[viruscore1]

Selling OTM put options. It's like catching falling knives

 

[ironchef]

It's precisely what it is. OP will end up in an all-or-nothing position just like playing martingale in the casinos. He's not factoring in the leveraging effect though, that if he's reasonably far out of the money and the option gets within 1 point of his position the IV has likely spiked way beyond the model he has (if he has any) and is likely bleeding out.



Karen the SuperFraud's strategy relied on fraud. Then volatility striked and wiped out 100 million in paper. For reference she basically followed this exact strategy, fraudulently rolling losses to the next month on the HOPE that they'll improve next month. OP is not a fraud (most likely) but is making the same fundamental mistake.

Selling premium in this way is just deferring a bad trade over and over. Sometimes it'll work, sometime's you'll be remortgaging your house. OP is far too confident.

Basic difference: OP sells cash secured puts, Karen naked with margins.

 

[piezoe]

I would like to add that there is a widespread misconception that selling premium entails some kind of wild risk that only a fool would undertake. I have made the case that selling puts is less risky than an equivalent stock position - it's just simple math really. The important thing is that I have the position cash-covered, I'm not leveraging with margin.

A stock owner loses dollar for dollar with every drop in stock price. What do I, the put seller lose? Perhaps nothing. The time value I collected (the premium) may be enough to cover the drop in stock price while still returning me a profit.

Let's say the premium doesn't cover it. The stock has dropped so far that it's 1 point under my strike, the time value is gone. So I trade the intrinsic value for time value by rolling. I buy back my put for 1.05 and sell one strike lower for next week for 1.20. I now have my original premium plus 15 cents. I have gotten paid to lower my entry point. The stock owner is where he always was. I'm now 50 cents lower with a large premium that is about to pay off, either this week or some weeks down the road, at which point I will have an even larger premium to collect.

It should at least be clear that I have far more control over my position than a simple stock owner. And that means a lot less risk.

Fine. Just keep in mind that your ultimate success will require a change in strategy when the market peaks and we get into a recession and a bear market. How prescient you are in foreseeing changes in market trend, and how nimble in adjusting, are going to determine your long term net. Your strategy is by no means foolproof. At least by cash securing your trades you won't be forced to sell the Picasso's when things go badly wrong.

 

[marameo]

What if I sell a credit where max loss is 5% of my liquidity and when I am right I make 1% to 1.5%

So I have 70% chances to be right and make 1.5% or 30% chances to be wrong and lose 5%.

 

[Tony Optionaro]

What if I sell a credit where max loss is 5% of my liquidity and when I am right I make 1% to 1.5%

So I have 70% chances to be right and make 1.5% or 30% chances to be wrong and lose 5%.

So risking 500 dollars to make a 150, with probabilities of 30% and 70%, your excpected value for profit would be as much as forty-five dolla loss. If you still think you invented the money printing machine, after commissions and all, be my guest..

 

[KINGOFSHORTS]

Selling OTM put options. It's like catching falling knives

Shit I sell short calls short puts ITM DITM ATM slightly OTM

I entered a naked short call on SPY yesterday at the 288 strike price.
Long puts and calls also.

I jump in with both feet none of this pennies in front of steamroller bs. More like getting in the steamrollers and taking wallets

 

[Orbiter]

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.

That’s a great question. The short answer is: similar returns with the benchmark with lower beta and lower drawdowns.

There are a bunch of ETFs selling puts in a similar fashion and their returns are in line with the indexes but less volatile.

https://etfdb.com/etfs/investment-style/buywrite/

I’ve personally done a lot of research on the subject and traded similar strategies for a while with good results.

 

[PriceJuggler]

Great results, keep it up. SP500 CAGR is about 13.7% for the last 4 years, you are doing about 5% better.

Thanks.

Update in case anyone's interested:

 

[drcruz]

I'm a smallish / newish / intermediate experienced options seller. Currently focused on selling /ES options (mostly Ron Bertino's STT OTM BWB). Even after getting stopped out in Aug. 2019 (if I count my chickens) I will end up positive in 2019 and this will be my first profitable year since seriously starting my trading business in early 2017. Current strategy direction is neutral to bullish (risk is to the downside and is vega negative)

As far as I can tell the trader’s edge is the market goes up 53% over time and IV usually overstates actual.

It’s not perfect but I backtest using ONE and I try to be as mechanical and unbiased as possible (maintaining fixed rules as much possible).

Also, it seems like during times like the Financial Crisis of Aug. 2011, Brexit of Aug. 2015, Vol-mageddon of Feb. 2018 there's enough time to get out of the losing position before the big down move. Theoretical losses are 1x to 2x the premium collected.

Going by market down move averages:
- 10% once every 11 months.
- 15% once every 2 years.
- 20% once every 4 years.
- 30% once every 10 years.

Isn’t money management the key to survival - you have to closeout the losing position. Plus none of these down moves happen in a single day even if you count 2008 (which I haven't backtested yet). During bear markets you shouldn't be putting on bullish positions anyway (sometimes the best trade is the one you are not in, isn't it?). Am I totally screwed up in my thinking?

 

[viruscore1]

Do anyone sell otm call for premium, uncovered.