Selling Premium - Strategy Never Discussed

[destriero]

Well another couple of months and I thought I'd post another update to this thread, just for kicks and giggles. Of course the last few months has been "interesting" to say the least but nonetheless, here we are!
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There's less that $30K in there.

 

[robertSt]

@robertSt and @PriceJuggler ,

I've just re-read the whole thread again today - curious if you two are still using this strategy, and if so, how things have been since March. Have there been any learnings, or changes in the way you trade this now?

Yep, still going strong. Been great since March, even better now, with increasing volatility and higher premiums. I love my job.

 

[Quiet1]

There's less that $30K in there.

Not sure what you mean. It's not too hard to find that account on fund seeder. Currently has $134.6k. Sharpe is 0.5. Been in drawdown since equity high around the time of that June post.

 

[manic]

Yep, still going strong. Been great since March, even better now, with increasing volatility and higher premiums. I love my job.

It's worked well for me too, even with the recent correction (Sep 2020). I've sold puts on at least 30 underlyings and have achieved profits in every single one of them. Some are even down 20% from when I started, and I'm still profitable!

I do have a few short puts that are ITM right now, but if I closed them, the previous credits I received would make up for the debit required to close them. My plan is to keep rolling these ITM puts until the market recovers, at which point, they will expire worthless. One of the most important things in this strategy is to not fear being ITM for long periods of time. A lot of option sellers panic when this happens, but being ITM -- even deep ITM -- is nothing to fear. It's also surprisingly easy to roll deep ITM puts to a lower strike for a credit. Occasionally, you'll have to go out two weeks to do this.

@robertSt -- Thank you so much for intruding this strategy to the forum.

 

[Pkay]

It's true, because options are mainly used for downside protection, not directional bets, so the vast majority of them expire worthless.

Hmm, not sure about that, puts maybe. Many traders use options for directional trades of they have a strong conviction.

 

[ffs1001]

Some are even down 20% from when I started, and I'm still profitable!

@manic, if you feel comfortable posting an example of this, then that would be much appreciated. I'm curious how it plays out in real.
So, for example, say you sold an ATM put at 7DTE on a stock trading at $50 for 2. This would give you an initial 4% return. Lets say that by expiry, the stock moved down to 45. Rolling your put to the next week would now give lower premium (maybe $1??). And say the stock moved down to 40 the week after, the 50P now has very little time value, so any further rolling brings in lower and lower returns. Or is it a case of increasing the DTE from 7 to say 28?

Happy trading.

 

[manic]

@manic, if you feel comfortable posting an example of this, then that would be much appreciated. I'm curious how it plays out in real.
So, for example, say you sold an ATM put at 7DTE on a stock trading at $50 for 2. This would give you an initial 4% return. Lets say that by expiry, the stock moved down to 45. Rolling your put to the next week would now give lower premium (maybe $1??). And say the stock moved down to 40 the week after, the 50P now has very little time value, so any further rolling brings in lower and lower returns. Or is it a case of increasing the DTE from 7 to say 28?

Happy trading.

Here are my trades on Boeing: https://i.imgur.com/hIpk4h4.png

C = expired worthless
R = expire ITM and had to roll

The stock is down about 25% since I started, but I am profitable. However, I was lucky because the decline happened pretty gradually. Had it occurred quickly, then I would have had trouble rolling my short puts.

Also, if Boeing crashes hard right now, then the credits I accumulated might not make up for any losses on the short put I have now (it would need to crash below 130 for this to happen). However, if this does happen, I can keep rolling. I might have to roll out more than one week to get a credit.

 

[taowave]

Didn't read the whole thread,but you are correct.Unleveraged,selling puts has slightly outperformed the S and P..If Robert is putting up the returns he claims,then it's,pretty clear he is selling high vol names,which he does say in his,initial posts..No secret sauce here..

What Robert does not do is track the performance of the underlying stocks he sells premium on.We don't know if he is outperforming by 50 basis points or 1 thousand.

My guess is,Roberts returns are slightly better than the "portfolio" of stocks he,sells premium on..

Any incremental returns are due to the fact that he's pretty good at what he does.But until we know the performance (vol and return)of his portfolio,we have really don't know how effective his strategy is.

Here is a look at the returns of mechanically selling ATM puts over a 32 years time frame:

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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.

 

[taowave]

On another note,there is no inherent mathematical edge to selling an option vs buying it.
That belief should get filed with "90 percent of options expire worthless"...

I did run a very simple backtest on buying the 30day SPY ATM call vs selling the 30 day ATM put,rolling both..

Over the last 10 years,selling the put returned apx 2x with significantly better risk measures.
Both strategies underperformed buying the SPY,with the short ATM put returning slightly over half of the long SPY return

For the record,it was a very simple backtest..

 

[samuel11]

but you have to pay short-term capital gains on all these options vs holding the stock