Selling short straddles is like printing free money convince me I'm wrong

Saltynuts said:
Dude, are you seriously saying that MY post is a troll post? This thread I mean? LOL, that is hilarious if so. I CLEARLY explained the whole logic behind it in my initial post and subsequent posts. I advise you to re-read my initial post and my subsequent posts to completely follow it. Its not that complicated, just complicated in a very minor way. Good luck with that.
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You did a lot of hand waving claims without data to support them. It sounded logical, just like all the other claims, be it "Selling Options For a Living", "Doing Wheels For A Living", "Covered Calls For a Living"... So I ran an expectancy test using real SPY data and assuming a lognormal distribution with the current market parameters (i.e. BSM). The expectancy of your strategy is essentially zero without slippage and commission, independent of where I placed the straddle. I haven't done the calculations to incorporate your exit and adjustment strategy but my gut says if I use the same lognormal distribution and BSM, the outcome would be the same: No gains.

To make money you need knowledge, knowledge of the behavior of the underlying, the market, volatility, interest rate, dividend.... It would be a more fruitful thread if you could show us how you make adjustments with some real life examples.
 
What time frame did you bscktest?? Im going to run a backtest as well..

ironchef said:
You did a lot of hand waving claims without data to support them. It sounded logical, just like all the other claims, be it "Selling Options For a Living", "Doing Wheels For A Living", "Covered Calls For a Living"... So I ran an expectancy test using real SPY data and assuming a lognormal distribution with the current market parameters (i.e. BSM). The expectancy of your strategy is essentially zero without slippage and commission, independent of where I placed the straddle. I haven't done the calculations to incorporate your exit and adjustment strategy but my gut says if I use the same lognormal distribution and BSM, the outcome would be the same: No gains.

To make money you need knowledge, knowledge of the behavior of the underlying, the market, volatility, interest rate, dividend.... It would be a more fruitful thread if you could show us how you make adjustments with some real life examples.
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taowave said:
Im going to run a backtest as well..
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What is the point of back testing? Obviously this strategy traded without taking context into consideration and with meaningful size is blow up waiting to happen. Couldn’t this be said about any premium selling strategy?
Looks like many people here like butterflies. I don’t understand what the appeal is (besides reducing margin). One book I read described it as “shooting fish in a barrel” - low risk/low return strategy. Admittedly, the book targeted people like me, who don’t know any better.
 
taowave said:
What time frame did you bscktest?? Im going to run a backtest as well..
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ironchef said:
20 trading days.
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Actually not a back test, I took the SPY data of the day and ran an expected return: Simply integrated the payoff curve with a lognormal distribution curve and BSM parameters. I can do it at the beginning, any day in between or at expiration.
 
The straddle backtest,delta hedged or not,was mediocre at best..And as expected,the max drawdown was too large to leverage up....I didnt place a filter on IV,but did place a minimum percent of spot for the straddle sale on one of the backtests...Didnt help...
 
taowave said:
The straddle backtest,delta hedged or not,was mediocre at best..And as expected,the max drawdown was too large to leverage up....I didnt place a filter on IV,but did place a minimum percent of spot for the straddle sale on one of the backtests...Didnt help...
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I agree with you and your analysis. OP must have secret source which he won't reveal.

@destriero always posted real trades so we know he is the real deal from those trades. And by the way, if he could make money with butterflies, he sure could do the same with straddles which fundamentally are not that different except butterflies are lower risk trades.

@Saltynuts, you need to post some trades.
 
taowave said:
The straddle backtest,delta hedged or not,was mediocre at best..And as expected,the max drawdown was too large to leverage up....I didnt place a filter on IV,but did place a minimum percent of spot for the straddle sale on one of the backtests...Didnt help...
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It does not matter where you place the spot, the expectancy is always around zero, that is to be expected otherwise it can be arbitraged to get a risk free return. You get a positive expectancy only if you can predict where spot will land. :p
 
Yikes. I don't have a lot of firm trading rules, but one is that if it seems too easy (like, selling a basic two-leg option strategy), it's not going to work because someone else would have figured it out a long time ago.

In my experience -- and it's a lot more limited than many here, but still fairly deep -- just about every strategy available to retail traders needs to:
  1. make a directional bet -- yes, even for supposedly market-neutral strategies
  2. have a way to calculate the risk of each position you enter
  3. use a lot of initial capital to make large gains (no broker is just going to let you sell naked puts/calls without corresponding collateral)
  4. [bonus for futures traders: account for slippage. It's trivial to design even a fully automated system that yields eye-popping monthly gains if we assume no slippage. It's extremely difficult to do the same with real-trade slippage.]
But I don't want to be overly negative. Go trade your strategy. It's the only way to either confirm that it works, or to learn from it. But keep the above in mind, because at some point, they will become relevant.
 
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