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

TheBigShort said:
At first I was not too sure if your original post was serious. But it looks like you are being serious.

Instead of focusing on the exact question "Does selling vol make lots of money"? I think it will be more insightful to talk about strategy. Note there are also countless papers on the returns of selling variance that will explain it much better than i can(spoiler alert there is no silver bullet) .

Whenever you think a strategy will make large returns on capital - in this case "hundreds of percents a year" - it will have to meet at least 1 of 2 criteria: 1) Hard to take advantage of 2) Low capacity.

1) Hard to take advantage of: This could be caused by rules and regulations, large transaction costs to trade in the market, high upfront cost to start the business (infrastructure), etc..

2)Low Capacity: Once you reach a certain size it is hard to trade without moving the market. These strategies are usually left alone by larger players.

Anyone with a brokerage account can sell options and there is lots of capacity especially on large names/indexes. So right off the bat this strategy is not going to make hundreds of %'s a year, not even close. Never forget you are trading in a market place - People who do not have good strategies will become smaller and people who have good strategies will become larger. Eventually the sellers will have grown so big (because they are making 100's of %'s) that the supply will outweigh the shrinking pool of option buyers(losing players).

But as Aaron Brown would say - "take the bet!" Bet big enough that it means something and you learn from it but not too big that it causes you hardship.
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Yeah buy option buyers win too. They might not win often but when they do win, they win a windfall. They basically become the steamroller and win back all of the money that they've been losing to the option sellers. LOL
 
Saltynuts said:
Some people be like "yo, if you sell both a put and a call your risk of a disaster trade doubles dude!!!!".

Others be like "whoa bro, if you sell a call you loss potential is unlimited!!!".

Maybe all that is theoretically true, but realistically is there any easier way to print money, other than printing money itself if you are the Fed?

I mean, you sell both a put and a call. If the underlying goes up, not only do you have the call premium to cover you, but you got the put premium as well. The put guy is literally eating what would have otherwise been your loss. Reverse if the underlying goes down, the call buyer is eating your loss for you.

Now, of course, if the underlying goes up or down TOO much, it could cut into your profitability (or actually cause a loss). HOWEVER, at the point in which it would become unprofitable (or thereabouts, whatever makes you comfortable), you close out your initial positions and sell new calls and puts closer to the market. That way changes in the prices of the underlying are effectively being borne by the guy that bought your puts/calls, not you.

Its like money in the bank. Hell, I wish I knew how to start a hedge fund, I'd make a hedge fund that does just this and earns ROIs of hundreds of percents a year...
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Your risk is to be "fooled by randomness"
 
Saltynuts said:
And by the way, what is a "covered" straddle,
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An Iron Butterfly is a hedged short straddle. You're selling the straddle and buying wings. You can place them far OTM if you like but it makes it much more affordable to put on the straddle as your BP is less and your risk of catastrophic blowout is much lower.
 
I'll bite..Are you Delta hedging with stock??

Are you setting certain levels of historical IV to enter the trade??

Have you spent 5 minutes backtesting ,I.e. Orats...
 
qlai said:
So you close at possibly huge loss? I have been playing around with selling covered straddles (most commonly referred to covered call plus short put). I find that this strategy is only “worth” doing on high volatility stocks which can really hurt you. So back to playing it small for premium selling.
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Much cheaper to just buy the wings and it is call iron butterflies. That is the reason some of us are looking at butterflies.
 
taowave said:
I'll bite..Are you Delta hedging with stock??

Are you setting certain levels of historical IV to enter the trade??

Have you spent 5 minutes backtesting ,I.e. Orats...
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No need to delta hedge, as @caroy said, just hedge the wings. You can then print money and avoid the steamroller. :D
 
JSOP said:
Yeah buy option buyers win too. They might not win often but when they do win, they win a windfall. They basically become the steamroller and win back all of the money that they've been losing to the option sellers. LOL
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Blindly selling variance risk premium doesn't generate alpha, nor does buying it. There's more to optionality than just being a buyer or a seller, at least if you want to make something out of it.
 
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