if you own the stock,loss more on the downside gap
Selling slightly OTM-Puts-Good Idea?
- Thread starter antares66
- Start date
When your net worth reaches zero, 'unlimited' becomes theoretical.
You really cant answer the question without a decent backtest and somewhat disciplined strategy...
Where I 100% agree with you is that selling OTM puts will obviously not outperform the underlying in a market like we have experienced the last 10+ years.
Bear minimum,you should be selling delta .50 puts,rolling them each month.Read the Goldman research paper on how it fared vs being long to index.FYI,its a bit dated...
The other 2 questions is should one sell 2 0.50 delta options as opposed to 1 delta .5 options?Yes,its opening a can of worms...Also,should one only sell the put with IV30 over 50% or whatever percentile you like..
FWIW,if you sell a .70 delta SPX put and roll each month,returns are getting close,with the put returns a bit less volatile..I did not do an extensive backtest...
Where I 100% agree with you is that selling OTM puts will obviously not outperform the underlying in a market like we have experienced the last 10+ years.
Bear minimum,you should be selling delta .50 puts,rolling them each month.Read the Goldman research paper on how it fared vs being long to index.FYI,its a bit dated...
The other 2 questions is should one sell 2 0.50 delta options as opposed to 1 delta .5 options?Yes,its opening a can of worms...Also,should one only sell the put with IV30 over 50% or whatever percentile you like..
FWIW,if you sell a .70 delta SPX put and roll each month,returns are getting close,with the put returns a bit less volatile..I did not do an extensive backtest...
Right. Limit is the difference between the strike price and zero. But this is not nothing.
You are playing with fire...And you know it. Three examples I lived (and traded) through...Eyes wide open.
What Was the Stock Market Crash of 1987?
The stock market crash of 1987 was a rapid and severe downturn in U.S. stock prices that occurred over several days in late October 1987. While the crash originated in the U.S., the event impacted every other major stock market in the world.
In the five years leading up to the 1987 crash, the Dow Jones Industrial Average (DJIA) had more than tripled. On October 19, 1987—known as Black Monday—the DJIA fell by 508 points, or by 22.6%. Up to this point in history, this was the largest percentage drop in one day. The crash sparked fears of extended economic instability around the world.1
9-11
To prevent a stock market meltdown, the New York Stock Exchange (NYSE) and the Nasdaq did not open for trading on Tuesday morning, September 11, 2001. When American Airlines Flight 11 crashed into the North Tower of the World Trade Center at 8:46 a.m. and American Airlines Flight 175 hit the South Tower at 9:03 a.m., it was obvious that American was under attack.
The assumption that a coordinated terrorist assault had targeted some of the country's most iconic structures and institutions was confirmed sometime later that morning when a plane hit the Pentagon, and a fourth hijacked plane bound for Washington, D.C., was brought down by passengers in Shanksville, PA.
Key Takeaways
Anticipating market chaos, panic selling and a disastrous loss of value in the wake of the attacks, the NYSE and the Nasdaq remained closed until September 17, the longest shutdown since the Great Depression.1 Moreover, many trading, brokerage, and other financial firms had offices in the World Trade Center and were unable to function in the wake of the tragic loss of life and collapse of both towers.
On the first day of NYSE trading after 9/11, the Dow Jones fell 684 points, a 7.1% decline, setting a record at the time for the biggest loss in exchange history for one trading day (this has since been eclipsed by the market reaction during the global coronavirus pandemic). At the close of trading that Friday, ending a week that saw the biggest losses in NYSE history, the Dow Jones was down more than 14%. The S&P 500 Index lost 11.6%, while the Nasdaq shed 16%. An estimated $1.4 trillion in value was lost in those five days of trading.
March 2020 saw one of the most dramatic stock market crashes in history. In barely four trading days2, Dow Jones Industrial Average (DJIA) plunged 6,400 points, an equivalent of roughly 26%. ... Whereas most sectors suffer and their stock prices collapse, some other may benefit from the pandemic and the resulting lockdown.
All three of these events happened during my lifetime of trading. In one or two of them..."THERE WAS NO MARKET"!!! I say, do it...You'll learn a lot.
What Was the Stock Market Crash of 1987?
The stock market crash of 1987 was a rapid and severe downturn in U.S. stock prices that occurred over several days in late October 1987. While the crash originated in the U.S., the event impacted every other major stock market in the world.
In the five years leading up to the 1987 crash, the Dow Jones Industrial Average (DJIA) had more than tripled. On October 19, 1987—known as Black Monday—the DJIA fell by 508 points, or by 22.6%. Up to this point in history, this was the largest percentage drop in one day. The crash sparked fears of extended economic instability around the world.1
9-11
To prevent a stock market meltdown, the New York Stock Exchange (NYSE) and the Nasdaq did not open for trading on Tuesday morning, September 11, 2001. When American Airlines Flight 11 crashed into the North Tower of the World Trade Center at 8:46 a.m. and American Airlines Flight 175 hit the South Tower at 9:03 a.m., it was obvious that American was under attack.
The assumption that a coordinated terrorist assault had targeted some of the country's most iconic structures and institutions was confirmed sometime later that morning when a plane hit the Pentagon, and a fourth hijacked plane bound for Washington, D.C., was brought down by passengers in Shanksville, PA.
Key Takeaways
- The terrorist attacks on September 11, 2001 was marked by a sharp negative reaction by the stock market.
- The first week of trading after the attacks saw the S&P 500 fall more than 14%, while gold and oil rallied.
- The largest industries impacted were airlines (since the attacks utilized airplanes, and flights were subsequently grounded), and insurers who needed to pay out claims.
- Ultimately, the market rebounded after just a relatively short sell-off, but the lasting effects of 9/11 still linger.
Anticipating market chaos, panic selling and a disastrous loss of value in the wake of the attacks, the NYSE and the Nasdaq remained closed until September 17, the longest shutdown since the Great Depression.1 Moreover, many trading, brokerage, and other financial firms had offices in the World Trade Center and were unable to function in the wake of the tragic loss of life and collapse of both towers.
On the first day of NYSE trading after 9/11, the Dow Jones fell 684 points, a 7.1% decline, setting a record at the time for the biggest loss in exchange history for one trading day (this has since been eclipsed by the market reaction during the global coronavirus pandemic). At the close of trading that Friday, ending a week that saw the biggest losses in NYSE history, the Dow Jones was down more than 14%. The S&P 500 Index lost 11.6%, while the Nasdaq shed 16%. An estimated $1.4 trillion in value was lost in those five days of trading.
March 2020 saw one of the most dramatic stock market crashes in history. In barely four trading days2, Dow Jones Industrial Average (DJIA) plunged 6,400 points, an equivalent of roughly 26%. ... Whereas most sectors suffer and their stock prices collapse, some other may benefit from the pandemic and the resulting lockdown.
All three of these events happened during my lifetime of trading. In one or two of them..."THERE WAS NO MARKET"!!! I say, do it...You'll learn a lot.
Quick backtest over the last 10 years shows that by selling the 50 Delta put,it does exactly as you would expect...Half the return,lower Sharpe,far lower Sortino..
The lower the Delta put,the worse the return.Trading legal delta's will produce a much larger max drawdown,and no real incremental return over long index.
This was for rolling 30 day periods
The lower the Delta put,the worse the return.Trading legal delta's will produce a much larger max drawdown,and no real incremental return over long index.
This was for rolling 30 day periods
That's why I only work with ES or mega cap (> 100B) stocks.