I agree, harder to know where to put margin capital once markets calm down. A lot of vol has come out of the system. Any particular trades you’re favoring now that most things are dropping into a predictable contango? I was making a lot buying calendars and diagonals in disrupted equities but obvious opportunities there are getting a little harder to find. Also now with index vol getting relatively closer to its floor; less chance of significant vega PnL there. What are you looking at trading in the next few months if no other shocks materialize?
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Selling slightly OTM-Puts-Good Idea?
- Thread starter antares66
- Start date
I agree, harder to know where to put margin capital once markets calm down. A lot of vol has come out of the system. Any particular trades you’re favoring now that most things are dropping into a predictable contango? I was making a lot buying calendars and diagonals in disrupted equities but obvious opportunities there are getting a little harder to find. Also now with index vol getting relatively closer to its floor; less chance of significant vega PnL there. What are you looking at trading in the next few months if no other shocks materialize?
It works on index ETFs, but single stocks are a different story. Boeing (BA) over the past year is a good example of how dangerous this could be. I have backtested vertical spreads, ICs, and iron butterflies over 3 years of EOD data (GBM/Monte Carlo sim) and interestingly only TSLA and AMZN have positive reward/risk. Otherwise I have yet to find a way to consistently sell volatility premium without enormous downside risk.
What parameters did you use??
How are you defining positive risk reward??
How are you defining positive risk reward??
It works on index ETFs, but single stocks are a different story. Boeing (BA) over the past year is a good example of how dangerous this could be. I have backtested vertical spreads, ICs, and iron butterflies over 3 years of EOD data (GBM/Monte Carlo sim) and interestingly only TSLA and AMZN have positive reward/risk. Otherwise I have yet to find a way to consistently sell volatility premium without enormous downside risk.
RR = max(theoretical pnl) / abs(min(theoretical pnl)) over 25,000 random walksWhat parameters did you use??
How are you defining positive risk reward??
I am using the Finmath library for the Monte Carlo simulation: http://www.finmath.net/finmath-experiments/montecarlo-blackscholes/
I use the VIX formula applied to the single stock as the volatility (variance) input to BS, and price the spread at each step of the GBM price path, then count the number of times it reaches a 50% profit target. If the simulation returns >90% target met, I backtest it with the actual EOD data and compare the results, and that is where it falls apart in a March 2020 scenario. I haven't found how to protect against 4+ STD downside (BA, BKNG, EXPE, etc.), not at least without adjustment or "repair".
Option traders selling naked puts are often scolded for being reckless and dirty speculators: "you assume unlimited risk!". But in fact stock holders (naked long stock, without buying a put option to protect it), also have unlimited risk - the naked stock position can very well go to zero too. Yet they're praised for "investing".
I am taking a step back and not doing much...Doing some split strike flys in the Indicies/Large cap and some diagnols in a couple of equities...Probably trade some earnings "time" spreads with a directional bias
I agree, harder to know where to put margin capital once markets calm down. A lot of vol has come out of the system. Any particular trades you’re favoring now that most things are dropping into a predictable contango? I was making a lot buying calendars and diagonals in disrupted equities but obvious opportunities there are getting a little harder to find. Also now with index vol getting relatively closer to its floor; less chance of significant vega PnL there. What are you looking at trading in the next few months if no other shocks materialize?
I haven't found how to protect against 4+ STD downside (BA, BKNG, EXPE, etc.), not at least without adjustment or "repair".
OR cost
u could try and buy teenies but it comes at a cost (drag) on your position (portfolio)
paying for protection
The strategy is fine when used for the correct intended purpose. If one wants to collect premium and is fully comfortable owning the stock then fine. If one has a directional upward bias on the stock then not so good. If you are correct then your gains much less than just buying the stock. However if you are wrong then your losses may quickly grow toward the same losses as buying the stock. So, for premium capture-sure. For making a directional bet, no, too unbalanced reward/risk.