Do you think vega would be a big issue in a weekly trade?. .isn't just the gamma major culprit because you have to hedge the trade till the end. Is this kind of trade popular among other prop traders too?
Selling Weekly Straddles
- Thread starter rohann09
- Start date
I don't think it is a big issue per se BUT by isolating it through wing purchase turning short straddle into flies, you might be sacrificing profit potential for better manageability of the trade since 1) you can sleep at night knowing your losses are capped 2) margin relief..I just wanna be able to trade again the next day...and the wings afford me that.
It is pretty easy to test this strategy.
Long Buywrite 2 times, short spy 1 time. So delta is neutral at the open.
This is a monthly rebalance, not a weekly rebalance.
In practice, results will be slightly worse for portfolio1 since you need to add transaction cost and short rates.
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&s=y&timePeriod=4&startYear=1985&firstMonth=1&endYear=2017&lastMonth=12&endDate=11/17/2017&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=4&showYield=false&reinvestDividends=true&benchmark=VFINX&symbol1=^BXM&allocation1_1=200&symbol2=vfinx&allocation2_1=-100
Long Buywrite 2 times, short spy 1 time. So delta is neutral at the open.
This is a monthly rebalance, not a weekly rebalance.
In practice, results will be slightly worse for portfolio1 since you need to add transaction cost and short rates.
https://www.portfoliovisualizer.com/backtest-portfolio?s=y&s=y&timePeriod=4&startYear=1985&firstMonth=1&endYear=2017&lastMonth=12&endDate=11/17/2017&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=4&showYield=false&reinvestDividends=true&benchmark=VFINX&symbol1=^BXM&allocation1_1=200&symbol2=vfinx&allocation2_1=-100
I think this portfolio covers the basic premise of the strategy ..in practice we are trying to hedge delta beyond a range with more options..so the new options will be embedded with the adjusted IV and more edge to cover revised prediction of future volatility..in the end we will be accumulating a cumulative edge and hopefully that would be more than actual volatility of the pwriod
just doing an "eye test".--- see the slope between 1999-2001 vs 2015-2017? most likely due to higher iv's then vs now... also see the steep drop in 2008? now what you have in 2017 going forward..( just " heuristic " analysis) is not a good environment for writing straddles bec your profit is much lower but your downdrafts are as hard if not more due to neg gamma on low IV's...