Selling Weekly Straddles

[sle]

You are just assuming the market is mis-pricing options every week?

Some people do it systematically just like that. Their reasoning is that the risk premium is there all the time, so you keep harvesting it. In the world of limited capital, it’s less about mispricing and more about risk reward - for example, SPX vol in the current environment (pricing 7 and realizing 4) is “rich” but selling it is not a great risk reward.

PS. I wonder if a long put-write ETF with some delta is a viable alternative to actually doing it yourself - probably cheaper and less hassle

 

[rohann09]

The low odds of something bad happening are 100% irrelevant until you're the one it happens to. Only risk what you can afford to lose on short strategies and that may be impossible with naked strategies.

If your strategy yields close to 100% yield, waste some money on OTM long legs ( butterflies) and accept a 'mediocre' 60% or so, without the tail risk.

..makes sense!What would you say will have a better risk reward profile..selling iron butterflies and delta hedging them with more butterflies till the end or buying some wings at the start and selling straddles within the range.

 

[mushinseeker]

the bid/ask spread w all these legs will kill you... also it is not a matter of win/loss % but the payoff when you are wrong. It is also human nature to ramp it up when you are batting .750 which straddle selling offers. This means it will take a lot of discipline to stick to your position size parameters. Often times , traders find that they are at their max size when the black swan happens since it worked 75% of the time past x expirations.

 

[spindr0]

..makes sense!What would you say will have a better risk reward profile..selling iron butterflies and delta hedging them with more butterflies till the end or buying some wings at the start and selling straddles within the range.

I can't tell you what's best for a number of reasons. Since I'm just a reasonably knowledgeable retail guy, I can only share my experience which is far from comprehensive. Perhaps some of the former MM-ers here can enlighten us. Be that as it may, I prefer entry with wing protection in place (spreads, condors, butterflies, etc.) and then defend the side that goes into play. On my level, defense (delta hedging) is as much an art (luck) as it is a science since it requires a cooperative underlying and perhaps some lucky guesses as to when the underlying reverses, in order to break even, let alone profit on a move to a wing (and back). IOW, in order to get some premium flow to offset initial position losses, you have to take on some additional risk somewhere else. At times, the market has a perverse way of finding that add'l level of risk :-(

 

[rohann09]

I can't tell you what's best for a number of reasons. Since I'm just a reasonably knowledgeable retail guy, I can only share my experience which is far from comprehensive. Perhaps some of the former MM-ers here can enlighten us. Be that as it may, I prefer entry with wing protection in place (spreads, condors, butterflies, etc.) and then defend the side that goes into play. On my level, defense (delta hedging) is as much an art (luck) as it is a science since it requires a cooperative underlying and perhaps some lucky guesses as to when the underlying reverses, in order to break even, let alone profit on a move to a wing (and back). IOW, in order to get some premium flow to offset initial position losses, you have to take on some additional risk somewhere else. At times, the market has a perverse way of finding that add'l level of risk :-(

How do you manage a strangle going bad.do you roll it to make it a strangle and eventually a reverse strangle (gut)or just roll down or up the strike depending on which side is at risk.

 

[spindr0]

I surmise that you meant straddle, as in "How do you manage a straddle going bad?" ?

You can do as you suggested as well as sell more premium on the other side but there's almost no way to defray a short straddle's accruing losses on an underlying that is moving hard against you. That's why I prefer limited risk positions (spreads).

Assuming that you're not willing to bite the bullet and book the loss, for example, with a fly or iron condor, you can roll the winning leg in to generate some add'l premium. It won't solve the problem so you're either going to have to buy more long legs or find short premium elsewhere. Push comes to shove, at some point the underlying is going to have to cooperate otherwise you're SOL.

 

[dunleggin]

PS. I wonder if a long put-write ETF with some delta is a viable alternative to actually doing it yourself - probably cheaper and less hassle

Hmm, could roll your own version: long PUTW as the core fund then short some fraction of S&P index fund, rebalance at monthly opx ?

Probably simple to backtest on ETFreplay ..

 

[EliteThink]

on spx it will do well, and then take a huge hit once in a while. edge in random option selling is dropping, but still there. Iron Flies make much more sense. Rolling them with the trend, even more so. have an indicator which sells atm flies for each bar of a chart to test for drift. Used to sell 24 hour flies with exotics years ago. killed it at times.

 

[rohann09]

on spx it will do well, and then take a huge hit once in a while. edge in random option selling is dropping, but still there. Iron Flies make much more sense. Rolling them with the trend, even more so. have an indicator which sells atm flies for each bar of a chart to test for drift. Used to sell 24 hour flies with exotics years ago. killed it at times.

The prop traders say iron fly skew kills all the profit.they are better of booking big lossesthan buying expensive wings.. theoreticaly it might look more profitable though but in a moving market it's huge cost

 

[mushinseeker]

i would'nt say flies kill all the profit.. it does a good job in isolating vega so you only have to worry about other greeks since flies are vega neutral (generally). There is nothing more frustrating than getting things right such as direction, and magnitude only to see your $$$ leak due to vega.