Strategy: Selling Put Options: The Best Income Method?

[botpro]

This is my first post, and I've read all the posts in this thread. I'll try to give botpro a explanation why the strategy is zero risk without using "greeks".

First of all, you should understand that option-prices does not have a linear correlation to the stock price.

First of all, I never said nor would ever expect a linear relation between the option price and the underlying stock price.
And: a simple linear relation wouldn't be worth a Nobel Prize Black and Scholes won...
I know the distribution curve very well: lognormal, or alternatively said: the natural logarithms (ln) of the changes are normally distributed, ie. a bell-like shape (Gauss, the famous German mathematican discovered and formulated it some centuries ago)...
But these are basic things, I'm over them since at least 5 years...
My deficit is in options selling and the use of the greeks for an optimal hedging when needed, ie. to prevent a loss. But I'll have mastered it soon; it's not rocket science...

This example shows that botpros strategy would fail about half-way until expiration, but if the put is held to expiration, the strategy will still be profitable. One can easily see that using an end-price of 176.9 (Strike - Put premium) the strategy can impossible be exited without a loss.

The argument against this might be that SPY would never drop from 200 to 176.9 in 132 days. Well, it can!

Well, I guess you mean that according to you a zero-loss strategy is impossible, right?
That's IMHO not an open question anymore. With correct hedging one can prevent a loss.
But that I already stated in my previous postings.

For me the still open question is at what point should the hedge be initiated, IMHO the later the better, but it should be not too late... Ie. one needs to find the right point in time...

 

[destriero]

Obv you don't, as it's Cauchy.

 

[botpro]

Obv you don't, as it's Cauchy.

"The Cauchy distribution is often used in statistics as the canonical example of a "pathological" distribution since both its mean and its variance are undefined" --> https://en.wikipedia.org/wiki/Cauchy_distribution

I mean the "usual" normal distribution with mu=0, sigma=1, ie. that one: https://en.wikipedia.org/wiki/Normal_distribution

 

[Blip!]

For me the still open question is at what point should the hedge be initiated, IMHO the later the better, but it should be not too late... Ie. one needs to find the right point in time...

By this, it sounds like you believe the put value initially will fall. This is not always the case. You may experience that the put is sold at the lowest possible value and remains the same (or higher) than initially sold. The lowest loss will be if you buy them back at the same value (and looses the bid/ask spread), but in this case a loss is impossible to avoid.

To put it simple... The Greeks is used to try to predict how the options will react on stock price movement (or lack of) and time "movement". If you don't want to understand and use this, option Trading is more like gambling. Fun, if that is how you want to spend your money.

Option trading is all about statistics, probability and knowledge (and thus reduce the effect of randomness). You sound like a smart and creative guy. I guess we all have been I'm the same situation. Please use Google or read books if you won't believe what people here are trying to tell you.

And to answer your question: The best exit strategy is to exit before any loss. This, however, not possible at all trades...

 

[OptionGuru]

For me the still open question is at what point should the hedge be initiated, IMHO the later the better, but it should be not too late... Ie. one needs to find the right point in time...

You don't "hedge" or micro-manage in anyway .......... All options positions including Short Puts should be left alone while the trade is open. If the trade is too risky for your comfort level then make changes before you open it.

 

[botpro]

The following tables can explain much and would be useful in hedging (for example in the PEP case):

Spot=100.000 Strike=90.00 ExpDays=94 HoldDays=94 Interest=0.000% Dividend=0.000% VolaPctS=21.00000%  -->  Call=11.406355  Put=1.406355 Cdelta=0.812085 Pdelta=-0.187915

Day 0  : Annual         : Vola=21.00%   +1SD=23.37%     -1SD=-18.94%
         Daily          : Vola=1.32%    +1SD=1.33%      -1SD=-1.31%
         Period(0 days) : Vola=1.32%    +1SD=1.33%(101.33)      -1SD=-1.31%( 98.69)     C@+1SD=12.5058(9.6%)    C@-1SD=10.3579(-9.2%)   P@+1SD=1.1741(-16.5%)   P@-1SD=1.6721(18.9%)
   deltaSpot%        spot         call         put           cprm0PL%      pprm0PL%     -cprm0PL%    -pprm0PL%    Cdelta   Pdelta
---------------------------------------------------------------------------------------------------------------------------------
       10.00%     110.00000      20.32179      0.32179      78.16197%    -77.11913%     -78.16197     77.11913   0.94831 -0.05169
        9.50%     109.50000      19.84859      0.34859      74.01341%    -75.21344%     -74.01341     75.21344   0.94444 -0.05556
        9.00%     109.00000      19.37738      0.37738      69.88236%    -73.16580%     -69.88236     73.16580   0.94033 -0.05967
        8.50%     108.50000      18.90830      0.40830      65.76990%    -70.96730%     -65.76990     70.96730   0.93595 -0.06405
        8.00%     108.00000      18.44147      0.44147      61.67719%    -68.60866%     -61.67719     68.60866   0.93131 -0.06869
        7.50%     107.50000      17.97703      0.47703      57.60542%    -66.08018%     -57.60542     66.08018   0.92640 -0.07360
        7.00%     107.00000      17.51512      0.51512      53.55583%    -63.37176%     -53.55583     63.37176   0.92119 -0.07881
        6.50%     106.50000      17.05589      0.55589      49.52973%    -60.47292%     -49.52973     60.47292   0.91568 -0.08432
        6.00%     106.00000      16.59949      0.59949      45.52844%    -57.37276%     -45.52844     57.37276   0.90986 -0.09014
        5.50%     105.50000      16.14608      0.64608      41.55337%    -54.05999%     -41.55337     54.05999   0.90372 -0.09628
        5.00%     105.00000      15.69582      0.69582      37.60595%    -50.52295%     -37.60595     50.52295   0.89725 -0.10275
        4.50%     104.50000      15.24889      0.74889      33.68767%    -46.74959%     -33.68767     46.74959   0.89043 -0.10957
        4.00%     104.00000      14.80545      0.80545      29.80006%    -42.72749%     -29.80006     42.72749   0.88325 -0.11675
        3.50%     103.50000      14.36570      0.86570      25.94468%    -38.44389%     -25.94468     38.44389   0.87571 -0.12429
        3.00%     103.00000      13.92980      0.92980      22.12317%    -33.88569%     -22.12317     33.88569   0.86780 -0.13220
        2.50%     102.50000      13.49796      0.99796      18.33716%    -29.03949%     -18.33716     29.03949   0.85951 -0.14049
        2.00%     102.00000      13.07035      1.07035      14.58836%    -23.89157%     -14.58836     23.89157   0.85083 -0.14917
        1.50%     101.50000      12.64719      1.14719      10.87848%    -18.42796%     -10.87848     18.42796   0.84175 -0.15825
        1.00%     101.00000      12.22867      1.22867       7.20927%    -12.63447%      -7.20927     12.63447   0.83227 -0.16773
        0.50%     100.50000      11.81499      1.31499       3.58251%     -6.49667%      -3.58251      6.49667   0.82238 -0.17762
        0.00%     100.00000      11.40635      1.40635       0.00000%      0.00000%      -0.00000     -0.00000   0.81208 -0.18792
       -0.50%      99.50000      11.00297      1.50297      -3.53645%      6.87026%       3.53645     -6.87026   0.80137 -0.19863
       -1.00%      99.00000      10.60506      1.60506      -7.02501%     14.12890%       7.02501    -14.12890   0.79024 -0.20976
       -1.50%      98.50000      10.21281      1.71281     -10.46386%     21.79075%      10.46386    -21.79075   0.77869 -0.22131
       -2.00%      98.00000       9.82644      1.82644     -13.85116%     29.87067%      13.85116    -29.87067   0.76672 -0.23328
       -2.50%      97.50000       9.44616      1.94616     -17.18510%     38.38341%      17.18510    -38.38341   0.75434 -0.24566
       -3.00%      97.00000       9.07217      2.07217     -20.46386%     47.34366%      20.46386    -47.34366   0.74155 -0.25845
       -3.50%      96.50000       8.70468      2.20468     -23.68566%     56.76592%      23.68566    -56.76592   0.72835 -0.27165
       -4.00%      96.00000       8.34389      2.34389     -26.84873%     66.66446%      26.84873    -66.66446   0.71475 -0.28525
       -4.50%      95.50000       7.99000      2.49000     -29.95135%     77.05329%      29.95135    -77.05329   0.70077 -0.29923
       -5.00%      95.00000       7.64319      2.64319     -32.99184%     87.94606%      32.99184    -87.94606   0.68640 -0.31360
       -5.50%      94.50000       7.30365      2.80365     -35.96857%     99.35602%      35.96857    -99.35602   0.67167 -0.32833
       -6.00%      94.00000       6.97157      2.97157     -38.87995%    111.29594%      38.87995   -111.29594   0.65659 -0.34341
       -6.50%      93.50000       6.64711      3.14711     -41.72447%    123.77809%      41.72447   -123.77809   0.64117 -0.35883
       -7.00%      93.00000       6.33045      3.33045     -44.50071%    136.81411%      44.50071   -136.81411   0.62543 -0.37457
       -7.50%      92.50000       6.02172      3.52172     -47.20730%    150.41501%      47.20730   -150.41501   0.60940 -0.39060
       -8.00%      92.00000       5.72109      3.72109     -49.84297%    164.59108%      49.84297   -164.59108   0.59309 -0.40691
       -8.50%      91.50000       5.42868      3.92868     -52.40655%    179.35184%      52.40655   -179.35184   0.57652 -0.42348
       -9.00%      91.00000       5.14461      4.14461     -54.89697%    194.70600%      54.89697   -194.70600   0.55973 -0.44027
       -9.50%      90.50000       4.86900      4.36900     -57.31328%    210.66124%      57.31328   -210.66124   0.54273 -0.45727
      -10.00%      90.00000       4.60192      4.60192     -59.65476%    227.22337%      59.65476   -227.22337   0.52557 -0.47443

...
Day 30 : Annual         : Vola=21.00%   +1SD=23.37%     -1SD=-18.94%
         Daily          : Vola=1.32%    +1SD=1.33%      -1SD=-1.31%
         Period(30 days)        : Vola=7.25%    +1SD=7.51%(107.51)      -1SD=-6.99%( 93.01)     C@+1SD=17.7142(55.3%)   C@-1SD=5.5518(-51.3%)   P@+1SD=0.1995(-85.8%)   P@-1SD=2.5412(80.7%)
   deltaSpot%        spot         call         put           cprm0PL%      pprm0PL%     -cprm0PL%    -pprm0PL%    Cdelta   Pdelta
---------------------------------------------------------------------------------------------------------------------------------
       10.00%     110.00000      20.11744      0.11744      76.37049%    -91.64913%     -76.37049     91.64913   0.97436 -0.02564
        9.50%     109.50000      19.63093      0.13093      72.10516%    -90.69046%     -72.10516     90.69046   0.97168 -0.02832
        9.00%     109.00000      19.14581      0.14581      67.85212%    -89.63224%     -67.85212     89.63224   0.96875 -0.03125
        8.50%     108.50000      18.66222      0.16222      63.61245%    -88.46553%     -63.61245     88.46553   0.96557 -0.03443
        8.00%     108.00000      18.18028      0.18028      59.38733%    -87.18074%     -59.38733     87.18074   0.96211 -0.03789
        7.50%     107.50000      17.70016      0.20016      55.17804%    -85.76766%     -55.17804     85.76766   0.95835 -0.04165
        7.00%     107.00000      17.22199      0.22199      50.98590%    -84.21539%     -50.98590     84.21539   0.95427 -0.04573
        6.50%     106.50000      16.74594      0.24594      46.81236%    -82.51234%     -46.81236     82.51234   0.94986 -0.05014
        6.00%     106.00000      16.27218      0.27218      42.65892%    -80.64622%     -42.65892     80.64622   0.94510 -0.05490
        5.50%     105.50000      15.80090      0.30090      38.52720%    -78.60402%     -38.52720     78.60402   0.93995 -0.06005
        5.00%     105.00000      15.33229      0.33229      34.41888%    -76.37199%     -34.41888     76.37199   0.93441 -0.06559
        4.50%     104.50000      14.86656      0.36656      30.33574%    -73.93565%     -30.33574     73.93565   0.92846 -0.07154
        4.00%     104.00000      14.40391      0.40391      26.27968%    -71.27980%     -26.27968     71.27980   0.92206 -0.07794
        3.50%     103.50000      13.94457      0.44457      22.25265%    -68.38847%     -22.25265     68.38847   0.91521 -0.08479
        3.00%     103.00000      13.48878      0.48878      18.25670%    -65.24502%     -18.25670     65.24502   0.90787 -0.09212
        2.50%     102.50000      13.03678      0.53678      14.29398%    -61.83206%     -14.29398     61.83206   0.90004 -0.09996
        2.00%     102.00000      12.58882      0.58882      10.36672%    -58.13153%     -10.36672     58.13153   0.89170 -0.10830
        1.50%     101.50000      12.14517      0.64517       6.47722%    -54.12474%      -6.47722     54.12474   0.88281 -0.11719
        1.00%     101.00000      11.70610      0.70610       2.62786%    -49.79234%      -2.62786     49.79234   0.87338 -0.12662
        0.50%     100.50000      11.27189      0.77189      -1.17889%    -45.11444%       1.17889     45.11444   0.86337 -0.13663
        0.00%     100.00000      10.84282      0.84282      -4.94053%    -40.07061%       4.94053     40.07061   0.85279 -0.14721
       -0.50%      99.50000      10.41919      0.91919      -8.65448%    -34.63998%       8.65448     34.63998   0.84161 -0.15839
       -1.00%      99.00000      10.00131      1.00131     -12.31812%    -28.80128%      12.31812     28.80128   0.82983 -0.17017
       -1.50%      98.50000       9.58946      1.08946     -15.92878%    -22.53291%      15.92878     22.53291   0.81744 -0.18256
       -2.00%      98.00000       9.18397      1.18397     -19.48377%    -15.81308%      19.48377     15.81308   0.80444 -0.19556
       -2.50%      97.50000       8.78513      1.28513     -22.98040%     -8.61983%      22.98040      8.61983   0.79081 -0.20919
       -3.00%      97.00000       8.39326      1.39326     -26.41594%     -0.93120%      26.41594      0.93120   0.77657 -0.22343
       -3.50%      96.50000       8.00866      1.50866     -29.78771%      7.27470%      29.78771     -7.27470   0.76172 -0.23828
       -4.00%      96.00000       7.63165      1.63165     -33.09303%     16.01957%      33.09303    -16.01957   0.74625 -0.25375
       -4.50%      95.50000       7.26251      1.76251     -36.32926%     25.32477%      36.32926    -25.32477   0.73020 -0.26980
       -5.00%      95.00000       6.90155      1.90155     -39.49382%     35.21125%      39.49382    -35.21125   0.71356 -0.28644
       -5.50%      94.50000       6.54905      2.04905     -42.58420%     45.69935%      42.58420    -45.69935   0.69635 -0.30365
       -6.00%      94.00000       6.20529      2.20529     -45.59799%     56.80869%      45.59799    -56.80869   0.67861 -0.32139
       -6.50%      93.50000       5.87052      2.37052     -48.53286%     68.55807%      48.53286    -68.55807   0.66035 -0.33965
       -7.00%      93.00000       5.54501      2.54501     -51.38663%     80.96530%      51.38663    -80.96530   0.64160 -0.35840
       -7.50%      92.50000       5.22899      2.72899     -54.15722%     94.04705%      54.15722    -94.04705   0.62241 -0.37759
       -8.00%      92.00000       4.92267      2.92267     -56.84275%    107.81877%      56.84275   -107.81877   0.60280 -0.39720
       -8.50%      91.50000       4.62625      3.12625     -59.44147%    122.29455%      59.44147   -122.29455   0.58282 -0.41718
       -9.00%      91.00000       4.33991      3.33991     -61.95183%    137.48699%      61.95183   -137.48699   0.56251 -0.43749
       -9.50%      90.50000       4.06380      3.56380     -64.37247%    153.40714%      64.37247   -153.40714   0.54192 -0.45808
      -10.00%      90.00000       3.79805      3.79805     -66.70236%    170.06329%      66.70236   -170.06329   0.52110 -0.47890

...

 

[botpro]

You don't "hedge" or micro-manage in anyway .......... All options positions including Short Puts should be left alone while the trade is open. If the trade is too risky for your comfort level then make changes before you open it.

That's indeed the question: should one apply hedging or not. I just wanted to study/analyse all these alternatives.
I was thinking about applying hedging for example if after 30 days the spot is say 5% lower, vola staying the same.
But hedging it only if such a critical situation arises; not hedging from the beginning on.
According to the above table, in this situation (spot=95) we are already 35% in the reds...
The good point is that there is still much time till expiration. And that time can be used for the hedging strategy to develop its effect...

 

[botpro]

Btw, the above tables have year = 252 business days

 

[botpro]

The best exit strategy is to exit before any loss. This, however, not possible at all trades...

Yes, for those cases where one can't exit that easily b/c it would mean a big loss I just try to find alternatives to limit losses
or even prevent losses by using some intelligent hedging... Still experimenting...

 

[botpro]

I think this online options calculator is calculating the delta wrong when Interest and/or Dividend is >0:
http://www.fintools.com/resources/online-calculators/options-calcs/options-calculator/

The following has Delta correct: