Strategy: Selling Put Options: The Best Income Method?
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In my example I was using 100% utilization. So approximately 50k principle gives me 100k buying power.
I've never traded the minis but the spy did close down 5% the week of august 17. So assuming I sold 3% out of the money puts than I would have been put spy and been underwater about 2%. The following week, spy closed at or near where it closed on the 17th. Selling atm calls should have been enough to recoup those losses allowing me to exit and return to cash without a loss or very little loss. And again if it was only 10% of my portfolio the overall impact would have been small.
Okay, so let's pretend. You sell 1 2035 put (~3% off 2100) the week before for 15 aka 750$ premium (15*50) on a 100000$ account - sweet 0.75% return in the best case. Market goes well beyond that and you get put at 2035, yet the market is now ~1915 on 9/1, so you're now out ((2035-1915) * 50 - 750) or 5250$ aka -5% (where are you getting 2%?).
So you sell a 1915 call for 50 or 2500$ in premium, which never goes below 40 and at one point even heads towards 70. Finally after you're out of this call a week later, you've netted (50-40) * 50 or 500$ and are still down to -4750$ on a 100k account.
Yeah and you would have collected like 75$ for the privilege of eventually being down 500$ or 0.075% gain for 0.5% loss. Aside from that, this doesn't jive with your 1st post on this strategy which was:
and
Seriously, if it were that easy everyone would be doing this. Yet they don't actually do that - they sell closer to the money and hedge deltas to remove delta from the equation and focus on vol.
It should also be pointed out that the entire exercise above involves quarterly options - and you would not be collecting even 15 on your first put sale with a weekly (probably more like 3-5/each).
It is easy, but guys like you want to make it difficult. Forget about deltas and gammas. All i care about is the probability of a certain strike price option expiring out of the money. Like i said there are no guarantees in trading but if you stick to the high probability trades and add some risk controls like diversifying amongst different positions, trading around major support lines, avoiding earnings events, and trading securities in an upward trend, one can mitigate company risk and market risk.
There are lots of options strategies that work well under various market regimes not just put selling. I listened to a "small" fund manager ($50M AUM) marveling the crowd over drinks in Greenwich CT (Hedge fund country) last week with his 20% return.. which is pretty good .. until he sells puts. In this low Vix, he is taking an awful lot of risk. Candidate for a spectacular blowup much like Karen the supertrader.There are other spreads that generate alpha with lower standard deviations. The biggest obstacle is the lack of tools in this space to simulate what spread works under specific stock price pattern and iv regime.By simulator, I don't mean the typical vol screener or ranker offered by everybody. For example, under low vix, trader could achieve a positive expectancy (win rate > 50% with a 1:1 risk reward) on a call diagonal purchased daily. IOW, buy 1 monday, 1 on tuesday,etc. and hold it for 2 weeks. If IV creeps up 5%, strategy is finito..done! .. BUT if IV creeps up another 5% ,butterflies start to have positive expectancy .IOW, regardless of technical analysis, a trader should intuitively know what certain spreads to employ given a certian IV regime. THE GRAIL IS achieved when trader adds stock filters to the right spread. The example above just uncovers structural edges of the low IV since primary filter is put on a position everyday- indiscriminate random trading. (ie trading 1x per day , every day) .. now you start layering filters and find that your win rate goes from 52% to 60% win rate.. it gets really interesting.
So you diversify and rely on put selling, switched to call selling once assigned.
Lets use an example like the dog VRX over the past year and a bit. It keeps going down. Say you were assigned puts at $30. It drops to $25. You take assignment and sell calls at $30. It works for one month hovering slightly under $30. But the next month it drops to $15. Now you can't sell any $30 calls worth of anything out two years. So dead money now.
Do you close out VRX at a loss? Do you sell more puts to double down so your cost basis is lower and allows you to sell calls closer out again?
You're right. There are many ways to trade. Some trade deltas. Some trade vol. Some are a mix bag. Some trade forex. Some futures. Some options. Whatever is your forte.
Regarding probability of a certain strike being ITM or not. How does anyone know? It ultimately goes back to price projection and trying to predict what the market will do. What is a high probability trade? If a stock drops 40%, then you can sell puts because it's less likely to fall after a huge gap like that? What is the rationale?
Also, why selling of options? If you can reasonably project where prices may or may not go, why not directly bet on the underlying? More profit that way. I guess the advantage to selling options OTM is larger 'margin of safety' and so it seems 'safer' than betting on underlying, because there is a huge cushion before you get 'into trouble'.
The whole sell covered calls after being assigned thing is funny because it's just more put selling but this time with a synthetic short put (S = C - P => S - C = -P). The entire strategy is another bull market genius story of selling puts and basically everything going great until one day market context changes and it stops going great.
Also far OTM is not necessarily safe. If it were so safe we'd all be selling delta 5 options a 1000 times over and loading up the bank account (which clearly won't happen in the long run). I'd rather not sell things that explode in value if any number of random swans show up.
IMO you're much better off selling ATM straddles - atleast then you can get out alive because you won't need to juice the hell out of things to get a decent premium and also have gamma working for you not against you.
However were at almost record low VIX again so why be short volatility into that?
Also far OTM is not necessarily safe. If it were so safe we'd all be selling delta 5 options a 1000 times over and loading up the bank account (which clearly won't happen in the long run). I'd rather not sell things that explode in value if any number of random swans show up.
IMO you're much better off selling ATM straddles - atleast then you can get out alive because you won't need to juice the hell out of things to get a decent premium and also have gamma working for you not against you.
However were at almost record low VIX again so why be short volatility into that?
If you are short, gamma is certainly working against you. You probably mean dGamma/dSpot being on your side since as you move away, your gamma decreases