Strategy: Selling Put Options: The Best Income Method?

[beefcaketrade]

The reason some people buy otm wings is so they can have ammo to sell into strength.ie build a condor or turn a backspread into 2 verticals where the pnl graph is all " above the line " regardless of where XYZ ends up 0 DTE.. Willing to take on some vega risk in return 4 curvature for a bigger payoff in the event an underlying has an unanticipated move. Believe it or not there are traders out there with a psychological makeup that is comfortable with losing 70% of the time in return for multiples of winners for the other 30%- Richard Dennis comes to mind. The have modeled it out that owning wings will lose 70% of the time or whatever but in return their avg win is x times greater than avg loss on the 30%.How do they model it out.. that is the secret sauce.. I can tell you . it is most likely not in the option scanner or rankers available off-the-shelf. That "something" could be as simple as a 200d moving avg crossover or something exotic that they only know.

Some people do that with the VIX as well. Lose most of the time, but VIX has a tendency to spike hard, and so they make money after a long period of losing.

Or like the housing crisis, people buying CDS on MBS lose money every year paying premium until the housing collapse and they rake in hundreds of millions or billions in some cases.

 

[beefcaketrade]

that supertrader kept selling more puts AND bringing the strikes closer since the shrinking IV meant less and less premiums. Any option selling strategy works out most of the time until it does not and since the win % is pretty high, traders get greedy and size up so when they get pinched , it is often at the point of their biggest size. A good trader will approach such system with discipline and appropriate use of margin.

I think that supertrader says she adjusts positions if the market moves against them? Maybe closing some puts that are too close and re-selling more further OTM? It also involves call selling on rallies? TBH I'm not really sure what the strategy is.

The interviews never made clear whether the returns were audited. I duno. Last I heard of them was in a Forbes article around the middle of 2016.

 

[beefcaketrade]

Sounds crazy to me to do that but I'm taking the other side of those trades all day long especially 3-5 days till expiration.

I thought that initially too. But I've had a change of thought and am now in the middle as far as which is better.

When you are buying premium, you also risk less. You risk only what you paid in premium. When you are paying premium, you can have high (or unlimited) profit potential. I think there is something to be said about having less risk and higher upside. Lose 80% of the time, but the 20% win payout can make up for that 80% loss? Then it's worth it.

It's a different style than 'taking fixed income' from selling premium, but risking everything.

One risks little to potentially earn more. One risks more to definitely earn a small fixed income.

But buying options is troubling because of time decay. Not only do you need to get direction right, but you need to have timing right. Timing is the hardest thing to consistently get right in the market. The price you can reasonably make a case analyzing fundamentals. So yeah, being buyers of premium isn't a sure thing either. It's a harder game than just being long the underlying. Of course, the main benefit also, is you risk way less with long options than dealing with the underlying. This makes theta decay an acceptable reality because of lower risk. The mindset of those that engage in premium buying must be one of capital retention and lowering overall capital exposure to market fluctuations.

 

[NanoTick]

I searched the archive but couldn't find whether the following strategy was already discussed here:

"Selling Put Options: The Best Income Method Today" (November 19, 2014) by Chad Shoop, Editor, Pure Income
http://thesovereigninvestor.com/investment-opportunities/selling-put-options-better-income-yield/

"Collect a 22% Yield in Just Three Months With Put Options"

He makes this with the help of margin, ie. using the leverage effect of margin.

I must admit I like this long-term strategy, but have not traded the strategy myself yet as I mostly do day- and swing-trading, ie. short-term.

What do you think of that strategy?

Selling options is much like running an insurance business. It can be profitable, but insurance companies do go bankrupt.

 

[beefcaketrade]

Selling options is much like running an insurance business. It can be profitable, but insurance companies do go bankrupt.

Insurance companies often don't sell naked premium though, particularly if their risk exposure becomes too high. There is reinsurance to hedge themselves to prevent catastrophic loss if there is a claim.

That's the equivalent of selling a credit spread to cap losses.

In this thread, some advocate naked options selling with no hedge and rely on good instincts and trading skills to mitigate risks. That's like an insurance company choosing to only sell disaster insurance after a major earthquake occurred. Maybe thinking they are in the clear with superior timing. Except there may be after shocks after the first quake. Or smaller quakes caused by frackers that they didn't anticipate. Now their liability is too large.

 

[yobo]

Just wondering, which names do you normally trade?

I'm all over the board but I like to stick with stocks I get good fills on and that work until they don't.

 

[NanoTick]

Insurance companies often don't sell naked premium though, particularly if their risk exposure becomes too high. There is reinsurance to hedge themselves to prevent catastrophic loss if there is a claim.

That's the equivalent of selling a credit spread to cap losses.

In this thread, some advocate naked options selling with no hedge and rely on good instincts and trading skills to mitigate risks. That's like an insurance company choosing to only sell disaster insurance after a major earthquake occurred. Maybe thinking they are in the clear with superior timing. Except there may be after shocks after the first quake. Or smaller quakes caused by frackers that they didn't anticipate. Now their liability is too large.

Insurance companies also rely on investment gains on the premium to offset the risk. Reinsurance is just a form of arbitrage that option traders use all the time.

 

[mushinseeker]

I think that supertrader says she adjusts positions if the market moves against them? Maybe closing some puts that are too close and re-selling more further OTM? It also involves call selling on rallies? TBH I'm not really sure what the strategy is.

The interviews never made clear whether the returns were audited. I duno. Last I heard of them was in a Forbes article around the middle of 2016.

Yes but rolling out further means that a loss is locked in, so every rollover means the entire position sits lower and lower in the pnl graph. When I saw her interview on TTrade, I am like. she has no idea about higher order greeks that creep up on big positions during market upheavals. I think those are called charm,etc ie vol of the vol or something like that.

 

[beefcaketrade]

Insurance companies also rely on investment gains on the premium to offset the risk. Reinsurance is just a form of arbitrage that option traders use all the time.

Yeah they try to earn a risk free rate on the premium collected. Interest rates are low now but in the trading analogy that's like using your put selling premium to earn interest sitting in cash.

I don't get the part about reinsurance being arbitrage for options traders?

My reinsurance analogy to options trading is turning naked options into spreads to cap losses. Primary insurers often seek out reinsurers to cap their risk. It's like selling credit spreads in the options market with defined risk by first selling a put and then buying another put further OTM.

 

[beefcaketrade]

Yes but rolling out further means that a loss is locked in, so every rollover means the entire position sits lower and lower in the pnl graph. When I saw her interview on TTrade, I am like. she has no idea about higher order greeks that creep up on big positions during market upheavals. I think those are called charm,etc ie vol of the vol or something like that.

Yeah.

To be fair, the interviews were kinda 'mushy'. I don't think there are a lot of details. But from what I gather, if the market moves against you, you *sometimes* buy out the losing short contract and you re-sell lower and more of it to recoup. But yeah, basically that time period becomes recouping loss, rather than making gains.

Also, didn't she say she doesn't care about delta? What? Selling naked options and delta doesn't matter?

Well as it turns out, uncle sam smelled something and came knocking. So ultimately, does that strategy really work?

Actually, I don't doubt the put selling has worked during that bull run from 2008+. How can it not? It's a directional market going up. Put selling will be profitable. But didn't she say she sells calls too? I think the calls are probably what would get you in that bull market.