TastyTrade Method

[DTB2]

Selling premium mechanically works. I sell naked straddles systematically for a living, own account. I've been doing so for several years even through three market lock limit downs over night. It works. I backtested it before trading it live in 2012. The reason I'm on this forum is simple. I want to wake people up. There is no magic formula. If you take 20 TTs and put them in a room, they will all sell premium differently.

Making money? I find I do better when staying mechanical. That's it. Easy to say, hard to do for most traders.

I run a meetup once a month telling people how to trade by selling options. Why? I want to share. Again, it works. That Rice study has many holes in it. Great school but they missed the boat on that study. I read about 15 pages of it...too theoretical. Note: selling straddles very short term is not a great strategy due to gamma risk. It is optimal around 45 DTE. I could go on and on, but I'll stop.

Overall, if you disagree with selling premium. That's ok. It works. We always need a counter party.

A Tastytrader thinks that study has many holes in it? That's rich. You seem to prefer this type of study. https://www.tastytrade.com/tt/shows...des/buying-premium-before-earnings-04-26-2016

Buying a straddle which hopes to see significant price and these guys do a study of buying a straddle and closing it right before earnings!? See? It doesn't work. smh

 

[Texas Johnny]

Ironchief,

Glad to hear you are interested. To compare apples with apples, buy 100 shares of a liquid stock and compare it over time versus doing a 1 contract option play on the same stock, etf, etc. You choose. I suggest backtesting it first or paper trading it, but paper trading it will take time. At any rate, you will see that selling a Put ATM will outperform buying the stock over time. Better yet, the risk will be less for selling the put (smaller standard deviation...meaning it drops less) over time. Check out today's Options Jive segment on TT. It was done on 30 different stocks during a bull market. If you disagree, do the study. I always do. I did my own studies on selling strangles at 10 delta, 15 delta and 30 delta, then compared it to selling a straddle at 50 delta...yes, fully naked. You close the straddle earlier since the extrinsic value decays faster...grab it and leave. If capital is an issue, do an iron fly (sell the ATMs, buy the wings). In all the options trades, I prefer the butterfly/broken wing fly. You define your risk, which I prefer for capital reasons not for safety.

Regarding the Rice study reminds me of many finance folks in academia, they have never placed a trade. What? It's true. Crazy. I lecture twice a semester at two universities in an undergrad derivatives class (I recommend it if you have time and the background). The first thing I say is simple, "Whatever you are learning here, throw it out the window if you want to make money in the market." It's good for a laugh, but it's true. I love this game, but it's the most competitive game in the world. We can all play it differently. There is no one "right way". TT is good since it tries to give you a different approach.

For those that beat it down, that's fine. I suggest backtesting a simple put spread selling strategy in the RUT (sell the 10 delta, buy 3 strikes lower). For a $100K account that would be 33 contracts. You could open the trade at 65DTE and hold until the next month hits 65DTE or you close once your loss in the trade = the credit you received (IE. Debit = $2, close when Debit = $4). You are looking to collect $200 while risking $2,800. It will beat the S&P 500 ever year, well, it has from 2002 - 2015. I didn't do 2016 yet. It has averaged 24% annually. Warren Buffett has averaged around 10% during that time. Hmmm, a little work pays off....just check the trade once a day to be sure it doesn't need to be closed. Sounds easy. It isn't at all. Most people can't even do it. Why? It's becomes a psychological challenge. In 2008 you had several months where you lost. Could you keep going? Most couldn't.

 

[Stymie]

The markets are efficient - everyone including Tom agrees with that. End of story. There is no edge in selling or buying premium and the broker gets rich. Thats why they are setting up a broker cause greed has no end.

The people that make money understand that you have to make Money long term. Thats it. Tastytrade professes that selling premium creates more profitable trades over time within a limited sample which they curve fit for their goal. That is not a lie.(TastyTrade-OptionJive Today) What they dont tell you is that the fewer unprofitable trades kill your portfolio returns and cause margin calls at the worst time. You lose Money. That's it.

So, if your goal is to have fun and make more times than you lose while taking significant heat before expiry, then sell premium and buckle up. You will win and win but overall you will lose Money.

If your goal is to make money, then do the opposite of these tastytraders cause you know you can find liquidity when they put on their trades. The odds are still the same given the markets are efficient. The only way to tilt the outcome is to understand how to manage your money and your emotions with a focus on the end game - Make Money long term.

As Tom has always said, "if you think we are wrong, take the other side of the trade - I dont care". Now he does care if you use his brokerage - cause either way he wins!

 

[Stymie]

Ironchief,

Glad to hear you are interested. To compare apples with apples, buy 100 shares of a liquid stock and compare it over time versus doing a 1 contract option play on the same stock, etf, etc. You choose. I suggest backtesting it first or paper trading it, but paper trading it will take time. At any rate, you will see that selling a Put ATM will outperform buying the stock over time. Better yet, the risk will be less for selling the put (smaller standard deviation...meaning it drops less) over time. Check out today's Options Jive segment on TT. It was done on 30 different stocks during a bull market. If you disagree, do the study. I always do. I did my own studies on selling strangles at 10 delta, 15 delta and 30 delta, then compared it to selling a straddle at 50 delta...yes, fully naked. You close the straddle earlier since the extrinsic value decays faster...grab it and leave. If capital is an issue, do an iron fly (sell the ATMs, buy the wings). In all the options trades, I prefer the butterfly/broken wing fly. You define your risk, which I prefer for capital reasons not for safety.

Regarding the Rice study reminds me of many finance folks in academia, they have never placed a trade. What? It's true. Crazy. I lecture twice a semester at two universities in an undergrad derivatives class (I recommend it if you have time and the background). The first thing I say is simple, "Whatever you are learning here, throw it out the window if you want to make money in the market." It's good for a laugh, but it's true. I love this game, but it's the most competitive game in the world. We can all play it differently. There is no one "right way". TT is good since it tries to give you a different approach.

For those that beat it down, that's fine. I suggest backtesting a simple put spread selling strategy in the RUT (sell the 10 delta, buy 3 strikes lower). For a $100K account that would be 33 contracts. You could open the trade at 65DTE and hold until the next month hits 65DTE or you close once your loss in the trade = the credit you received (IE. Debit = $2, close when Debit = $4). You are looking to collect $200 while risking $2,800. It will beat the S&P 500 ever year, well, it has from 2002 - 2015. I didn't do 2016 yet. It has averaged 24% annually. Warren Buffett has averaged around 10% during that time. Hmmm, a little work pays off....just check the trade once a day to be sure it doesn't need to be closed. Sounds easy. It isn't at all. Most people can't even do it. Why? It's becomes a psychological challenge. In 2008 you had several months where you lost. Could you keep going? Most couldn't.

The reality is very different from your scenario. Try to cover your short options when the market is gapping down and the market maker is quoting $2 spreads on the bid/ask. You wont get out for the amount of your credit or $4 dollars but something much higher like $8/$10/$14 dollars and your account is underwater. It's the execution people dont understand until they get in it and try to get out. You have limited loss on your spread of $2,800 while trying to make $200 over one month so if you timed it perfect for a year you would make $2,400 and the one loser would be max loss of $2,800 for a net loss for the year of $400. Your broker collects more than $1,000 dollars in commission for loss of $1400. No thanks...

If you avoided that max loss trade which only has to happen once each year to wipe you out then congrats for avoiding this expected event. Enjoy it while it lasts ...

 

[sysdevel99]

A Tastytrader thinks that study has many holes in it? That's rich. You seem to prefer this type of study. https://www.tastytrade.com/tt/shows...des/buying-premium-before-earnings-04-26-2016

Buying a straddle which hopes to see significant price and these guys do a study of buying a straddle and closing it right before earnings!? See? It doesn't work. smh

This study goes back to cherry picking though - First I'm not sure that 6 years of a bull market with contracting volatility is a representative sample but that's for everyone to decide.
The bigger problem is there's no info on the sizing, if I buy an ATM straddle on AMZN (trading @ 700) and I buy an ATM straddle on something like X (trading @ 20) - wouldn't I need to dollar neutralize them and buy the same amount. The second you add that into the mix the study looks very different (see the initially quoted paper). There's not enough information available (or considered) - if you run this study from 06-12 (which is the only time I have option data for) and you dollar neutralize the position size - all of a sudden buying straddles becomes profitable before earnings by 8% assuming no margin relief.

Now I'm not here to say one is right or one is wrong - you had 2008 which one could consider an outlier year - but then again so are the last 6 years of the market - all I'm saying is that their studies are very skewed toward results that they want to publish

 

[tradelosses]

credit spreads are bad.too many trades, too much fees

. The simple ATM strangle (plus the far OTM call) that is 200+ days works best . 600+ day ones are good too. If it's 60 days or less the gamma risk is too high. this is the easiest way to make decent money in options by far

SPY is better than ES because the fills are better (down to the penny)

 

[Stymie]

So one of my biggest winners in 2016 was $AMZN where I bought options and rode them through the earnings event and the stock exploded multiples of the expected move based on the ATM straddles. So the study is odd in that they bought options and took them off before the earnings announcement which is when the stock experiences maximum volatility. They would have made more money if held on for the earnings.

But, when the stock exploded the bid/ask spreads were in $1 increments so hard to take profits and get a fair price. This is the reality of execution - very different from these research studies.

 

[ironchef]

. The simple ATM strangle (plus the far OTM call) that is 200+ days works best . 600+ day ones are good too. If it's 60 days or less the gamma risk is too high. this is the easiest way to make decent money in options by far

SPY is better than ES because the fills are better (down to the penny)

Are you talking about long or short strangle?

Appreciate your comments.

 

[tradelosses]

Are you talking about long or short strangle?

Appreciate your comments.

short

 

[sysdevel99]

credit spreads are bad.too many trades, too much fees

. The simple ATM strangle (plus the far OTM call) that is 200+ days works best . 600+ day ones are good too. If it's 60 days or less the gamma risk is too high. this is the easiest way to make decent money in options by far

SPY is better than ES because the fills are better (down to the penny)

In an actual account or in paper trading?

I was trying to enter one based on what you said and so far I've given up 5 cents from the mid price and I'm still not filled