What is this strategy called ?

J

jdbertron

Hi,
I've heard of a strategy for harvesting profits from a mean-reverting underlying that involves alternating between selling ATM covered calls and ATM cash secured puts.
Does it have a name ?

Here is how it works: (Using VIX as an example, knowing you can't really buy shares of it)
Say you know the VIX is mean reverting at 20. Today it's at 13.
A) Buy 100 shares of the VIX and sell a Call option with the strike price at 20. This is a covered call. Rinse and repeat until you're called out. You lost the shares but got your money back, plus the premium and appreciation.
B) Switch to selling Cash-secured puts until you're called out and you're forced to buy VIX at 20. You lost the money but now you have the shares and can switch back to A) again.
 
Yes, it’s the Wheel, but it works exactly the same as only selling covered calls or only selling naked puts. They’re 100% equivalent.
If you don’t have a stock then you can sell naked put, or you can buy the stock and sell covered call against it. If in both cases you select the same strike (for the covered call or for the naked put) then the outcome will be the same, same risk, same margin, same p&l. It is a misconception that the Wheel does anything differently than simply using one strategy.
 
As a follow-up, since you can't buy VIX shares, is there a way to implement this with synthetic covered calls and puts ?
Looks like guru might have answered this already.
 
guru said:
Yes, it’s the Wheel, but it works exactly the same as only selling covered calls or only selling naked puts. They’re 100% equivalent.
If you don’t have a stock then you can sell naked put, or you can buy the stock and sell covered call against it. If in both cases you select the same strike (for the covered call or for the naked put) then the outcome will be the same, same risk, same margin, same p&l. It is a misconception that the Wheel does anything differently than simply using one strategy.
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Just to add a bit, @guru is correct, but in some cases where a stock is hard to borrow, you will be off selling a naked put vs the buywrite as the hard to borrow "bonus" makes the put more valuable.
 
guru said:
It is a misconception that the Wheel does anything differently than simply using one strategy.
More...

Could you define that "one strategy", please? Covered calls are, of course, equivalent to naked puts - but what do you see as a continuous set of trades you can keep executing if ALL you're doing is selling calls (where you'll end up progressively shorter in the stock as you get assigned) or selling puts (where the reverse will happen)?
 
jdbertron said:
Hi,
I've heard of a strategy for harvesting profits from a mean-reverting underlying that involves alternating between selling ATM covered calls and ATM cash secured puts.
Does it have a name ?

Here is how it works: (Using VIX as an example, knowing you can't really buy shares of it)
Say you know the VIX is mean reverting at 20. Today it's at 13.
A) Buy 100 shares of the VIX and sell a Call option with the strike price at 20. This is a covered call. Rinse and repeat until you're called out. You lost the shares but got your money back, plus the premium and appreciation.
B) Switch to selling Cash-secured puts until you're called out and you're forced to buy VIX at 20. You lost the money but now you have the shares and can switch back to A) again.
More...


A) Sell the 20P.

B) Why?
 
jdbertron said:
As a follow-up, since you can't buy VIX shares, is there a way to implement this with synthetic covered calls and puts ?
Looks like guru might have answered this already.
More...


I think that trading VIX cash is one of the unsolved problems discussed by many people (incl recently here on ET), and considering different approaches, not only options.
Yet I (and I believe other traders) don’t know of any way of trading VIX cash.
 
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