Wheel strategy un hedged

[wxytrader]

In a wheel, are long the stock and short the call (ie short a synthetic put) or flat the stock and short a put. So you are always losing money when the underlying is going down and don’t make any money (beyond the premium) when underlying is moving up. Feels a little like a missionary position, doesn’t it?

No, you are making premium in both directions, and you recover any realized losses with the ebb and flow. You are also making money when the stock gets called out, if you ignore the break even at that moment. And that money reduces the loss from the assignment.
I told you I ran the entire last year as if the strategy was employed, and by the end of the year the realized loss taken from drawdowns was only $-1200 and the total premium received was 25k

The problem you guys have is you think too linear...you have to see the big picture.

 

[wxytrader]

Hea meant selling puts, i believe.

And he averages down but instead of the underlying he just sells (longer term, maybe?) puts so he's avg entry is lower thanks to the premium.

I guess that's the answer, but if you are selling calls below your average price, then there is a chance you will have to take losses on your calls (or realize your loss on the shares).

Yes the numbers just don't seem support for hedging at all because you are capping your gains, so the protection the put will offer will not overcome the cost to keep adjusting. The relationship is skewed unlike with just a regular protective put that you just hold to protect a long position.

 

[Slow Learning Elf]

No, you are making premium in both directions, and you recover any realized losses with the ebb and flow. You are also making money when the stock gets called out, if you ignore the break even at that moment. And that money reduces the loss from the assignment.
I told you I ran the entire last year as if the strategy was employed, and by the end of the year the realized loss taken from drawdowns was only $-1200 and the total premium received was 25k

The problem you guys have is you think too linear...you have to see the big picture.

Mkay,
(A) you do understand that covered call and short put are both synthetic puts? So you only make money if the market is going up, by very fucking definition of your positions

(B) the gist of the strategy is that you are long underlying and short vol. Granted, this year was a great year for vol sellers of any shape (the trajectory of implied vol and correlation shows it so well). However, in a year when vol actually outperformed, you’ll get dinged big time. What do you think happens when you actually take assignment on your puts 20% below the strike? Or if you holding long stock against your calls and the stock dumps 50% - you think a couple of percent you took as call premium is gonna help you?

(C) you might be a smart dude, but the markets attract a lot of very smart people from all walks of life. Because of that, it’s always worth thinking “why does this opportunity exist and whose lunch am I eating?” Could you answer this question?

 

[newwurldmn]

Mkay,
(A) you do understand that covered call and short put are both synthetic puts? So you only make money if the market is going up, by very fucking definition of your positions

(B) the gist of the strategy is that you are long underlying and short vol. Granted, this year was a great year for vol sellers of any shape (the trajectory of implied vol and correlation shows it so well). However, in a year when vol actually outperformed, you’ll get dinged big time. What do you think happens when you actually take assignment on your puts 20% below the strike? Or if you holding long stock against your calls and the stock dumps 50% - you think a couple of percent you took as call premium is gonna help you?

(C) you might be a smart dude, but the markets attract a lot of very smart people from all walks of life. Because of that, it’s always worth thinking “why does this opportunity exist and whose lunch am I eating?” Could you answer this question?

All those quants on Wall Street are no good. If they were really smart they would be trading their own accounts instead of working for a hedge fund that underperforms the s&p.

 

[tsfx]

No, you are making premium in both directions, and you recover any realized losses with the ebb and flow. You are also making money when the stock gets called out, if you ignore the break even at that moment. And that money reduces the loss from the assignment.
I told you I ran the entire last year as if the strategy was employed, and by the end of the year the realized loss taken from drawdowns was only $-1200 and the total premium received was 25k

The problem you guys have is you think too linear...you have to see the big picture.

Your strategy only works if the market is flat or drifts down so you keep averaging down with the assignments and the bonus is the premium. Your idea is that the market will eventually trade up back to the original point where you sold your first put.

However, Should the market trade down fast after you sold your put, then get assigned, then sold a call and the market trades up fast, you'll lose. Thats it. Your premium doesnt cover your realized losses bc realized vola was way higher than your premium.

You just assume natural "ebb and flow" aka realized vola wont outperform implied

 

[wxytrader]

Mkay,
(A) you do understand that covered call and short put are both synthetic puts? So you only make money if the market is going up, by very fucking definition of your positions

(B) the gist of the strategy is that you are long underlying and short vol. Granted, this year was a great year for vol sellers of any shape (the trajectory of implied vol and correlation shows it so well). However, in a year when vol actually outperformed, you’ll get dinged big time. What do you think happens when you actually take assignment on your puts 20% below the strike? Or if you holding long stock against your calls and the stock dumps 50% - you think a couple of percent you took as call premium is gonna help you?

(C) you might be a smart dude, but the markets attract a lot of very smart people from all walks of life. Because of that, it’s always worth thinking “why does this opportunity exist and whose lunch am I eating?” Could you answer this question?

Yes, because if you are selling everyday you will not suffer a huge drawdown all at once, and are collecting premium and called out profits all the way down to offset the losses from assignment. I ran the entire year and the net from assignment losses + called away gains was -$1200...plus all the premium. There is no magic here other than perseverance.

Example: the worst week this year would have been getting assigned at 191 on Mar6, and then getting called away at 173 on Mar15. So ok an $1800 loss, but already by Mar15 I would have collected around $600-$800 in premium, plus the $200 getting called away at my strike, so almost half of the loss is recovered in just 8 days...and you just keep plowing away until the realized losses are recovered. and that is the worst case scenario last year. If I double dip and sell puts and calls then it would the loss would already be recovered.

 

[wxytrader]

Ok here the results if you ran the wheel strategy starting Dec.30 2022 - Dec.22 2023 selling 1 contract OTM weekly versus daily, taking all assignments.

Weekly results:

Realized losses = $-3257
Premium collected: $11,150
Net profit: $7893
Monthly income: $614.38
Return on capital: 43%


Daily results:

Realized losses = $-1127
Premium collected: $16,135.50
Net profit: $15,008.50
Monthly income: $1,250.70
Return on capital: 82%

Doing daily you get higher premium due to higher IV (31.94/23.84% versus 21.22/17.60%) on 0 dte prices, and you get less slippage on realized losses. With either strategy, PUT protection is not necessary...and its possible detriment to the position out weighs its benefit.


If we compare this to not taking assignment and closing the put contract for a loss:

Weekly

Realized losses: $-4,339.00
Total premium: $3582
Net profit: $-757


Daily

Realized losses: $-5,117.00
Total premium: $7200
Net profit: $2083


So the results are pretty clear that options should only be sold if you can afford to take assignment, otherwise over time the losses will insidiously negate any gains. This holds true for vertical spreads and probably every other strategy under the sun. Essentially, every time you close a short option to cap losses you are in fact only locking in absolute future losses should you continue the futile endeavor. You are incrementally selling off a (synthetic) stock position for a loss.

 

[destriero]

lol 20 v 30 vol line is like 50 cents on a 20D 30-wide ps 0DTE. I was at the office of a large L/S fund this year when one of the PMs shorted a 30-wide ps on Thursday’s close into Friday’s SET expiration. SPX opened like 55 lower and he lost 20x the credit received.

Sounds like a plan? That 50 cents was pure juice!

 

[taowave]

How are you defining return on CAPITAL...

Are you talking margin?

Whats your max drawdown?

Ok here the results if you ran the wheel strategy starting Dec.30 2022 - Dec.22 2023 selling 1 contract OTM weekly versus daily, taking all assignments.

Weekly results:

Realized losses = $-3257
Premium collected: $11,150
Net profit: $7893
Monthly income: $614.38
Return on capital: 43%


Daily results:

Realized losses = $-1127
Premium collected: $16,135.50
Net profit: $15,008.50
Monthly income: $1,250.70
Return on capital: 82%


Doing daily you get higher premium due to higher IV (31.94/23.84% versus 21.22/17.60%) on 0 dte prices, and you get less slippage on realized losses. With either strategy, PUT protection is not necessary...and its possible detriment to the position out weighs its benefit.

 

[wxytrader]

lol 20 v 30 vol line is like 50 cents on a 20D 30-wide ps 0DTE. I was at the office of a large L/S fund this year when one of the PMs shorted a 30-wide ps on Thursday’s close into Friday’s SET expiration. SPX opened like 55 lower and he lost 20x the credit received.

Sounds like a plan? That 50 cents was pure juice!

D...see below.

Yes, because if you are selling everyday you will not suffer a huge drawdown all at once, and are collecting premium and called out profits all the way down to offset the losses from assignment. I ran the entire year and the net from assignment losses + called away gains was -$1200...plus all the premium. There is no magic here other than perseverance.

Example: the worst week this year would have been getting assigned at 191 on Mar6, and then getting called away at 173 on Mar15. So ok an $1800 loss, but already by Mar15 I would have collected around $600-$800 in premium, plus the $200 getting called away at my strike, so almost half of the loss is recovered in just 8 days...and you just keep plowing away until the realized losses are recovered. and that is the worst case scenario last year. If I double dip and sell puts and calls then it would the loss would already be recovered.

How are you defining return on CAPITAL...

Are you talking margin?

Whats your max drawdown?

I tallied up every transaction on a spreadsheet for last year and these are the results. There was a huge drawdown last year from $199 to $162 so that is baked in the results.

Margin account, but have the cash on hand to receive assignment.

Max overnight drawdown see my quote above.