When Selling Options, What Delta & Expiration Date Do YOU Like?

[zghorner]

Assume for this question that Delta and Prob ITM are the same thing. I have been watching the educational courses at Option Alpha and (when selling/shorting) he sticks with a delta of around 0.3 giving him a 70% chance the options will expire worthless...and 25-45 days till expiration as that range has the highest theta impact on option pricing. Does that information sit well you you bad ass elite traders? Do you prefer something different?

thanks.

EDIT: Delta of .30 determines the anchoring strike of which you can build your spreads off of etc...

 

[lindq]

Assume for this question that Delta and Prob ITM are the same thing. I have been watching the educational courses at Option Alpha and (when selling/shorting) he sticks with a delta of around 0.3 giving him a 70% chance the options will expire worthless...and 25-45 days till expiration as that range has the highest theta impact on option pricing. Does that information sit well you you bad ass elite traders? Do you prefer something different?

Don't short options. You'll live longer.

 

[TommyR]

i have looked at this. as short as possible even at low vol. use lots of numbers of stocks and contract strikes/types per unit notional for lower variance obviously.

 

[tommcginnis]

Assume for this question that Delta and Prob ITM are the same thing.

Fair enough -- but P(ITM) may be much hotter than you wish to go -- even with defined-risk spreads, and closer to the money shorts. The further out you go (catching 15¢-25¢), the more those things can blow up. "Ouch!" So, if you have any sort of "exit at twice Entry Premium" rule, then what you want is P(Touch). You can google it, but I can save you a LOT of work, and boil it down to a very close approximation: P(Touch) = P(ITM) x 2....

This is real life. And Expectancy under a P(Touch) regime is negative.
The only other thing that saves option/credit-spread sellers is that in a Reversion-To-Mean world, you have the opportunity to work the entry situation in your favor: sell the top on market rises; sell the bottom on market drops. "Sweet!"

SO! To answer your question -- if you do a lot of screening, weighting, make equivalencies between expiry dates and spread (risk) differences...... I favor selling two-four weeks out, and holding for 1 week. Commonly sell the calls first -- damn put skew....

 

[gaussian]

"Ouch!" So, if you have any sort of "exit at twice Entry Premium" rule, then what you want is P(Touch). You can google it, but I can save you a LOT of work, and boil it down to a very close approximation: P(Touch) = P(ITM) x 2....

To be clear this is only true for short trades (which is obviously what we are talking about here).

If you were talking about probability of touch for a long option it is approximately P(OTM) x 2. Not to be pedantic but knowing the other side is useful.

There is very little reason for me to short anything that is not nearing the second or third standard deviation of historical IV (using the ATM straddle, of course). Additionally you must consider the actual volatility presently in your calculation because this could blow you out long before you get to see the IV crush.

There isn't enough juice in the trade for historical IV less than 2-3 standard deviations to make it worth it against the increased margins required to hold the position. At this point though, you are capitalizing on a fundamental mispricing of the market (the market thinks there will be an explosion and you think not). As a result the P(ITM) and P(OTM) are extremely skewed and the goal becomes figuring the skew. It's not possible to really say which delta to choose then, because I would choose the one that provides me the most protection given my assessment of the actual realized IV going forward.

 

[zghorner]

IV is nearly always higher than historical volatility correct? So it is my understanding that one should screen for high IV rank to select what to short as the premium will be inflated.

 

[zghorner]

Fair enough -- but P(ITM) may be much hotter than you wish to go -- even with defined-risk spreads, and closer to the money shorts. The further out you go (catching 15¢-25¢), the more those things can blow up. "Ouch!" So, if you have any sort of "exit at twice Entry Premium" rule, then what you want is P(Touch). You can google it, but I can save you a LOT of work, and boil it down to a very close approximation: P(Touch) = P(ITM) x 2....

This is real life. And Expectancy under a P(Touch) regime is negative.
The only other thing that saves option/credit-spread sellers is that in a Reversion-To-Mean world, you have the opportunity to work the entry situation in your favor: sell the top on market rises; sell the bottom on market drops. "Sweet!"

SO! To answer your question -- if you do a lot of screening, weighting, make equivalencies between expiry dates and spread (risk) differences...... I favor selling two-four weeks out, and holding for 1 week. Commonly sell the calls first -- damn put skew....

Thank you for that, it was helpful and i did google prob. touch lol and my question to you now is what p(touch) do you draw the line? Like dont short anything with a p(touch) over 45 etc...

 

[Bum]

Don't short options. You'll live longer.

Some have a well-defined strategy that works.
Most eventually fall off a cliff at some point but I've seen some with a good 10 year track record.

This program is doing pretty well......so far.

 

[taowave]

are you planning on "continuously" delta hedging the short vol/gamma,or are you going to stop yourself out at a predetermined limit(good luck on that one)

 

[lindq]

Some have a well-defined strategy that works.
Most eventually fall off a cliff at some point but I've seen some with a good 10 year track record.

This program is doing pretty well......so far.

To quote Mike Tyson in one of his more lucid moments: Everybody's got a plan until they're wacked in the face.