Where is the edge?

[comintel]

Quote from njrookie1:

selling condor has positive expectancy.....

Not according to the studies in that e-book.

He back-tested S&P 500 condor premium-selling strategies over 5 years and reports:

"Neither baseline strategy showed a positive return, unsurprisingly. The difference between the two baseline strategies is striking, however: The one-month version fared so poorly in both bull and bear markets that we could be forgiven for wanting to explore the inverse of that approach. The two-month version ended the period underwater, but the returns look much more like statistical noise."

 

[jb514]

Quote from njrookie1:

selling condor has positive expectancy. high prob but negative convexity. it is part of the strategy.

you can call it a risk premium instead of an edge. it does not matter.

think of it like selling insurance. overtime it works out. just need enough reserve capital.

So why would MMs bid too high? Is it because they are net short volatility and bid it up to try and hedge?

 

[njrookie1]

if you are shorting vol if your net credit for your option positions.

 

[justrading]

Quote from comintel:

Not according to the studies in that e-book.

He back-tested S&P 500 condor premium-selling strategies over 5 years and reports:

"Neither baseline strategy showed a positive return, unsurprisingly. The difference between the two baseline strategies is striking, however: The one-month version fared so poorly in both bull and bear markets that we could be forgiven for wanting to explore the inverse of that approach. The two-month version ended the period underwater, but the returns look much more like statistical noise."

In his tests, did he have a defined criteria for trade entry?

 

[short&naked]

LJM Partners is hedge fund that sells options. Are they gambling or do they have an edge? Over time they seem to win in all their strategies and beat the S&P.

http://www.ljmpartners.com/performance-history


LJM Preservation & Growth Strategy

LJM Moderately Aggressive Strategy

LJM Aggressive Strategy

 

[newwurldmn]

Quote from jb514:

So why would MMs bid too high? Is it because they are net short volatility and bid it up to try and hedge?

It's two things:
1. It's the hedgers (who are much bigger than the vol markets). They buy vol to protect their portfolios. They don't care if they overpay slightly.

2. The market as a whole is slightly risk averse. It will pay to avoid infinite loss.

You can sell to the hedgers and monetize the overpriced volatility. There's positive expectancy, but the risk/reward and hence the realistic returns aren't great.

If you can improve the risk reward (through timing or underlying selection or risk management) then selling vol can be a great strategy.

 

[comintel]

Quote from justrading:

In his tests, did he have a defined criteria for trade entry?

Summarizing his text (and quoting parts of it), the base case strategy sells an iron condor using S&P 500
index options on the day before options expiration in the first-closest expiration cycle....... For the short strikes of the spread, it sells whichever options have a delta
closest to 20 .... and buys further OTM puts and calls 20 points
away from the short strikes...... Each spread is exited on the day before it expires, and a new trade is also opened on the same day. "

It is this base case strategy (and a similar one using the second month out) that proved NOT even remotely profitable when tested over 5 years.

He then goes on to add a series of improvements including volatility filters and delta hedging that DO make the system profitable.

But it seems to me that it is very significant that the base scenario is not profitable, since many people out there claim it is.

 

[njrookie1]

very well said.

you sell vol to earn vol premium. or you can long equity to earn equity premium. difference ways to make a living with different return profiles.

*****************
It's two things:
1. It's the hedgers (who are much bigger than the vol markets). They buy vol to protect their portfolios. They don't care if they overpay slightly.

2. The market as a whole is slightly risk averse. It will pay to avoid infinite loss.

You can sell to the hedgers and monetize the overpriced volatility. There's positive expectancy, but the risk/reward and hence the realistic returns aren't great.

If you can improve the risk reward (through timing or underlying selection or risk management) then selling vol can be a great strategy.
*****************

 

[comintel]

Quote from short&naked:

LJM Partners is hedge fund that sells options. Are they gambling or do they have an edge? Over time they seem to win in all their strategies and beat the S&P.
.......

with enormous (over 50%) drawdowns at times. Almost nobody would hold through that. You could take those results to show that selling options does *not* work within acceptable risk limits.

Many would rule them out because of the large drawdowns and in fact have done so. I believe they were regarded very negatively by many.

But in any case, let's assume for purposes of discussion that their statistics do prove that there are some (undisclosed) options selling strategies can work. Sure, there are some options strategies that can work, but which ones? I have looked at their disclosure in the past and they certainly are using all sorts of proprietary techniques and filters that they do not reveal.

 

[njrookie1]

it is all about position sizing.