Why do people sell S&P index options

[ET180]

Selling options premium generates consistent and predictable income. It can be extremely dangerous if you don’t know what you’re doing. I’ve been selling options premiufor years, and have developed hedges to prevent catastrophic losses. I am very comfortable with the concept, but most traders should never attempt this strategy.

Selling 1 naked SPY put is always less risky than owning 100 shares of the underlying. Premium sellers really only get into trouble for 1 reason -- they trade too big.

 

[tommcginnis]

sle said:
How does it make sense to sell puts if you're are already holding S&P? If your trading model shows positive expectancy, extra profits of time decay.

If your trading model shows positive expectancy, extra profits of time decay.

I see: rather than just get slapped on the right cheek, you get slapped on both cheeks simultaneously, not ever having to turn one or the other.

I've got to think about that a bit...

 

[ajensen]

when you could just sell VIX futures that are apparently much more profitable over the long haul? Like all the VIX funds and ETFs, VXXB, VIXY, UVXY, TVIX, they spiral towards zero, in the case of the last one I think to the tune of almost 100% a year over time. Why not just sell the VIX futures over time instead of selling S&P options, which seem to be much less profitable?

The strategies are not that different. Selling S&P 500 put options and selling VIX futures should be profitable in the long run, if you size your positions so that you are not forced to cover at the worst moment, such as Feb 5 2018. Both strategies have positive S&P 500 betas and negative convexity -- they lose more when the S&P 500 falls 3% than they gain when the S&P rises 3%.

Selling VIX futures has been profitable on average, but so has been just buying S&P 500 futures. How profitable is selling VIX futures after you hedge out stock market exposure daily by shorting S&P 500 futures? That is an analysis that every prospective VIX futures seller should do.

 

[sle]

No you don't get dividends when you sell SPX options. It's cash-settled cuz it's an index; you don't ever get the physicals.

It's included in the forward and by that virtue is included in the price. So you are do effectively get the dividend whenever you are short puts or long calls (otherwise it would be an arbitrage, right?)

 

[robertSt]

Selling options premium generates consistent and predictable income.

Agreed.

It can be extremely dangerous if you don’t know what you’re doing.

It's only dangerous if you're leveraged. If you are covered, then you can keep trading time value for intrinsic value for as long as you need to minimize a catastrophic downturn. The truth is option selling is far less risky than stock ownership, if you are able to actively manage the trade.

 

[JSOP]

It's only dangerous if you're leveraged. If you are covered, then you can keep trading time value for intrinsic value for as long as you need to minimize a catastrophic downturn. The truth is option selling is far less risky than stock ownership, if you are able to actively manage the trade.

With the account size of average retail traders, there is no way you can sell SPX options without leverage. And shorting in itself is a leveraged trade inherently.

 

[robertSt]

With the account size of average retail traders, there is no way you can sell SPX options without leverage. And shorting in itself is a leveraged trade inherently.

Yes, I only trade equity options. But not sure why you say it's inherently leveraged. If the stock is put to me, I have the cash to buy it. But it's rare that I allow that to happen.

 

[Sig]

Yes, I only trade equity options. But not sure why you say it's inherently leveraged. If the stock is put to me, I have the cash to buy it. But it's rare that I allow that to happen.

SPX options are cash settled, they will never be "put to you".

 

[robertSt]

Right, I responded as if we were talking of equity options, even though the thread was about index options, which are a whole different animal. Serious traders should look at the advantages of equity options, which I have tried to outline elsewhere.

 

[iprome]

No you don't get dividends when you sell SPX options. It's cash-settled cuz it's an index; you don't ever get the physicals.

SPX options are priced off interest- and dividend-adjusted index (ATM strike is shifted by the amount of dividend less interest). So selling SPX puts gives you the dividends, while missing the interests on the margin you could have earned risk-free.