The 1650 strike put (3 delta) that I used in my example (taken from today's pricing) is 20% out of the money. The options you show above are 33% and 37% out of the money. Not even close to apples to apples. Why the difference? Vix is at 17 today vs. 32 on 8/5/2011. Are you aware what happens to delta/vega at higher levels of IV?
Serious question, do you not have an options pricing calculator? Your broker must have one embedded in their platform. Model up the Sep 1650 put with 43% IV and ES at 1900.
Your obsession with the recent past is clouding your judgment. Go ahead and check my numbers using an options pricer. I'm not trying to scare anyone but rather making people aware of what can happen when trading this size in cheap options. Since 2008, it has been arguably the best time in the history of options trading to sell cheap puts. That doesn't mean it will work forever. I'm honestly coming in here with good intentions trying to create awareness that losing everything is very possible with this strategy. No doubt people have gotten away with it in the past and made enough to quit the game...but the Wall Street graveyard is full of people who weren't so lucky with the timing.
No doubt, that is true. I'm not against selling vol and if sized appropriately I do believe it will be positive expectancy long term (although the ride could be bumpy). However, some of the sizing recommendations here are crazy in my view and almost guarantee a complete wipe out in many not-so-far-fetched scenarios (the IV blow out is being wildly underestimated).
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I would probably advocate being more conservative for new traders with smaller accounts. One of the trader mention on here having 20k, said he could sleep well at night using IMx3. Unless there is more in other accounts to cover margin calls, this is risky for new traders with smaller accounts. Two margin calls close together, (hasn't happened in last 2 years but would have happen multiple times between 2008-2011) and the account is down 50%
Last edited by blb014; July 2nd, 2015 at 06:15 PM.
Also, your scenario is not realistic to a mere 8.2% drop. Current IV at the .03 delta is 24.5%. You are talking about a 18.5% IV increase in a single day (which would take a much larger move). The VIX is for a delta of 1 and is not the same as the volatility surface.
Also, the rate of increase of the IV not only correlates to the drop in price of the underlying but also the starting value of IV. Therefore, you would need much less of a price drop to increase IV by 20% if starting IV is 60% vs. starting at 25%.
Obviously, extreme IV tail risk can and will occur. Typically, higher volatility follows high volatility and lower volatility follows low volatility. This is a non triviality - selling options in September 2008 (clear bear market with IV at 60%) is a far riskier proposition than selling them now (clear bull market with IV at 25%).
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You shouldn't be comparing the Sep 2015 1650 put to any option in August 2011. It's nonsensical. We live in 2015 in a much different environment (vix is now half of what it was). As we sit here today, you are still selling puts. The Sep 1650 is a 3 delta put that is representative of what you sell. If the market opens up down 8.2% and at 43.2% vol, what will the Sep 1650 put be worth? This is perfectly easy to answer without using tortured logic to find some historical analog.
In reality, that's just one arbitrary scenario - why not build a grid of % gaps and %IV and look at the resulting put valuations?
Also, I just want to say that I actually totally agree. There is no shame in starting (or even staying) small on size. Ron has been doing this successfully for years and knows far more than I do and I'm not a beginner. 2008 was a beast - and most people forget there were two big dips before the fall of 2008 (by that time I remember clearly that even most retail folks were getting the hell out of dodge).
I think what Ron is illustrating with his own results is what is possible. I hope to think that I might achieve that level at some point. Until them I'm very happy even making half what he does.