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Got to 52% in 21 days. I do notice that when the DTE is getting below 80 in this backtest that the premium erosion of the longs, which are a lower strike, is picking up speed faster than the short. So what I think I will do is just get out around 30 days held because the profit after that will be slow in coming. Also the protection by the longs will be decreasing and might not cover a huge ES drop.
Last edited by ron99; September 23rd, 2015 at 08:43 PM.
Reason: 3rd table was wrong DTE
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Thanks you, Ron, for great job!
I have the similar research with similar results.
I use 3 leg vertical spread, DTE > 90 days, with short leg 100 point from current future price, IM x 2 from 1 short/1 long.
ESZ4 = 2004.6
DTE = 92
ESZ4 P1900 short/ESZ4 P1800 long/ESZ4 P1700 long = 4.7 (spread price)
IM2 from ESZ4 P1900 short/ESZ4 P1800 long (1132 x 2) = 2264
There are a lot of variants for spreads construction (for any leven of greed and fear)
Whats your conclusions from this research?
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I've been trading stocks for years with not much greater returns than the market, a couple of years ago I started getting into etf and stock options and have developed some pretty good systems risk/return wise versus my prior trading pursuits. So I'm hooked on options. I'm still amazed at your returns though. One question for you, to help me understand your trading style. What's the worst drawdown for your entire trading account during the last few years of your trading. For example, if you had $100,000 trading account and it went down $20,000 at any point for a 20% drawdown. I'd like to know your drawdowns to see if I'm capable of making returns like yours. I'm not comfortable with large drawdowns by the way. Large being 20%. My apologies if you've stated an answer at some other time. thanks so much for all you contribute to this forum. Bob
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@ron99, if you're going to essentially do a ratio vertical credit put spread, there is no reason not to do an iron condor which will give you the extra premium on the call side so you can increase your return and reduce your risk.
Try a delta 10 bear call and delta 5 bull put, then play with the ratios. Crashes go down not up so you might get a better result with 2S 1L on the call side and 1S 2L on the put side.
Since you're doing fotm and the curve is inverted, the front months are much cheaper than the back months. See what happens if you calendar spread the two long put legs and buy say 30 and 60 dte, let them expire and roll then sell the 90 dte and close at 30-60 dte. This should be the cheapest option with the best protection.
For the call side, buy the 30 or 60 and roll then sell the 90 close at 60
Since only one side can ever get in the money, it means you will get approximately double the premium for the same risk and you can half your IM risk for the same return. I.e. halve your draw down
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Btw you're doing back testing the hard way, options returns are very specific since intrinsic is a very specific number when they are ITM and very specific when their OTM using black Scholes. Go download IB and use their options strategy lab and you can construct the return bell curve by entering the legs you are testing.
Also don't forget that what you're doing is theory only, the broker or the clearer or the exchange can double or triple IM to protect their downside because they always have a big book of crazy naked put sellers that are blowing up and will suck up 10x their worth in margin, which means all your IM calcs will almost certainly be unrealistic for a market that's crashing.
Also as an options seller you should have two roles, a seller and a risk manager. The only way to win at this game is not to just build a combination that works and sit back and do the same thing over and over again. At this point in time you are doing a bit of curve fitting as well. You are an options seller at first, once you've sold, you become a risk manager. The best way to do this is to sell them across multiple strikes and multiple DTE's, then your next job should be keeping your books total delta close to 0 and if delta starts to move to your pain point (delta should be your pain point, not your IM) you actively hedge your portfolio to get it closer to 0 again. This is what options market makers do - they are still in business for a reason. You should never have margin issues if you are actively hedging and managing risk.
Also, I am not kidding about finding a good broker and why they have a much higher IM requirement. This is what happens when a broker collapses and you can't close your positions:
I don't keep strict track of drawdown. I do keep track of month performance over all of my trading. But I don't have numbers of just option selling drawdowns because I am doing many types of trading in the same accounts.
Looking only at option selling I would guess I have had a drawdown of about 50%.
To make big returns you have to take on big risk. The strategy I just posted for ES puts should keep the losses small. But my small is not the same as your small. You will have a 20-25% loss for a long term bear market. If you try get get out before a 20-25% loss you will be doing that so many times that you will wipe out your account.
If you do that strategy and ES gradually drops 200 over 30 days you will lose money. No strategy will prevent that. But it will prevent getting wiped out by a flash crash. Might even make money on that day.
So much of trading is about timing. If you start trading and make 200% over 4 years and then have a 50% loss you are still up a good amount. But if you start trading and 6 months after starting you lose 20% you are probably in the hole.
You will have to judge for yourself if you can handle bigger drawdowns so that you can get bigger returns over the long term. Not everybody can.
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