@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.

It only decreases risk by amount that you sold the opposite side of the losing spread. That is not enough risk protection during a flash crash.

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.

The 30 DTE long offers little protection because it is getting close to expiration. Also because the longs are closer to expiration their premium decreases faster than the short so it takes longer to make a profit. Leaving you longer in the market and exposed to risk.

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,

Not true. When I had an account at Liberty Trading they lost money and exited the call side and kept the put side. 3 weeks later they lost money on the put side.

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

It doesn't halve your drawdown. It only reduces drawdown by amount of profit on side making money.

@Big Mike can you please delete the poll in this thread?

Here is one short of NGv5c350 and one long of NGu5c340 on the left side. Naked short NGv5c350 on the right hand side. After 52 days held (bottom line) the calendar spread has made zero profit. The naked short's premium has dropped over 50%.

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.

That software does not give you margins. That is the whole point of my research. Avoiding going on margin call and having huge drawdowns.

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.

That is why I have never traded at IB.

@ron99 thank you very much for the detailed analysis you are sharing - still reading through the thread.
Have you ever thought about building protection against a market crash with volatility products like VIX Options (and buy VIX calls instead of buying ES puts?

askerix

the VIX is a mean-reverting index. Often, spikes in the VIX do not last and usually drop back to moderate levels soon after. So, unless the expiration date is very near, the market will take into account the mean-reverting nature of the VIX when estimating the forward VIX. Hence, VIX calls seem heavily discounted whenever the VIX spikes.

Here is one short of NGv5c350 and one long of NGu5c340 on the left side. Naked short NGv5c350 on the right hand side. After 52 days held (bottom line) the calendar spread has made zero profit. The naked short's premium has dropped over 50%.

Sorry it has to be diagonal, so buy a lower strike sell higher for put, otherwise it'll go nowhere unless vol comes down.

Your delta shouldn't change much if you're fotm at delta 10, and the call delta offsets the put side as well so unless your strikes get too close for comfort delta should be almost neutral throughout.

Your suggestion of diagonal iron condor with 10 deltas on each side offers no risk coverage and goes on margin call. Whereas a lower delta on each side iron condor does not. See table below.

High vol in the market won't change how often you need to hedge in a high vol environment a delta 10 would be much further out than a low vol environment.

The problem imo is that there really isn't an edge in selling spreads or selling in general,

Of course there is. You can be moderately wrong on direction and still profit. The market can be flat and you profit. The market can go the opposite way of your short call or put and you profit.

you'd need to get the edge by market timing vol or buying and selling a mispriced option. Options is all about laying off risk to another party so the winner is the one who can lay off the most risk for the most theta. This implies you need to outplay mm's at pricing risk, that's hard. Hope you can find a mispriced long leg to hedge your short ones.

Just a bit more on what I mean by mispricing.

In terms of a spread, there is no edge in selling them. For example, if you do a 10 point credit spread at delta 10, you would normally get 1 pt for 9 pts of risk (10-1) for a 90% chance it will work out. So for every 9 trades you win (9x1 pts), you will lose 1 trade (1x9pts) and you end up at B/E minus comm and whatever spread you paid the mm,if you sell them like clockwork without timing.

The only edge you can get without market timing is if a mm mispriced an option which doesn't happen often.

However, since market are mean reverting, puts are mispriced in 2 situations. When the market is up, they are priced too low since vol is low (and vol goes from low to high) and the chance of a market coming off is higher. They are priced too high when market is down since vol is high (and vol goes from high to low) and the chance of a market mean reverting up is higher. In other words, you still need to go back to technical analysis and get an edge by market timing by selling them at the lows. You want to be selling insurance to people who are fearful and who are willing to pay a premium for the insurance, this happens when vol is high and the markets are at lows. Amateurs buy puts at the bottom of a market, you want to be selling to them.

At the moment it seems you are only testing how often you get hit by margin calls, but the end game is still the same. Even if you don't get hit by margin call and your short legs expire way in the money,

If you had any comprehension while reading my posts to see how I am trading you would know that is a totally wrong statement. I have never had an option expire way ITM. Or even ITM. I am too far OTM for that to happen.

you're still up for a massive loss if the market doesn't revert back in time for them to get back out of the money. You still have an issue where there is no edge with your win rate & RR, they end up being symmetrical not asymmetrical.

Another thing, the strategy has worked for the past few years but it's incorrect to think that this strategy is the best one. The better strategy is to buy calls all the way through and reap the open ended profits on the way up, not sell puts.

Do you have any data to back your theory?

The reason is that vol has being low historically so it's cheaper to buy calls all the way up, selling puts all the way up means you've being selling insurance to hedgers such as funds for cheap. Incidentally, you wouldn't have got caught in the latest correction since calls have a limited downside. Anyhow, that's a story for another day and another thread...