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Ohhhh Options Theory... This is one of the things I really miss about working on a trading desk, conversations like this... and I am now probably very (very) rusty.
With all else equal, longer dated options have greater Vega but lower Theta than shorter dated ones. Hence as DTE increases Vega/Theta increases as well. Note that this is a function of time rather than risk, although of course there is obviously more risk the longer you have a position on. Of course the corollary to this is that volatility moves a lot less for longer dated options than short ones (ignoring things like seasonality, ie March NG etc), while a day of decay is a day no matter what the term of the option. So while longer dated options do have higher Vega/Theta ratios, the fact that volatility moves less means in real life practice they may have lower ones.
To me it looks like it would be best to exit at 60 % (= value of the options at exit is 40 % of the original value). Profit per day is the same as at 50 %, but commission, fees and slippage is lower due to the longer holding time.
Be careful with the interpretation of the average values.
Each line of the table is showing, after how many days an option sold at 90 DTE will reach the given MROI percentage and will give you the MROI in percent. But you need to look at each line independently from the others.
BUT:
This means, there are times, when you will not be invested and times when you will hold more than only one position.
F.e. the ESJ4 position
20140117 ESJ4 sold
for MROI 30 % this means, you exit the trade after 25 days and wait till Feb 14 for the next one
for MROI 60 % 39 days
for MROI 75 % 49 days
20140214 ESK4 sold, no mather if ESJ4 is closed or still open
For MROI 60 and 70, there will be 2 open trades overlap a few days.
Or the first position:
ESX3
for MROI 30 it means in 7 days 8.7%, or 40 $ for the whole month
for MROI 50 it means in 25 days 4.4%, or 72 $ for the whole month
for MROI 60 it means in 26 days 5.1%, or 82 $ for the whole month
for MROI 75 it means in 33 days 5.1%, or 103 $ for the whole month (in this example, even 75 would not overlap trades)
I say "whole month" because the next trade will start about 30 days after the previous one.
So from the total premium collected the MROI 75 would be the best for the ESX3 trade.
But this is only for this trade!
To get more general suggestions, you need to look at the prereqs.
I am looking more for contigous trades, no entry points fixed on dates. Maybe switching to the next option instead of waiting till 90 DTE will increase the collected premium ... But at which MROI percentage.
I am trying to get the historical option premiums as suggested by Ron, then I will try backtesting it.
I prefer to sell further options, when the value of all puts in this program has decreased to about 90 % of the target value. Thus, I am always fully invested. Additionally, in the portfolio there are a lot of different options with different exit points, thus, reducing cluster risk.
The procedure is described in thread "Diversified Option Selling portfolio"on 20th of October:
I trade a diversified option selling portfolio for many years. Different than other concepts to sell options, I strive for diversification (I strive for holding 8 – 15 options), and, thus, spend a lot of time studying fundamentals of various commodities. …
Here are the results of my long term ES put selling studies. They started on 1/2/2013. The starting account balance was $100,000. I used $7.00 RT for costs. They are for deltas 2.00, 3.00, & 4.00. I exited positions the day the settlement was 50% or less …
After 9 hours of work on this I have finished my long term study using ES spreads. :stickyman:
I started 1/2/13. I used a short option that was close to 0.0400 delta and was 90+ DTE. The long part of the spread was an option with a delta close to 0.0100. …
Someday when I find the time I will do a long term study using my 5.00 delta short with two 1.5 delta longs.
@ron99
I appreciate your work. I do not want to criticize the study, I think it gives very good hints.
I justed wanted to put my 0.02 cents in, because if someone is only looking at the average line, it could be misleading for a as myrrdin calls it "always fully invested" person.
I think it is difficult to answer his question, and it seems no one has tried it till now.
"To me it looks like it would be best to exit at 60 % (= value of the options at exit is 40 % of the original value). Profit per day is the same as at 50 %, but commission, fees and slippage is lower due to the longer holding time.
Do I interprete your figures correctly ?"
I will study the older pages from this thread on the weekend, thanks for the hint.
You are correctly interpreting the study. The average line will not give you what your results would be if you traded this way. It was to find the best exit point. That can then be used to make your own strategy.
