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Number one advantage of ES over SPX is volume. Most of the SPX trades are done in the pit, not electronically, because of large traders needing large volume.
I was thinking of using a "mental stop loss" and exiting once it was hit on a closing basis, so the actual loss could be greater than 20%. The flash crash would not have been an issue based on the closing price, but the risk is definitely a real one to consider, even though they have since put in more robust circuit breakers to deal with the potential. I suppose a Black Monday 1987 event would be the biggest risk, which could result in losses of 50% of account value (using 3-4x IM) based on option pricing modeling at the time.
The reason this idea was intriguing to me was I truly think there was something elegant and simple in the original ES naked put selling strategy. We all understand that we were selling "risk premium" similar to an insurance company and that is why there is a market for options so far OTM. The challenge comes in how to manage the risk and avoid blowing up one's account. This can be accomplished a number of ways including buying extra long options further OTM (i.e., using a vertical or ratio spread), or by using less of one's margin buying power ( 5x,6x,7x, or more IM) and/or having a stop loss in place that limits the loss one is willing to take.
I think if sized properly and using a reasonable stop loss, this could still be a viable strategy. I don't like the idea of buying the 2x long options because of the triple commission costs involved and longer time frame required to extract the same time decay. The realistic expectation for this type of strategy with increased IM and stop loss in place would be perhaps 20-25% return per year which is a lot less than the IMx3 strategy. I calculated the original strategy as returning 50% and even over 60% some years during its run.
Of course I think it would also be best to tread carefully and step aside once a major trend change occurs to a bear market (e.g., 5+ sustained days closing below 200 day moving average and subsequent rejection of major support levels).
I use a strategy selling naked puts very similar to the one you describe. "Corner Stones" are:
Stop loss in the area when the position reaches a value of approx. 200 %. Can be more, can be less. I definitely get out when the stop loss is hit at the end of the day. I might decide to get out during the day. If I decide to re-enter I do this with the (smaller) original size, and not with the (larger) size when I liquidated.
I get out on a close below the 200 dma. I rarely sell further puts below the 200 dma, and only after a clear reversal.
Please find more details in the thread "Diversified option selling portfolio".
If you were using 3x then your loss on 8/24/15 could have been 75%. Now Sunday night you might have exited at a smaller loss. I'm not sure.
The strategy using 2 longs and 6x made 21.5% MROI in 2013. 16.3% in 2014. 28.7% in 2015. And as of 6/6/16 it made 13.8% in 2016. Compounding gains this strategy made 31.4% ROI per year for 41 months.
The naked 3 delta 3x strategy made 64.4% MROI in 2013. 41.1% in 2014. -65.4% in 2015. And 25.5% as of 5/24/16 in 2016. Putting in the exit at 20% and using exactly 20% as the loss, the ROIs are 64.4% in 2013. 8.5% in 2014. 64.6% in 2015. And 14.9% in 2016 (ending 5/24/16). This is 66.3% per year for 41 months.
The whole question is can you exit at 20% on every drop.
So the success or failure of the 20% drop and exit depends on where you exited on 8/24/15.
I'm going to make the assumption that it won't be too difficult to run a slight variation of the metrics you just ran. If this assumption is wrong then don't worry. What would happen if you did a 1 and 1 rather than a 1 and 2 but used a 20% stop?
BTW, a key issue here is when you started trading. Say you started trading when I did, last year, then your trading career starts with a 65% draw down out of the gate pretty much ending you before you begin. Since it's impossible to know when an 8/15 type event or any event will occur a spread makes more sense. I'm just wondering if a 1 and 1 is better with the idea of buying additional puts as the market moves against you.
maybe a good idea would be to start using a put spread now (1 naked 2 otm long puts) and on the day of a LIMIT DOWN event, switch to naked puts with 6xIM. I would be interested in the type of returns when this is used.
Here are 3 ES put strategies using exit at 20% drawdown. Started trading 1/1/13.
Because of the amount of work it would require, I didn't start a new position on the day the 20+% drawdown occurred. I just used the next position that I had as if the exit didn't happen at 20%. So the account sat empty a few days. This might mean that ROI might be slightly higher if I didn't do this.
They all had three 20+% drawdown events. Oct 2014, Aug 2015 & Jan 2016
Short 3 delta no longs 3X excess factor
2013 64.4% ROI
2014 8.5%
2015 64.6%
2016 11.7% (through 8/5/16)
Overall +228.1% or 63.7% per year
4,969 positions in 49 trades with an avg of 26.8 days held
Short 5 delta 2 longs at 1.5 delta each 3x excess factor Avg delta was 2.12
2013 53.4% ROI
2014 9.8%
2015 35.8%
2016 27.8% (through 7/29/16)
Overall +192.4% or 53.7% per year
10,119 positions in 45 trades with an avg of 28.8 days held
Short option 80% of futures 1 long at 100 lower strike than short 3x excess factor Avg delta was 1.88
2013 47.2% ROI
2014 10.8%
2015 39%
2016 7.5% (through 7/28/16)
Overall +143.6% or 40.1% per year
7,784 positions in 44 trades with an avg of 29.6 days held
The short 5 deltas with 2 longs has a lower IM than short 1 with 1 long, average 267 vs 318, so you have more positions on and thus make more profit on each time you trade. The naked 3 delta had an average IM of 665.
I would assume that this strategy would end up in a margin call long before a 20 % move down of the ES. (I assume that 3X excess factor means that 25 % of the margin are used in the beginning.)
