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The best strategy proposed so far for relatively safe returns is 1 short ES put at -5 delta and 2 long ES puts at -1.5 delta with 6 x IM and DTE around 100 days, exiting when premium = 50% of initial premium. This would not have required a margin call from 2013-2016 with median mROI of 2.8%. Many thanks to Ron for sharing this with us.
Based on recent back-testing I would like to propose another strategy that has a similar level of risk but has higher returns on average. 2 short ES puts at -3 delta and 3 long ES puts at -1 delta with 4 x IM and DTE around 100 days, exiting when premium = 50% of initial premium. This strategy also would not have required a margin call from 2013-2016 and the median mROI is 3.4%.
Here's a comparison of some stats between the two strategies.
And here's the how close the margin gets to a margin call (100% means you get the call) by date for #1.
And for #2.
Note that #2 has more peaks but they aren't as high as #1. The protection of the 3 further OTM puts seems to balance out the risk of selling 2 puts nicely. I believe this balance is mainly from a volatility offset (the puts are closer together in strike) because there's more delta exposure on #2 (delta = 3) compared to #1 (delta = 2).
It would be great if someone could validate my work.
I wonder if this strategy scales given the low deltas and relatively large number of contracts required? I am thinking slippage and commissions may substantially alter the risk/reward profile. Thoughts?
I assumed $7 RT per contract, with 5 contracts per position that's $35, paid when the spread is acquired. Slippage and volume may have an impact on this strategy, I don't have a means to test that. I would expect that these issues would exist on all far OTM option strategies.
I don't think slippage is an issue for the amount of contracts we trade. The bid and ask always have hundreds of contracts in them. At least for ES and EW3 options.
I don't have a good explanation for the difference in behavior between the two strategies. Another approach for the more conservative investors (like me) is to do strategy #2 with 5 x IM. The median mROI is 2.7% (close to strategy #1), but there's a lot more room for things to go wrong (see graph).
Another reason this strategy is safer is because it is less likely to go ITM if there's another recession. -5 delta strikes are roughly 20% OTM and -3 delta are closer to 25% OTM.
Good points on higher excess and also further OTM strikes.
The Dec 2008 ES futures contract had a max drop of 42.4% or 551.50 (1299.75 on 8/28/08 to 748.25 on 11/20/08) so it's impossible to prevent going ITM during recession. Just have to stay out of short ES puts when it looks like one is coming or add extra longs.
