I am only doing 2x3 because it had higher median ROI than other strategies tested.


But for this crash the 1x2 performed well. It only needed 4xIM to ride it out while the 2x3 had to have 5xIM to ride it out.

Is there a certain premium credit you are looking for when entering the 2x3 and 1x2? or you will take whatever price the market is giving at that moment?

Hi Ron,

sorry if this has been asked before, I have only gone through 25% of this thread so far, and thanks for starting this thread. How do you decide when to get out when the position has gone against you? i.e., Do you just wait until you get a margin call (assuming market goes down more and you cannot ride out the position) and then exit the position?

If I understand correctly the expectation with your strategy of 2 short 3 longs is that the further OTM (3 longs puts) will be affected more than the closer OTM (2 short puts) when volatility expanded. Thus, minimizing the premium expansion and the margin requirement during market correction as we had seen last week so you can ride it out, is my understanding correct so far?

I am testing the water and just placed short 1900P Mar 18 ES (30DTE) at 0.8 Delta. Premium collected $52.18 (commission is already included), IM $223.5 with 6 x IM ($1341). Expected ROI/Day = 0.1297% or ROI/mth = 3.95% (ROI/Day x 365 / 12).

I wait for margin call then decide whether to exit position or buy puts or sell futures to cover risk and take account off of margin call.

Your understanding is correct.

You do realize that selling naked options is very risky? I used to do it and will never do it in ES again.

Thanks for confirming, Ron.

Yea, I am leaning toward naked options because of it's simplicity and the cost associated, although I got burned in the last two weeks. All my 6% gain in January was wiped out when my mental stop loss was hit two weeks ago...
I am yet to read the rest this thread (has gone through about 25% of it for the past week) but if you wouldn't mind reiterate on the reason you switch from naked options (short 2 delta) to -2/+3? (I am assuming one of the reason is the volatility expansion will affect the far OTM much much more? and thus higher chance of large drawdown and the inability to ride out the position until things calmed down).

Currently, I am using a mental stop loss of 3x premium collected (similar to what Thomasthomsen had suggested, but at higher stop loss). do you think this wouldn't work? especially during flash crash?

I am transitioning to -1/+2 pr -2/+3 once my funds are all fully transferred.

Looking forward for your reply

Thanks for confirming, Ron.

Yea, I am leaning toward naked options because of it's simplicity and the cost associated, although I got burned in the last two weeks. All my 6% gain in January was wiped out when my mental stop loss was hit two weeks ago...
I am yet to read the rest this thread (has gone through about 25% of it for the past week) but if you wouldn't mind reiterate on the reason you switch from naked options (short 2 delta) to -2/+3? (I am assuming one of the reason is the volatility expansion will affect the far OTM much much more? and thus higher chance of large drawdown and the inability to ride out the position until things calmed down).

Currently, I am using a mental stop loss of 3x premium collected (similar to what Thomasthomsen had suggested, but at higher stop loss). do you think this wouldn't work? especially during flash crash?

I am transitioning to -1/+2 pr -2/+3 once my funds are all fully transferred.

Looking forward for your reply

@Narnar, I think you have the correct idea regarding the reason Ron and others have now proposed selling ratio spreads instead of naked options. You are trying to protect yourself against the negative vega of selling naked options and also moderating the positive delta to an extent. I've followed this thread for sometime and was initially very interested in the idea of selling naked puts on e-mini futures. I'd previously been trading various futures, read the Cordier book, and also had pretty extensive experience with credit spreads and iron condors in index options (SPX, RUT, etc...); however, I've learned that even though selling far OTM options like this often works great, and can for many months -- something crazy will eventually happen and you can get wiped out. Huge losses occurred in August 2015 using the previous naked put strategy because of the big flush down and major spike in volatility. A similar event just occurred earlier this month and the new proposed strategy using 4xIM actually went on margin call slightly based on SPAN margins. Some brokerages will impose higher margins during times of excessive volatility and the exchanges also can raise margin requirements during these periods -- which further increases the chance of a margin call.

I'm personally trading naked future options with a similar stop loss to what you mentioned (appx 2-3x the total credit collected). However, I tend to trade strangles with higher deltas(0.10 to 0.20) than described here and a shorter DTE (45-70 days) with a variety of underlyings (ES, CL, NG, 6E, ZS, etc...). It's all about risk/reward and sizing your trades appropriately using a much higher IM, especially when you trade closer to the money. I think trading closer to the money is actually a more conservative strategy overall, but it depends on a variety of factors: First and foremost you trade with smaller size (i.e., less contracts) which allows you to stay nimble and collect a higher credit, and still have some dry powder available when implied volatility spikes because this is the best time to be selling options. I actually sold some naked ES puts (around 0.15 delta but still very far OTM after a huge drop in the futures) in August 2015 and made a very quick 50% return on very inflated premiums in like 2 trading days. Likewise, I just sold a strangle in the ES earlier this week after the huge volatility spike and have already seen a quick 40% return.

Make sure you have realistic expectations for your long-term returns: 20-30% annually is doable with proper risk management, but once you start trying to push 60, 70 , or 80% annual returns you are setting yourself up for a big drawdown eventually. Just my experience and what I've seen occur to numerous other people selling options.

You should never base your strategy on costs of trades. They are minimal compared to profits and risk of loses. Look at overall ROI.

Learn how to use free XLS-SPAN (PC-SPAN thread) and backtest what you are thinking of doing during crashes like Aug 2015 and Feb 2018.

Thank you for the insight on this thomasthomsen. Yes, august 2015 was a very memorable moment to me since my P/L inverted upside down....mainly also due to lack of discipline on executing the stop loss.

If you wouldn't mind me asking, what is the percentage of your portfolio you placed in the market at any given point?


I had been since then modified my risk tolerance to approx 20% max loss at any given time and been using vertical spread on SPX / RUT. i.e., for $100K I am willing to lose $20k. Total premium that can be collected at any given time = $20k/3 = 6666.66. I modified this again this risk tolerance to 5% starting 2018, since I had been very anxious about my position.

I was trading strangle on IWM and SPY for quite sometime, but I find that the call side doesn't make as much, and very often have to aggressively manage the position, by rolling the call up to higher strike or to the following month when the upward movement continues. I make up the cost by selling more puts or strangle contracts. However, in the end my position become so large that if such upward movement were to continue I will run out of funds. I have since abandoned strangle, unless the market started to be more bi-directional.

Yea I need to get punched in the face to really manage my expectation
This year, my expectation is in the 20-30% range. I am glad to find this thread, i just wish I found it a lot sooner.