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Hi,
I learned about option selling from cordier's book and after backtesting on short strangles on Nifty (a commonly traded equity index in India) I tried my hand with a strangle for the march contract this month. It was a profitable trade although I bailed out 5 days before expiry as the future moved too close to comfort. I left 50% on the table only to see the options expire worthless. I was searching for any discussion on the subject and this thread popped up. Let me start by thanking Ron for this great initiative. I have read only 108 pages so far and will take me another couple of months to reach 600. This thread is as valuable as any book!
The best way to learn anything is by doing it live! And I had the following takeaways from my first short options trade
1. Sell far out of the money. Else you will lose sleep.
2. Sell atleast 60 days DTE because current month does not have attractive premiums at fotm. ROI is everything. less than 2% monthly ROI in a country where banks provide 7% annual compound interest (this is true in India) is not worth the risk and sleep.
3. 200% rule results in lesser winners ( about 75% winners in my backtest results) but keeps you from going belly up. I was hit twice in the trade but since the price did not cross the level convincingly i held on. This worked this time around but may be disasterous at other times. So i need to have a proper SL.
4. Another SL strategy could be exiting the strangle when the loss made by the strangle is twice the profit potential of the strangle. If you sold a call at $30 and a put at $32 and plan to hold it till expiry then the profit potential of the strategy as $62. The stop will be hit if the strategy as a whole is loosing $124. This will let you stay in the position longer and will increase your odds greatly.
5. My biggest fear was seeing a black swan. It literally killed my sleep on 4 days out of the 20 days i had the trade on. For me Black swan protection would be paramount. How about buying same strike calls of current month at 1/5th the premium of the short option. if you sold short option (90 DTE) at a premium of $50 then the protection (30 DTE) would cost $10. Does this actually protect against black swan? By black swan I mean market opening against you 10%. With your short option going itm by 500 points! does my strategy for black swan protection make sense?
6. What is your thought on maserati? Cordier claims the ratio credit spread is the best of all strategies. I agree but the 3:1 ratio leaves about 1.5 of the short option naked vulnerable to black swan.
7. what about rolling options to the next month on expiry? that way you get paid every month. For example if you sold June puts for $50 on 1st March and on 28th March (expiry) you bought them back for $20 booking profit of $30 and sold July puts for $50 again. Is this really meaningful? aren't options marked MTM as any profits are credited in the account on a daily basis.
8. What are your thoughts on illiquidity. If we are in the game of far otm and far off in time then illiquidity is something we will face everytime we punch in and order. Have you made a loss because you could not buy back the option at a reasonable price because of illiquidity?
I am interested in learning ways to protect against black swan. Please comment on my post.
Again a heartful thankyou to Ron, brit, MJ and all other contributors to this useful thread.
Yes I am reading your thread. Very insightful. I agree with you fully that diversification is the only true way to shield against black swan. Having said that I don't have access to commodity options at the moment. I could easily trade the CME options but my capital is limited at the moment. I will surely diversify to cme products if the option market in my country does not pick up.
In the mean while my understanding is the following:
1. I am not interested in profiting from the protective buy. It is strictly for protection and in 90% of the trades it will expire worthless. So my objective is to buy the least expensive protection.
2. The black swan protection exists to shield against black swan. It does not have to shield against a bad trade per say. If the market moved against your analysis then you have get out at the SL. And that is OK. Black swan protection simply exists against Black Swan events (10% limit down/up against your short option position) and nothing else.
I want to know your opinion on buying current month same strike call/puts at about 1/5th the short option premium. the protection will last a full 30 days after which we rollover the entire position to the next month contract. again in the new series we buy black swan protection for 1/5th of the premium collected. What do you think?
I rarely use the concept of buying current month options as a protection in case of an important report.
In my opinion it is to expensive to use it as a permanent protection against a Black Swan, if the time of occurence is unknown.
If you keep lot size at 1 % to 3 %, as I suggest, the value of the options can grow to 1000 % of the original value, and your account is not hurt. If you hold several positions, it is important to hold positions which are independent from each other.
After trading for many years it is my experience that the profit per year grows when I reduce the size of the trades.
Most of us are not keeping options until expiration. ROI is much higher if you exit at ~50% drop in net premium.
This is covered later in the thread. I suggest you read more of the thread before you make more trades. You can learn from our experiences trading so you don't make the same mistakes.
Hi Ron,
I see that some of you, including you, are with DeCarley Trading. DeCarley Trading website mentions $3.5 per option for the self-directed online. So, RT cost is $7 per option. You had mentioned RT cost as $7. Is it the same? So, the cost of one position of 2 shorts and 3 longs will be $35. Is this correct or am I missing anything?
I am currently with Thinkorswim and RT cost per option is similar to the DeCarley Trading. But if I can get cheaper deal from DeCarley, I don't mind shifting to DeCarley. Hope you can enlighten me.
Regards,
Dilip
I suggest you contact Carley and ask her for an offer. The fee you will be offered depends on the size of your account and on the number of trades per month you intend to enter.
Ron, you have mentioned that when market moves against you then you wait till the 2X excess margin you allocated for your position is wiped out. In general what is the option value at that time? is it twice, thrice or more times the buy price? I am asking because margin requirements are different for different brokers/countries. Also span is calculated differently in some countries. If someone were to use premium based stops what would it be?
