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Here is one short of NGv5c350 and one long of NGu5c340 on the left side. Naked short NGv5c350 on the right hand side. After 52 days held (bottom line) the calendar spread has made zero profit. The naked short's premium has dropped over 50%.
I am not going to be constantly adjusting contracts to have my positions be delta neutral. With the extremely volatile up and down markets lately you will be buying and selling constantly eroding your profits.
@ron99 thank you very much for the detailed analysis you are sharing - still reading through the thread.
Have you ever thought about building protection against a market crash with volatility products like VIX Options (and buy VIX calls instead of buying ES puts?
Here is what I am seeing trying to reduce risk when selling a NG call to cover the 10.9% increase in NG futures over 11 days last June. The list is sorted by Highest % Balance for IM. These use IMx3.
The spreads have just as much or more drawdown and have just as much or more percent of balance used for IM as the naked options.
If you switch to IMx4 reduce the drawdowns by ~10% and the percent balance used for IM by about 20%.
Sorry it has to be diagonal, so buy a lower strike sell higher for put, otherwise it'll go nowhere unless vol comes down.
Your delta shouldn't change much if you're fotm at delta 10, and the call delta offsets the put side as well so unless your strikes get too close for comfort delta should be almost neutral throughout.
High vol in the market won't change how often you need to hedge in a high vol environment a delta 10 would be much further out than a low vol environment.
The problem imo is that there really isn't an edge in selling spreads or selling in general, you'd need to get the edge by market timing vol or buying and selling a mispriced option. Options is all about laying off risk to another party so the winner is the one who can lay off the most risk for the most theta. This implies you need to outplay mm's at pricing risk, that's hard. Hope you can find a mispriced long leg to hedge your short ones.
Just a bit more on what I mean by mispricing.
In terms of a spread, there is no edge in selling them. For example, if you do a 10 point credit spread at delta 10, you would normally get 1 pt for 9 pts of risk (10-1) for a 90% chance it will work out. So for every 9 trades you win (9x1 pts), you will lose 1 trade (1x9pts) and you end up at B/E minus comm and whatever spread you paid the mm,if you sell them like clockwork without timing.
The only edge you can get without market timing is if a mm mispriced an option which doesn't happen often.
However, since market are mean reverting, puts are mispriced in 2 situations. When the market is up, they are priced too low since vol is low (and vol goes from low to high) and the chance of a market coming off is higher. They are priced too high when market is down since vol is high (and vol goes from high to low) and the chance of a market mean reverting up is higher. In other words, you still need to go back to technical analysis and get an edge by market timing by selling them at the lows. You want to be selling insurance to people who are fearful and who are willing to pay a premium for the insurance, this happens when vol is high and the markets are at lows. Amateurs buy puts at the bottom of a market, you want to be selling to them.
At the moment it seems you are only testing how often you get hit by margin calls, but the end game is still the same. Even if you don't get hit by margin call and your short legs expire way in the money, you're still up for a massive loss if the market doesn't revert back in time for them to get back out of the money. You still have an issue where there is no edge with your win rate & RR, they end up being symmetrical not asymmetrical.
Another thing, the strategy has worked for the past few years but it's incorrect to think that this strategy is the best one. The better strategy is to buy calls all the way through and reap the open ended profits on the way up, not sell puts. The reason is that vol has being low historically so it's cheaper to buy calls all the way up, selling puts all the way up means you've being selling insurance to hedgers such as funds for cheap. Incidentally, you wouldn't have got caught in the latest correction since calls have a limited downside. Anyhow, that's a story for another day and another thread...
If we allow for a 10% increase in implied volatility, and a 3% drop in the underlying, does this come close to
approximating the conditions of the August 21-24 crash??
On 5/15, the about 10 deltas on each side iron condors have a 70% drawdown and are on margin call. You blew up.
On 5/15, the iron condor with about 3.00 deltas on each side only has a 16% drawdown and is no where near a margin call. But the slow premium erosion makes for poor ROI.
If you are going to post in this thread at least know what you are talking about and have facts to back up your theories.