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I did not do a formal study on selling ES calls. But there is a post in this thread where I talked about this.
What I found was that ES calls were way to low ROI and far more risky because you couldn't get far enough OTM on the strike to be higher than past moves in ES. Largest gain in ES futures in 90 days since 2009 is 282.50 on the June 2016 contract.
A 5 delta call right now is ESu7c2630 which is 180 OTM. Premium is $90. This call IM is $1,576 which will give you a 0.4% ROI if you can exit at 50% drop in 30 days.
The -5.00 delta put is ESu7p2050 which is 385 OTM. Premium is $290. This put IM is $755 which will give you a 3.2% ROI if you can exit at 50% drop in 30 days.
Largest drop in ES since 2009 is 268.50 on the Mar 2016 contract.
I am going to use TFOpts's strategy for my new positions. I will sell two ESu7p1960 and buy three ESu7p1750. IM is $419. Friday's settlement was $160. I will use 4xIM. This could give me a 3.0% ROI if I exit at 50% drop in 30 days.
Edit. I sold them at 3.00 or $150 on June 5th. This makes possible ROI 2.7%.
I will also track how my old strategy of selling one ESu7p2050 and buying two ESu7p1830 performs vs new startegy. IM is $249. Friday's settlement was $90. With 6xIM the possible ROI at 50% drop and 30 days is 1.8%.
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The combination of the volatility skew in ES options (calls have lower IV than puts) and the directional bias of equity index's means the returns for call selling are significantly lower than put selling.
Ok fair enough . So then what's the strategy ?
Let's say my account is $100,000
Assuming you keep approx 6x IM, we are placing this trade once per month , covering it around 30 days once there's 50% decay.
So that is approx 12 times per year that we can put this trade on ?
Also what size are you putting on ?? It's one thing to sell 10-20 contracts , fine. But with a $100-$500k account, what is the strategy??
If you are doing this in size (kind of like Karen the super trader), one flash crash scenario and your account can be toast .
This is why I've always only sold the call side on the indices and am having trouble understanding the rationale behind the put selling side. There has to be a better reason than "the premium is higher." On the call side , in way more comfortable because you rarely have a melt up and always have time to basically adjust or roll. But even on the call side , I'm very cautious with the number of contracts.
Just because the backtesting shows that with 6xIMyou will be ok, that doesn't mean there won't come a day when you'll need to have 8 or 9xIM , and since you don't , you will likely get blown out.
I do think it's prudent to acknowledge that we are in an unprecedented market environment where the last 8 years has been up and the market has greatly been supported by the Fed....
You seem to be a pessimist. You are fearful of crashes, so you avoid puts. If that is what you are comfortable with, then that is how you should trade.
You seem to be a pessimist. You are fearful of crashes, so you avoid puts. If that is what you are comfortable with, then that is how you should trade.
Actually I'm not a general market pessimist. I sell OTM calls because volatility is generally overstated , and so even with the market moving up , they still make money. Yes I agree, not as much as your puts have earned.
What happened the last couple years is so far removed from anything historically (just look at Ibbotson Associates or Bloomberg for the actual long term numbers ).. and there is mean reversion over time. So to sell hundreds of put contracts each month after an 8 year bull run is what I don't get.
More precisely : according to you, 53 trades over 4 years is about 13 trades per year. And the return is around 12% annually from what I can discern.
I just see this as taking enormous risk for so little return (not that 12% is little, but You have to compare it to the risk...)
A basket of higher paying dividend stocks such as T , etc., coupled with writing calls on the stocks can easily get you near that 12% without the black swan risk. That's all I'm saying.
Trust me I've learned a lot from you Ron on this forum , but what I'm saying is: the strategy you have is great for selling small amounts. Once you have size , there's the black swan again. I'm not nissim Taleb; but you have to be mindful of that risk.
With a massive pop in volatility plus a big market drop , all backtesting can go out the window - the ask price on the index puts will simply skyrocket. A 10-20 contract position can be managed. Hundreds of contracts- forget about it.
Again I like your strategy , I just don't see it feasible in size. And yes I know you did it for a couple years now , but bear in mind we are in unprecedented times.