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Based on my reading of this thread, you had good success with commodity options for a long time and only started concentrating in ES for the last couple of years. I understand the ES advantage of being further OTM, having a very high win rate, and still collecting good ROI. What I don't understand well is your reason for moving away from commodities. From what I gather, there appears to be an advantage commodities have over ES: the ability to pretty accurately estimate the direction (or really the unlikely direction) of commodity prices. What I'm trying to get at here is a clearer picture of your investment philosophy.
A simplistic representation of two strategies might be:
ES Strategy (Ron's preference) - Focus mainly on ES and occasionally use commodity futures when good opportunities present themselves
Pros: Very high win rate, good returns, easy to be fully invested, mechanical investment strategy
Diversified Strategy (@myrrdin's preference) - Make a point to diversify underlying and direction as much as possible
Pros: Diversified, smaller drawdowns, decent returns, reasonably high win rate
Cons: Often underinvested, time-consuming (need a large knowledge base)
From my perspective (this is saying very little), strategies #1 and #2 seem to be two extreme ends of the options selling spectrum. So my question is, why not somewhere in the middle? Why take such large concentration risk (in the case of #1)? Or why focus so much on diversification at the cost of potential returns (in the case of #2)? Is it just comfort level around investment risk or is there something more?
PS: although this post is addressed to Ron, I hope to hear other's perspectives as well. I'm in the process of building my own investment strategy and I'm looking to compare notes.
Last year I did a large project of seasonals. Even those aren't working well combined with fundamentals which is saying that the markets are even more unpredictable and why I trade less commodities.
I used to trade milk futures and options and now I can't trade them because manipulators have made dairy contracts totally unpredictable and an extreme risk.
Thanks for the post. This may be a bit naïve, but would auto-trading help get out closer to the desired exit price? Let's say you use a simple strategy selling naked ES puts and getting out (stop-loss) when premium doubles. If you used an automated program that set Bid = Ask if Ask >= 195% of initial premium. Would you get out closer to your stop-loss point or could you still miss it and end up buying back at 3x or even 4x the initial premium?
I'm asking because this appears to be a high return strategy (with more frequent losses of course); but for it to work you have to be able to get out at the right price.
Quick question, have you given a thought to the exit method given the above quote? If the spreads get extremely wide during a big market move how does that affect the exit? When you calculated the loss during the moves in the back test did you account for the wider spreads and slippage? I'm curious about how this is managed when fear overtakes sanity.
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals, U308 and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,060 since Dec 2013
Thanks Given: 4,410
Thanks Received: 10,230
Okay it was RFQ's rather than specifically spreads, but the message is the same. It's in the traders best interests to use these types of functionality.
The migration of options markets to the electronic screen for execution has increased in recent years, with over 50% of options now traded electronically. The use of Request for Quotes (RFQ) has played a key role in enabling that transition to occur by …
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals, U308 and Crypto.
Frequency: Many times daily
Duration: Never
Posts: 5,060 since Dec 2013
Thanks Given: 4,410
Thanks Received: 10,230
Since we're obviously being extremely pedantic today, let me re-ask the question.
@ron99
Quick question, have you given a thought to the exit method given the above quote? If the spreads get extremely wide during a big market move how does that affect the exit? When you calculated the wins during the moves in the back test did you account for the wider spreads and slippage? I'm curious about how this is managed when fear overtakes sanity.
lol "the risk management department" . please. lets be real . we are discussing a strategy that although the best minds proved in theory it would work, and it should've worked...and it had the backtest to prove it would work....in the real world when you go in with too much size on one strategy, you set yourself up for failure. you can explain to the investors who lost billions that it was the "risk departments fault".
And you are wrong about funds being too large to do this. If Ron can it with 1000 contracts, it can be done with 10,000 or 100K or 1M contracts... The point is no sane money manager would do that to their portfolio.
there is no size limitation. open a $100M fund, open a prime brokerage account with Goldman, and they will allow you to sell as many puts you want at any level. So would you sell $20M in puts each month and keep the 4 or 5x IM ?? Is that what you would do with a fund??
just for the record- Karen also had issues with trading in a certain way in order to show gains and be able to withdraw her profit percentage, but thats beyond this discussion.
The same way you don't understand my logic, I can't understand yours. What i said is that this is a viable strategy up to a certain point. For example, if you have $100k-$500K, go ahead and sell 10-20 contracts and let that add some alpha to your portfolio return. When you go to hundreds of contracts, it doesn't work in many situations. You simply are testing it in a non-stop bull market. Of course selling puts works. As Ron himself said, a slow decline (to 20%, I believe he said) or in certain months in 2008 it would NOT work.
Not just "NOT WORK", but blow up including maybe losing a house too.
and again, Ackman can certainly do this. You can simply structure OTC trades with any prime brokerage firm and do any size you want. Ackman would KILL for 20%, heck even 10% lol after his VRX debacle.
I can't believe the level of complacency. Why are the real estate firms and hedge fund managers killing themselves to make 10% per year and beat the long term market results when they can employ this no risk strategy and make 20%?
The answer is that there a million ways this can blow up (when you have on enough size). What would you do if ES opens down 300, and goes down another 300 ? wake up to the fact that this has been an 8 year bull market and stocks go up every single day. A 20% drop would really not be a big deal.
So you are correct , it works in almost all scenarios (until it doesn't ). And thats why its a wonderful way to bring in extra income. But to use your whole portfolio is what I am questioning.
lol, if the threats about banning come out, you can tell someones feathers are wrinkled.
Ron, a spread or even a 2 by 3 ratio does nothing to protect you in this scenario where the market falls between your short and long puts. your long puts may only move slightly and your short puts may explode. essentially it is naked. A spread is typically close to each other. What you are doing is buying "wings" (which many traders do) in order to minimize margin. so you are essentially naked short. Lets say i short PCLN is trading at $1880, and I sell the $1900 call (something like $32k in margin). But to minimize this margin required, I buy the $2100 call. Do you think I am not "naked short" ?? I sure as hell am. Maybe its a "spread" in your account statement, but thats real $20K in risk between those two strikes.
I don't need to read 100 pages, since in the last two pages you offered no defense to what I said. I said that doing this in size on a portfolio can blow up spectacularly. doing this in small size is a GREAT WAY to add additional income. nothing wrong with that.