Welcome to NexusFi: the best trading community on the planet, with over 150,000 members Sign Up Now for Free
Genuine reviews from real traders, not fake reviews from stealth vendors
Quality education from leading professional traders
We are a friendly, helpful, and positive community
We do not tolerate rude behavior, trolling, or vendors advertising in posts
We are here to help, just let us know what you need
You'll need to register in order to view the content of the threads and start contributing to our community. It's free for basic access, or support us by becoming an Elite Member -- see if you qualify for a discount below.
-- Big Mike, Site Administrator
(If you already have an account, login at the top of the page)
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).
Can you help answer these questions from other members on NexusFi?
I follow the parameters of the strategy. 90-120 DTE Two shorts about -3.00 delta. Three longs about -1.00 delta. At least 5xIM. Exit at about 50% drop in net premium.
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.
@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.
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.
Great point, Ron. I am moving onto that thread as well very soon to back test what I am thinking.
Anyone know if there is any place where I can get my hand on the options data for SPX/IWM/SPX/RUT for the past few years?
I am also wondering if the -2/+3 would work in SPX/IWM/SPX/RUT? I am assuming not since they do not use SPAN like ES, CL? Unless we have portfolio margin...please correct me if I am wrong.
I would never risk 20% max loss for the entire account on just one position. The 5% figure you quoted seems more reasonable but is still a bit aggressive. This week I had on 4 total positions (ES, CL, ZS, and 6A) and 3 out of the 4 were profitable. The problem with concentrating your trading in just one underlying (e.g., ES, SPX, SPY) is that you leave yourself open to devastating losses, unless of course you're trading with a very high IM of like 10-15X, but then your returns are also going to be very modest as well... Remember that equity markets are highly correlated and it's helpful to diversity in other products. However, during times of crazy market volatility even some seemingly uncorrelated investment products can and do drop in unison together.
I see your point about managing upside risk with strangles, but there are many options for how to handle this. You can start out by trading more delta neutral (i.e., selling less calls than puts), or you can roll the untested put side up when the call side is challenged, or you can even hedge the upside risk by using more complex strategies like a long butterfly spread near your call strike. I personally don't like rolling the tested side up and/or out in time because this is how you can get stuck trying to swim against a strong current of a seemingly never-ending trend. The equity markets are almost always mean reverting though -- they will have some sort of a pullback and this gives you an opportunity to exit the trade. 2017 was pretty unprecedented with mostly one way price action since August, but even then in the first half of the year there were pullbacks nearly every month and trading strangles was profitable.