Bob, January was not a bad month, not even close. I would argue the opposite, that January was the ideal month for premium sellers in that they got both high premiums AND mean reversion. It's the one way extended moves that hurt. These funds should not have even lost money in January, the fact that they didn't speaks volumes to their lack of edge.
The 1st week hit some risk levels that required closing positions on that down 500 Dow day. These strategies out perform when the VIX is 17 to 22, IMO. Over that, they can have issues. Below that, the risk of outside moves is too costly because short options are too close. Just my observation from following these funds for 5 years. I was never an option seller myself.
You can call it what you like, but I can tell you that you can definitely make money selling puts and calls, with more emphasis on the puts. As with all trading, timing is everything, and if timing for selling puts means overpriced, then that is what you wait for, providing you know how to see it, of course. In relation to naked selling, that is pure gambling, and only a fool would take this approach, as you can make good money selling puts with another lower strike as protection, or your stop loss. I know I said this, but to prove my point, back in 2007 I done bout 85 trades in a row, selling mostly puts as mentioned, a few calls as well, and not one of them was a loser. Then the black swan came, and just when I decided to triple my normal amount of trades, which was 3 with multiple contracts of 3 lots average, so now I had nine trades open, most with 3 contracts each trade, for a total of roughly 25 short puts with the markets tumbling. I nearly shat myself! My biggest mistake was overtrading, but because I had a bad broker, and did not fully understand what to do, as I was in panic mode, I lost 17K sterling in one morning, and the irony is, I need not have lost anything, as I now know what I should have done, but should have known then of course, but that is life, all about experience. You can still make money selling puts, once you are selective, wait, and know how to adjust losing positions, and, in fact, if you have plenty cash, you actually can not lose, once you don't panic and trade Index options, of course. J_S
I never said one can't make money. In fact I said the opposite. You WILL make money if you sell over priced options and buy under priced options over a very large sample of trades that are independent of each other. That's the central limit theorem. However this idea of selling options that are "far away" or arbitrarily just selling them every month has a probability of ruin of 100%.
That goes without saying, as only a fool will buy or sell anything for no apparent reason! Selling far away is required for the way I talk about, but not too far away, as, who wants to sit and wait for too long. I currently only trade options for very short term, ES and CL mostly, buys only, and no more than 2 weeks out. Reason is simple, I am aware of delta changes with wide ranges, so the theta does not really bother me, in fact, I do not even look at theta now, but if volatility reduces, which does not look likely to happen anytime soon, then I will have to look more closely, but at the moment, things are going ok. J_S
This is what happened me with CL. When I bought current week options, bout delta .2xxxx, I mostly lost. When I bought next weeks options, with same delta, at higher cost obviously, I mostly won. CL is notorious for sudden moves, in both directions, so again, timing is everything, but with CL, options are a very effective way to cap your risk. On the low priced strikes, say 0.20 to 0.30, I averaged in to about 0.10, then limit sell a 0.40. Have left money on the table of course, but seen as it disappears very quickly anyway, I am not too worried bout that, as you never go broke taking profits! J_S
Have you already glanced at a payoff ? Even probability weighted, it's false. And dynamically ? It depends.
Selling naked options worked very good for me .I've been doing it for over two years with great returns.( about 35 % / year). I also don't think the concept needs to be so scary ! In my view , with SPX at ~1870 shorting 1375 puts is less risky then selling a vertical spread at 1600 and with more premium received.Probability of going in the money with the spread is far greater then with the naked put . I understand there are more $ at risk with naked options but with the position almost 500 points away of current S&P price there is no way in the world that I will not have enough time to react if the index starts going south ( even in a black swan situation ) . I keep at least 40-50 % of my account funds available to use as needed to reduce or completely eliminate risk if trades goes against me.
Must be joking! No wonder most, if not all, the options sellers here on ET for the last several years have retired from ET by today!