Why does everyone keep harping on 2008? It gets way worse than that. When I see stuff like this, I think about 1987. However, that was 27 years ago. Maybe there won't be another 1987 for 27 more years. Karen might not live that long, so maybe she will be lucky. I wouldn't want to trade the way she does. I don't think it is necessarily a bad idea, but I would not be using 50% of my capital to do it--more like 1% or 2%.
i hope u get the concept.. the risk is HUGE...its picking up pennies in front of a freight train. u cannot but have to allocate significant capital example 100K portfolio = u deploy 80% . u will make 25-35%. ie. 24K a year if u deploy 1-2K u will end up making 300$ per annum...
Agreed, Darwin. The amount of one's account that could be traded this way without taking on undue risk is so small that it makes the whole thing not worth doing. There are better (and safer) methods.
Thanks for that Darwin. I never really realized it until I saw the numbers. I thin I need to find other ways again.
theres always money in debit spreads or tight control long put/calls on earnings plays. but realistically the chance of success is like 25%
Turns out you would have been incredibly right here. Whoever sold naked VIX Oct calls better have closed them out before 10/9.
I am relatively new to EliteTrader, but I am someone who developed a strategy which I call ratio strangles with a heavy bias of nearly 5:1 of calls : puts. I find that many of the theories that I have developed are identical to Karen's now that I have researched her thinking a bit more. Where I differ from Karen is the idea that you should take a bias at any point time. My objective is to extract the maximum amount of time value from options while having a position size that allows for never receiving a margin call. In order to do this, I don't believe in having any cash on the side at any time. I want to be 100% invested in the right number of ratio strangles 100% of the time. The whole point is to exract the most premium without incurring any unnecessary risks, and to do so, it's about finding the right sweet spot of time value, strike, time to expiration, and position sizing. One other thing, Karen likes to trade expirations that are far out, and those often do not have great time decay, which requires over leverage to get a decent return. I start my positions on weekly options with 7 days to expiration, with much less leverage, and closer in on the strikes, taking on a lot of ITM risk, but getting a lot of theta decay. The trick is what do you do when the market moves against you (and it definitely will). Also, another criteria is that if there is any adverse move one direction or another, that given at least 12 months trading time, the position can be adjusted + deleveraged + more time acquired such that the overall protfolio's net liquidation value increases. If at any time I have a liquidation mandate <12 months, then my approach to trading strangles is too risky as an adverse event could create negative returns for a period of time while you are working to adjust your way out. Position sizing is essential as the strategy depends upon portfolio margin to open up many naked calls. The number of naked puts opened up is very limited so as to protect against significant market corrections that involve up to 40% single day downward moves like 1987. The positions are hedged only through position sizing - there are no long legs to create spreads. I have found that spreads cost a lot of money from commissions and the cost to purchase, which encourages a trader to open more of them. A better long term result is found by just going naked on each side and then stress testing all possible outcomes to get the right position sizing. I have traded this strategy consistently for 4 years. Average return is .39% weekly compounded for a 22% yearly return. 2013 with the surging S&P was a 7.2% return. 2014 also surged in bursts and found for the first time that my naked calls got caught in the money. Even rolling out and up and out and up couldn't keep the calls out of the money. So the year resulted in -9% returns. 2014 was my nightmare year and it allowed me to achieve a few things: a. Really feel confident that you can sell naked calls at leverage in a rising market without getting margin calls. b. Identify how many naked calls can be sold ATM without incuring a margin call. BTW, in a PM account, SPAN margin requirements are highest for options that are ATM at expiration. ITM options that are losers are different story, but for this strategy the determination is ATM margin requirements for naked calls at expiration. c. Identify position sizing adjustments that allow for extracting high premium while still being comfortable about how / when you might find yourself in the money. d. Show that given enough time / horizon, even losing trades with leverage that are sucking up more margin can be deleveraged, rolled out + up, while generating additional cash and time value. My strategy also has built in calculations for deleveraging any time an adjustment event occurs. If you have to continue to make adjustment events, you are naturally deleveraging yourself. When the markets were melting up over a period of two years, there were long periods of deleveraging, but even with all of the deleveraging, the cash position increased and time erosion ultimately lead to overall gains. Since 2015 has been a flat year, all of those calls which had been showing liquidation losses have been making terrific gains and (what remained of them) are about to expire worthless. The year is up 47% even though the overall margin requirements of the account have dropped to <30%, which is a far cry from the 80% required when the original position was opened and the market surged up ruthlessly attacking my calls. Given the way things are looking with Greece, it's possible that the positions that went first ITM about 9 months ago will finally expire worthless in the next few weeks. A couple of questions that I have gotten poked at over the years while development this and my answers to them. 1. I only sell enough puts such that I can handle an absolute valuation of the puts if the market drops 40% in a single day. This assumes that volatility rises to about 190 as well. This assumption offers a lot of protections. First, the S&P has lots of protections built in that will trigger trading stops at 10%, 20%, 30% if things are going sideways. So there are chances for the market to cool off. Second is that as long as there isn't a huge gap down, there should be a window to roll out. I am aware of the issues like in the flash crash where there was no liquidity and the bid / asks were stupid like $.01 / $10,000. In this situation, if there is no liquidity, the result is to ride it out, avoid the margin call, and wait for some market normalcy to return so that trades can be adjusted. If I have to roll out and down, I *always* deleverage. If I had started with 14 puts, when I adjust, there will only be 13 left. 2. What about the vega risk to the naked calls? Stress testing is key here. If volatility has a gap up to 190%, a pile of calls sold originally for $.50 for SPX can jump as high as $20 / call. Now, a couple of really good things here. First, if you do have a big volatility spike, market is going south fast. So when you look at calculators that look at VIX @ 200 with calls that are 15% OTM, the prices are in the $10-$20 range. So you are taking some losses. But the good news is that you are 7 or fewer days to expiration and this high price assumes you are 7 days out. The price of these options drops quickly as each day goes by, and you will expire worthless quickly. It's really important that the position sizing on the puts lets you have the market drop by 40% AND you still have enough cash to cover the cost of the calls. Turns out that even if naked calls go from $.5 to $20, the total impact to my net liquidation value is only 10%. It sounds a lot scarier than it is. And for this to really happen, the black swan event would have to happen the same day that I sold the calls. Any other day and the total cost of the calls would be much lower due to theta decay. 3. I never touch American style options. Only European options to avoid any sort of assignment risk. Assignment in a PM account is just dangerous. Assignment of some spys in a strangle messes up all of the position sizing. That is just scary stuff. So SPX is my thing. 4. I don't believe in diversification of the strategy over different asset classes like commodities & currencies. The price action is hard to pattern. Price histories are not long enough to use for statistical analysis. Liquidity is a problem. And markets are more correlated than you might think. I see no issue with investing 100% of my capital into this single SPX strategy as long as its properly sized to account for all possible price movements. My assessment of the overall risk is about the same in the end vs. having 10% of my portfolio in 10 different asset classes trying to recreate the same outcomes. Way too many ways for those other items to trade against you, liquidity to disappear, pricing behaviors move against statistics that are not historical, and the so forth. I recognize that this statement is probably heresy to many very strong traders on this forum, but it's a conclusion that I was able to get comfortable with after trying it for about 6 months. So I wrap all this up to say that I believe it is very possible for an options strangle trader to reliably make 20-30% compounded return each year without taking unnecessary leverage risk, as long as they have a solid adjustment strategy and are willing to whether up to 12 months of negative returns waiting for any weirdly moving market to adjust and stabilize.
Do I understand correctly that most of your gains have occured in 2012 and 2015 in this strategy? Because then you wrote: So I am a little bit confused. Could you clarify where I am wrong here? Thanks for sharing.
Your comment/reply makes me think of a recent Youtube video I watched on Options: Documentary: The Trillion Dollar Bet (2000)