Why do premium sellers have to be unhedged or leveraged? Someone could simply have shorted puts on the same size as he could cover for cash if necessary. After all, every time a crash occurs, the market bounces back hard the next few days/weeks. I'd be quite happy to write 1000 strike S&P puts for the right price. If there's a "black swan" (lol) I'll just get exercised and get long after a 37% correction. Oh noes, the horror of being long at better prices than everyone else in the market bought at!
The problem with most of these short premium "income" strategies is that people want to set these trades up and leave it alone. Collecting the "income" every month and blame the strategy when they lose! I trade strategies like butterflies and calendars every month in a portfolio. I dont like the so called low risk Iron Condor because the are very hard to adjust. When I trade an Iron Condor I go for a much better risk reward (so a lower probability) I trade these strategies on very liquid ETF's because the quotes are very tight and you need the liquidity and tight quotes because sometimes you have to roll the position. I balance my portfolio at the start based on my view on volatiility If Vola is low my overall position will be long verga and if its high my overall position wil be short vega. Can it go lower if your long vega? Sure it can! Vice versa if your short vega. At the start of the trade my position wil be a short premium strategy and in a normal market it is very easy to adjust them when the position reaches my risk limits. The problem with these strategies is if the market gaps way beyond your risk limits because you cant roll your position and you have a big loss and you dont know what to do next. Most of the time people start hoping and thinking "hey such a big gap needs to be filled" etc. etc. I solve this problem by buying extra puts on the downside. My position at that point is long vega so a rise in IV softens the loss and if the gap is big enough I even make money. How many extra puts you buy depend on your risk tolerance. There is no exact rule for how many extra puts you need to buy and wich strike. I do a lot of stress testing in my option software with different volatilities and different dates and the different volatilities at the different dates to see what kind of impact a move will have on my position. For example you can test this for a 5%, 10 %, 15% and 20% gap down. To the upside I have no protection in place ( I am not naked short to the upside off course) because first of all I have percentage invested in my long term portfolio so a gap up would help my long term portfolio an so limits the loss on my short premium strategies and second a big gap up is not as common as a big gap down. Did I lose money in this current volatile market with my short premium strategies? Absolutely. But only a small percentage of my portfolio (about 70% invested in short premium strategies). I am not scared of big gap down. What scares me more is that a government can change the rules in the middle of a game.
No I meant I lost only a small % on my total account while I invested about 70% of my account in short premium strategies like butterflies and calendars. I lost some money when the market went crazy from september 15th until september 18th. I then closed my positions instead of adjusting them to the downside. I could have adjusted my positions to the downside ( this lowers your breakeven on the downside but it also lowers your breakeven on the upside) but I didnt because the market was so volatile and I was scared that if the market bounced I had to adjust it on the upside again. So I took the positions off.
I make my trading income by shorting volatility as well. With the risk of the government changing the rules a true threat is it better or wiser to stick to ag and soft markets as opposed to index futures which are apt to be the target of government interruption? Any thoughts or would all the markets be in jeopardy?
shorting volatility ?? anyone have good strategies in it ? I thought only IC can do better on this, and only IC have good range with good risk/reward (usually). We can just IC more bearish or bullish, but overall it still market neutral, right ?
Yes, you can make your IC more bullish or bearish and that affords a small amount of extra safety (in return for collecting a smaller cash premium) - but for that to be effective: a) Your bias must be in the correct direction. b) Your extra safety must be sufficient. IC is a good strategy, but it still requires very careful risk management to work. That's more true now han it has been since the extreme volatility observed in 2002. I don't know how many IC spreads you buy, but if it's more than just a few, there is an insurance technique you can use. I found it made all the difference between making money in this bear market and losing a bundle. That technique involves buying some OTM strangles for ultimate safety. This is discussed in more detail in my blog. Mark http://blog.mdwoptions.com/options_for_rookies/2008/09/q-a-buying-extra-puts-as-insurance.html
Hi Mark, Thanks so much for your thoughtful and generous responses on this forum. I have ordered your book. I am an iron butterfly trader these days, and am wondering why you have a preference for ICs as opposed to IBs. Regards, Mary