I believe way back when you were using defined risk ie spreads, etc. Now that you have a "naked " element (if I have it right) how do you factor a mini black swam scenario into your expectancy ? Thanks
IT Will hurt, but I will remain in business and my account will not blow up. Risk is an essential part of the strategy.
I have stress tested the account for such an event. While it will hurt, the account will not blow up! You must take risk in order to make profits.
How do you know? The VIX equivalent went to almost 180 back then And if history shows anything is that there is always a new record to made, just keep getting data and it will happen eventually. What is your P&L if the VIX goes to levels never seen before in a very short period of time? I'm not trying to troll the thread or discourage you. I'm really curious about the effects in an options based portfolio of such events or how to even make estimates around that
All great questions. Tastytrade has done the research and I have my notes written within my trading plan. Basically, I use the analyze tab to simulate a drop of 25% in the market while increasing the VIX by say 30 points. (Specific numbers are in my notes). There is a historical relationship between a market drop and an increase in volatility that can be modeled in the TOS analyze tab.
So, what do the numbers say in terms of portfolio loss? Also, how is that not different from the banking industry modeling to the past 10-20 years and then suffering massively when something worse happens?
Daal, what will happen to your long stock positions, mutual funds, and 401k in a October 1987 event? I paper trades the strategy every day for 9 months and found that by using 25-50% of my net liq that I would never blow up the account in such an event. I started trading with real money in January 19, 2017 with real money. Because my account was significantly smaller, I tried to emulate the results by placing defined risk trades. It just didn't work. About a month ago I went back to naked spreads, though I traded much less often. I do not now go back to the analyze tab because I am using the tastyworks platform, but I have confidence that the numbers will continue to play out according to the probabilities. The key is keeping things very small. Right now I only have two strangles on and I might can handle a maximum of four. My Greeks tell me exactly what to do.
I will lose money, except I have a zero bound in my long stock investments. I cant lose more than what I put in, plus I usually have some hedges in place (UST bonds, gold, cash, way OTM puts in the index). So I will have a limited drawdown, I will never lose everything or be liquidated. For put sellers there is no certainty like that, in fact many of them get liquidated during major stress events. The chart that I posted on the VXO in 87 is a good example of the "margin call risk" that is probably the single most important thing when dealing with this strategy. Not last weeks greeks or 10y backtests from tastytrade. thats why I ask about the % loss in case 87 happens again, I want to know if you know what the figure is and how did you arrive at it
If you are trading undefined risk it is good that you have a stop loss (2X credit) and a gamma stop (1/2 DTE). In a big move down sometimes it is difficult to calculate actual potential losses due to the increased vega on top of delta losses. Holding those long OTM puts will help (Not a tastytrade method) those OTM puts will also create a drag on your portfolio. August 24, 2015 was a time when tastytraders accounts came close to blowing up luckily the market recovered quickly. Also know that the tastytrade studies are flawed because they do not take scaling up into consideration. If and when you decide to scale and you are using undefined risk you may get caught at the worst possible moment with an outlier move and take a substantial loss, none of the studies take that realism into account. The best way to gauge tastytrade or any real trading method is to watch them trade a real account with real money in real time. The only account at tastytrade that does that is Bat vs Bat where Tony B trades a real account. Tony has been doing this for 3 years (2 with Katie, 1 with Nick). So far the account has lost money every year.