I get woozy thinking of a strategy that at it's core is : Collect a dollar, if it goes against you 3 dollars stop out and if it goes your way 50 cents take your winner. This is supposed to be appealing somehow?
My rationale for carrying negative delta--after considering vega, being delta negative makes the position essentially flat. I'm also wondering if the US will experience the same thing Japan has seen over the past two decades.
I think Bobby is playing for theta, IVR being high *may* be a bonus as it *could* lead to a subsequent volatility reversion which would then at that moment enhance his return, however make no mistake that on indexes you will make more money over the long haul constantly selling for theta and mitigating outliers vs. waiting around for an IV spike and only putting positions on in those situations. There is also a reason IVR is high. I don't buy the "IVR at 100 and IVR at 25 carries the same implied risk in real terms, people are just stupid and bid something up when say the real IV should always be 10% or somesuch". If you are around long enough you get to see why often a high IV means a higher IV is right behind it, and then the roll out/down will catch up with people when that day comes waiting/praying for a reversal to bail them out. This is where I really hate the way Sos trades, he keeps averaging down and then ends up bag holding for years on something. The worst thing about options sellers is that they trying to out think a loss and end up getting "Karen'd" more often than not. Take the loss and move on!
Retail traders don't like losses, that is why Sossy ALWAYS stresses winning %. He's even said he would eschew a strategy that showed greater profit for one with greater win rate. Tony just shook his head on that one but had to let El Jefe go on.
I love the idea of being negative delta, it (essentially) eliminates crash risk. The problem is you are fighting inflation all the time, now as you say if you end up in a deflationary spiral you will look like a genius but I don't see how that is as of yet our market condition in the US. You have inflation and borrowing costs to fight so it really is a directional play (short) where you are trying to get a yield enhancement (short prem). If I could make it work I would totally do it as there is no crash up risk unless you have hyperinflation, I just personally can't make a all-the-time short underlying short strangle trade work in terms of generating a good profit. Doing it tactically could be a different story.
No doubt this is something that I wrestle with myself. But rest assured, carrying negative delta does NOT eliminate crash risk. I like to think my options portfolio is my personal hedge fund. I'm plenty long. So carrying negative delta reduces the correlation with the rest of my portfolio.
September 2016 is in the books and here are the statistics: The experiment is up $18,492.32 for the month of September 2016 or 11.75%. (The S&P 500 was down 0.12% for the same period.) The experiment is up $25,826.51 since April 5 or 17.22%. (The S&P 500 is up 6.02% for the same period.) I had 39 opening trades for the month and I had 46 closing trades. Of the 46 closing trades, only 6 were losers (four of which were long protective puts that I purchased) for a win rate of 87%. I sold approximately $49,000 of premium for the month and Tastytrade research would show that on average I will keep approximately 25% or $12,250. I actually kept $18,492.32 or 37.7%. Technically, the 25% would be calculated on the trades actually closed during the month and not on the traded opened during the month. I did not perform this calculation, but I assume that the actual number would probably be closer to 25% instead of 37.7%. Have a great weekend and Roll Tide! Bobby
I'm definitely not a fan of this strategy either. But different strokes for different folks. Everything in the marketplace is essentially priced accordingly...for the Risk vs Reward. It takes a skilled trader to bend that skew curve to their favor so the end result doesn't have to be, or appear, as a complete gamble.
Dear Sweet Bobby, After carefully following your journal and seeing your latest monthly results, I would like to offer you a job opportunity. I am an older woman who runs a hedge fund using a similar strategy to yours. Lately the fund hasn't been performing well, and your strategy seems to be much better than ours. So if you wouldn't mind to be employed in a hedge fund for a serious compensation, please get back to me as soon as possible because I am going to be busy with a few court cases in the near future. Sincerelly, K.B.