We should stop balking at Bobby. He will make 50% to ~135% on his capital before blow up. This is a simple math and sometime I just wonder why no one actually " get it". May be most of the so called "Elite trader" here just a third grade high school or community college student ? See my previous post (3 months ago) on Bobby strategy, this is preciously what happen now. Just wait for another 1 to 2 years (assume Bobby is making 1 to 3 trades a day with the commission+slippage he is paying now) and we will see the final episode. https://www.elitetrader.com/et/thre...hybrid-experiment.300013/page-42#post-4305024 Market is completely random in long term.
Coming soon - my buy and hold mutual fund experiment! I sometimes wonder if I bought far out of the money wings if that would satisfy the naysayers? Part of my experiment allows me to use up to 10% of my profits to buy puts. I bought a few with about 100 days to expiration. If I use profits from my closed trades, these long puts would eventually be wings for my future trades. Any thoughts?
If you are going to use a lot of leverage, you need wings. Of course by buying wings, it also takes less of a move for you to go to 0 in your account. Wings should = leverage, but also wings= no one is coming to take your house, you just go to 0 in the account if the worst happens. In actuality if the move is big enough, the pressured wing will really crank up on convexity and will buy you time to do something, that of course assumes there is any reasonable bid/ask to do anything in the options (probably won' be), but if you have sufficient margin perhaps something could be done in the futures (if the move is big enough, this may not work either due to circuit breakers/limit down). May I suggest an analysis of the largest gap open in your instrument of choice's history (for indexes/commodities... for individual equities assume gap to 0). Then add some fudge factor to that, and that will tell you how screwed you can really be. People talk about 87 but remember 87 wasn't a 20% gap down... If the S&P did a 25% gap down, then it is all over, for everyone. Even if you were right you will be wrong because of the counterparty risk. So I don't think it makes huge amounts of sense to "plan" for that with your normal risk capital (doomsday plan for it in other ways if you like, such as physical commodities, guns/bullets, butter). In the S&P, you need to be doing something before breakers trip if at all possible, that is how one should really be looking at this, what to do (or not to do) when things are going wrong and it is actually possible to do something.
To mitigate convexity risk while doing naked strangles, one needs to keep the leverage pretty low. If you buy wings, this negatively impacts your total credit but helps with convexity (if done right). So in order to get a reasonable yield with wings given the debit paid, you have to do more contracts, as you do more contracts, a big sustained move in the underlying will hurt more at the end of a period if nothing is done about it since you have more leverage on. If you try to narrow your margin by buying closer wings, you get less credit, which means you'll end up wanting to use more contracts to get a good yield, which means more leverage, and around and around we go. I would suggest that one should be set up to make around 30-40% annual yield on margin after all the wins and losses are tallied for an "average" year, in order to make this worth it. It seems one tends to keep 40-50% of the average monthly credit received over time if one is pretty good, so that means each month had better be a 8-10% net credit vs max loss collected. It is theoretically possible to lose the entire margin, minus credit received, so people are crazy to put a whole account at risk (although 30-40% return on a whole account is a siren song to many given the usually smooth equity curve). If one is good at managing things when they go wrong, allocating 50% or less of risk capital might yield a 15-20% annual cash flow on the total account, and one can diversify the rest of the portfolio to uncorrelated, perhaps even long vol / growth type of strategies, and have some cash flow and principal growth all wrapped up into one package. The key to the castle is to mitigate sustained moves (and when I say mitigate, at a certain point I mean you no longer have any exposure at all on the pressured side - you take the loss, if you keep rolling out/down, one day you will go boom), and be constantly collecting nickles all the damn time. It's like handling a wild animal. You do the tiger show in Vegas and eventually the damn thing will try to maul you, 95% tamed fun, 5% sheer terror/mortal danger. Short options in a nutshell
The experiment is up $808 for the day. Six trades today including 3 calendar trades. I'm loving the calendar trades because it gives me positive vega. Theta is 298, delta is -570, vega is -1361. T/V ratio is 22%!! The experiment is up 30.4% since April 5.
Be careful with this. This is true to only a certain extent with small moves in volatility. If the bottom falls out of the market, the calendars won't help offset the volatility expansion of the rest of the portfolio. This makes the calendars' contribution to portfolio vega a little misleading. I'm not at home right now, but when I do get home, I can find the Taleb reference for this. EDIT: See bottom of page 112.
The experiment is up $16,486.08 for the week (up 8.9% since the previous week's close). It is up 33.3% ($49,963)since inception of April 5, 2016. Theta is 296, delta is -844, vega is -1697. Have a great weekend and Roll Tide! Bobby