The rate of return for options is calculated off their margin requirements not off their entry price.
I do agree that most of the time gamma is a real killer for premium sellers but there are some instances where it's not the main ennemy. If often sell DOTM weekly put spreads and gamma itself is not the problem: often it is so low that even if it were to double, it still represents an acceptable risk and delta remains quite low... The real danger in cases like this is vega, it can double option prices even if the probability remains very low (less than 2-3% of ending ITM). Of course knowing that, one can take advantage in vol spikes to get into those spreads. In any case, a calendar against such a spread does actually reduce risk IMO.
I did calculated it as return on margin. If I collect $2 for an Iron Condor, my margin requirement is $8 (10-2). If I buy it back for $0.3-0.4, I make $1.6 on $8 margin. That's 20% on margin.
I wasn't sure that I'm allowed to mention names of those services, but since you mentioned condoroptions - no, it's not condoroptions. condoroptions actually had few months with very big losses. The first one is wickedprofits. You can see their performance here - http://www.wickedprofits.com/wicked_stats.html It's not compounded. The problem with this service (at least for me) is terrible risk/reward - it's about 1:25. He's going very far OOM, collects credit of about 0.3-0.4 and just waits. He exits when the underlying goes to the short strike. Till now he was correct, but one losing month of 25-30% will wipe 2 years of profits. I prefer to go for 1:4 to 1:3 risk reward. The second service is www.optionpundit.com. It has shorter history (2.5 years), only one losing month and very impressive record even in 2008. You are absolutely correct that if for every 3 I.C.'s that are successful, I have one that goes out for full risk, it's a breakeven. The whole point is NEVER to allow maximum loss. If I make on average $2-2.5, I will NEVER allow my loss to be more than $3-4. I think that with proper adjustments, it is possible.
Can anyone recommend software for back-testing these sorts of positions? So far I have been using ToS's platform for this but it is quite tedious. Plus I am also trying to do some adjustments off of expiration BEPs that I can't get on there. Automating this would be a great help.
You are making excellent points, and I would like to comment on some of them. First of all, I donât think that it is easy. The purpose of my post was to share my limited experience and to get comments and feedback, so we all can become better traders. Extreme bull markets are not much better for those strategies than extreme bear markets. Take September 2009 for example. During the live of my 2 months IC, RUT moved more than 20%. I was down 20% at some point, had to make two adjustments, but the final result was loss of only 6%. I was probably lucky that month and in general since I started doing it in April 2009, and Iâm afraid that those kinds of returns might lead to overconfidence. There are ways to protect yourself, at least partially. You can buy âblack swan eventâ insurance. For example, if I trade 10 contracts of January IC and get $2,000-2,400 credit, I can spend about $150 of it and buy 3 510/500 put spreads. If RUT goes down to 500 (17%), I have a profit of $2,800, which should more than offset my loss from IC. You mention 12-15 months ago. Yes, those months were difficult for those strategies, but was it any easier for stock holders? Some stocks crashed 40-60% in just 1-2 months.
What are you going to do if you lose all $8? You need 4-5 times of that amount which brings your return down to 4-5%.
This is irrelevant to margin calculation. If I make $2, it's 25% profit (2/8). If I lose $2, it's 25% loss. If I lose $4, it's 50% loss. If I lose the whole $8, it's 100% loss. Lets take as an example IC with $2 creadit. In order to lose 50%, the spread in money should be worth about $6 (the opposite one can be bought back for about $0.2 at that time). With proper risk management, you should never let this happen.