This is challenging because your knowledge of this appears to be constrained. Honestly, I think excel would work best. I think if you see real numbers at least you have something to go on. You keep referring to theta gains which don't exist, again theta is a 2nd derivative. It takes the change in price relative to the change in time respect to time. You are not "earning" that. You are exchanging that for risk. Then you keep talking about "making up lost premium". I don't even know what that is. If I buy crude oil and I lose money my next trade is not an attempt to "make that back". This is not a game guys. If I lose money on oil, then my next trade in gold or apple or google or the ES is just that, the "next" trade with it's own unique set of circumstances. I don't double down or roll out and hold on for dear life and hope the trade works. Let me say this to you, if you trade professionally none of this is hard to do in excel. Just create the two positions and use the random number generator in excel and run the positions out. The main complicating factor here is margin. When the shit hits the fan both IB and TOS are going to spike your margin. You are going to get margin calls. So even if you have "balls of steel" you won't be able to hold on. You will paying 20.00 for puts you sold for .50. I should say your broker will be paying that because it will be out of your hands once the margin call gets issued. And keep in mind, I'm not speaking about better in terms of expectancy, better meaning easier to hedge. Both trades require you to have a technical ability to model volatility or price in some capacity. You HAVE to have this skill. You cannot arbitrarily trade options willy nilly with no regards to value. That is absurd.
True, except I never sell straddles. I do of course end up with straddle positions but leg in puts and calls individually. I completely agree with what you're saying, but I'm trying to keep the discussion to the put leg since that's where risk comes from. The calls (at least OTM calls) lose so much value as vol drops with a rising market that it's very hard to lose money on calls and if you do it wont be big time like on the put side. I think where me and Maverick don't agree is that he thinks I am selling straddles and taking them to expiration, whereas in fact I am constantly managing the position and taking off contracts when they're profitable. I am still very much concerned about risk and maintaining the put side in a down market and vol spike. That's why I want to understand better what Maverick is doing because as you pointed out if you look at analyze tab in ToS there is a hug difference in p&l and margin usage with OTM and ATM puts. But, if you account for this and can hold the position until at least vol reverts, your OTM position will return to profitability quicker. That is all fact and math. This can be seen with a simple example. TM and ATM puts sold on Aug 20th (right before big drop, pretty terrible timing). 1x ATM or 20x OTM. Of course the OTMs got hit much harder at first, but by Sep 14th recovered and were ahead of the ATM. Even if you sold Aug 19th (even worse timing), OTM still ahead of ATM by Sep. yes, this does assume you could have held the positions on Aug 24th.
I am talking about real numbers. I don't use excel with random number generator because that has never been a good model of the market. I'd much rather use historical data on scenarios and stress test my strategies against those black swan events. Can the market drop 30% tomorrow in a day? Sure it's possible, building a strategy against that potential calamity I don't believe is appropriate (again some will disagree) Of course margin is the big issue here. And I completely agree you are miles ahead on margin with ATM. You already know this but margin for ATM does not change really as it goes ITM (at least not in PM). it sure as hell does change, and big time for OTM. If you think I am at 100% margin usage when I open my positions then I understand why you think I am nuts. I am usually at 30% or less on good days. Which is a LOT of cushion for things to go bad (yes I know margin can spike much higher than this, but I also dont just sit on my positions). The one thing you have not answered yet (and again I respect if you dont' want to but just say so that way I dont keep bugging you : ) is whether you always let your straddles go to expiry or whether you close it out at some point when it's gone too far ITM on one side? And yes, I absolutely agree it is rookie mistake to try to "win back" what you lost on a previous trade. That is not what I am saying at all. When I talk about making back the premium it's in reference to rolling a position out (I dont see why you're so offended by that btw) in TIME. That way at expiry I would still make the same $ (but expiry will happen later) but can reduce contract size or go further OTM to reduce margin usage (and thus not have to lock in losses)
I model volatility. If it's cheap, I buy it. If it's expensive, I sell it. That's it. I hold for 3 to 5 days, 10 days tops. I don't like the idea of rolling because it's really a brand new trade not trying to "repair" an existing trade. If a trade is not working, get out. Don't roll it into a bigger mess. Just move on. Occam's Razor.
Simple is usually the best. I hate to roll, only if I have to. This year only had to in January (watch me say that and the market tanks next week lol). BTW do you trade many markets or just ES/SPX?
Yep, I keep telling people this.. stay on the right side of gamma FFS. I think a lot of people into these types of strategies are really just interested in "high win rate" or "always does this" strategies. They don't really mind the *threat* of that every once in a while loss that kills their last 100 wins (which is irrational because it's obviously more psychologically debilitating and secondly way more risky).
All tests I run show good results with selling strategies, except for august , which has losses of 11k-16k for selling 50 SPY contracts and holding 22 days vs. $600-1000 credit. August was truly awfullest..the SPX fell 10% in literally four trading days . The IV surge is what kills you. But the nice thing about the deep in the money options is the decay , which is constant on the flat days and helps you recover quickly. Buy and hold takes too long for the bounce-back. On a 40k account, I can sell maybe 5 teenies with small margin and unless the market goes to hell, I should be Ok.
Man you should listen to Maverick, his strategy is vastly superior to what you are describing here. The whole thing can be summed like this: If you want to be short gamma (selling options) you better sell peak gamma (the max) which usually happens around the ATM strikes (it is skewed a little bit towards the right of ATM). Any other strategy is inferior in every sense. If you have the time just research this fellow: Victor Niederhoffer. He used to do exactly the same thing you are doing now, and blew up several times (and we are talking of serious money here).
You keep talking about theta - but do you understand gamma? When you're short OTM options about the only thing you've got going for you is the low probability of them ending ITM, *in the normal case*. However, as things go wrong in the trade and the strike *approaches* being ATM (or worse ITM), then gamma and delta start growing exponentially. On top of that, if these are puts, and vol/IV also starts increasing due to panic selling, you get the added bonus of vega crapping right on your face (remember, you're no longer OTM, you're near ATM or ATM). In fact, the only respite you get during this whole ordeal is when it passes ATM and heads ITM, at which point you'll still be getting punched in the face but those punches will be decreasing in strength because gamma is decreasing and delta *growth* is slowing (it doesn't mean it is decreasing) as it approaches 1. You're still going to get smoked and it's highly unlikely you'll be able to cover the parabolic growth in value of those short "sure thing" OTM options. So you figure you'll try and hedge it somehow right? Well turns out you had to juice things up a bit by selling 100 of these things just to make a solid return. Now it's moved against you and what was once 4 delta is now 40 delta and you've got to eat it and hedge off the other side with long options (and you will *pay up* for any IV increase that happened), or close it out entirely (still eating it), or hedge with the underlying. Good luck hedging with the underlying where you now need 4,000 outright shares (in a typical SPY case) to cover your 100*40 delta short options. Take something like SPY and that's 800k$ worth of outright, or ES where you're gonna need a 40 lot to cover this or around 200k$ in margin just to stop the bleeding (and btw, those margin reqs will probably be severely increased by the exchange just when you need it least!). Now take Mav who chose to instead sell 10 of these contracts ATM for an similar return in premium. From the start he was already on the right side of gamma (at the very *peak*) and if the trade goes wrong its not going to get more wrong and *more* painful as it approaches ATM - because it's *already* ATM, it's just going to be a losing trade as it goes more ITM which he can choose to manage, hedge with the underlying (which will be a heck of a lot more doable given there's not 100 of these grenades to worry about). He's of course exposed to volatility/IV, but so is OTM guy. Delta is always a factor but for Mav, gamma is decreasing (ATM->ITM), whereas for OTM guy it is increasing (OTM->ATM). Heck of a lot easier to herd 10 well behaved dogs than it is to herd 100 pissed off feral cats. Just look at the some of the "everything is awesome, nothing to worry about" cases vs -5%-10% move w/ +30% IV jump cases (caveat, I took quotes off hours and just took the mid): -10 ATM 2050 puts (using mid price [30], no IV bump): -10 ATM 2050 puts (using mid price [30], +30% IV bump): -100 OTM 1850 puts (using mid price [3.45], no IV bump): -100 OTM 1850 puts (using mid price [3.45], +30% IV bump): If you instead say "yeah but how often do +30% IV jumps even happen, it's 'rare'": NO FREE MONEY.