Ring the bell we have a winner. I960 is a buyer of the options I'm selling. But remember if you sell a straddle and then put on a hedge that is converting your initial trade to back to back credit call and put spreads. I too adjust my trades. If I just sold you a put and if I need to adjust my risk, I have many different things I can do to hedge. My options are 1. Take a loss. And buy my put back. 2. Buy an itm put expiring in the future and assume the shares. 3. Option two plus selling a call turning my position into a collar. 4 maybe sell a put against my long puts. Every strategy requires an initial position and then you adjust with the price action. I assume you start with the straddle and then add the hedging otm options?once you do that, you have just limited your profit but you also limited your losses. Once you have have turned your naked straddle into a condor or two credit spreads, you have accepted a binary outcome. You either win or you lose. Both will be realized at expiration and finalized. I'm not realizing losses, if I assume shares and trade options around it. My trade is still alive making money. I haven't realized any loss yet. I believe the naked put is the best trade to lead with. i
When I looked at bid/ask and volume I found far OTM options usually were thinly traded (for stocks) and started with 0 volume. Meaning most of the time whether you sell or buy you are trading with the market markers. They don't bet against you they hedge and make their profit through bid/ask spread.
How do you think options market makers work? If you look at an options chain and there is a two-way market in an option, do you think they have buyers and sellers all lined up?
The reason some people buy otm wings is so they can have ammo to sell into strength.ie build a condor or turn a backspread into 2 verticals where the pnl graph is all " above the line " regardless of where XYZ ends up 0 DTE.. Willing to take on some vega risk in return 4 curvature for a bigger payoff in the event an underlying has an unanticipated move. Believe it or not there are traders out there with a psychological makeup that is comfortable with losing 70% of the time in return for multiples of winners for the other 30%- Richard Dennis comes to mind. The have modeled it out that owning wings will lose 70% of the time or whatever but in return their avg win is x times greater than avg loss on the 30%.How do they model it out.. that is the secret sauce.. I can tell you . it is most likely not in the option scanner or rankers available off-the-shelf. That "something" could be as simple as a 200d moving avg crossover or something exotic that they only know.
Sounds crazy to me to do that but I'm taking the other side of those trades all day long especially 3-5 days till expiration.
You are not taking the other side of "those trades", most probably you are selling your options to market makers. Supply/demand for the extreme wings is an interesting animal. In the index space, it's mostly regulatory and hedging pressures that drive the demand and supply is provided by vol sellers mostly via structured notes and such. It's pretty clear that it's overpriced vs ATM vol, but since there is no hedge and no diversification, it will remain so. In the single name space demand for wings is lower because they are richer in absolute terms. Obviously, in absolute terms those things should and do cost more then index vol since they combine the equity market risk with idiosyncratic risk of the company. However, as I said, in single name space you have more choices and a diversification factor.
Are there not a couple of hedge fund examples where the fund got wiped from naked put selling? It works for a while, maybe even a long while, then a few bad or unlucky trades and its total wipe out. It's the kind of thing Taleb argues against. But can you make money doing it? Sure. It's about timing and luck too right? If you make money and then you get out and retire, you win and you keep your winnings. As long as you don't trade long enough until your odds eventually mean reverts leading to the inevitable, you would have dodged a bullet and you'd be fine doing risky stuff. Also, you can make money trading the absolute most dog shiz on the market and still make money if you get out in time. Heck, many people made money on the long side in the now bankrupt stock ESI. As long as you got out before BK, you could have made money trading the long side of that dog also. Is put selling dangerous? Yes. Can it be really profitable? Yes also. Whatever happened to a certain 'supertrader' who was well known as a naked SPX options seller? That being said, if you have an investment thesis, and you're willing to go out and buy the stock in cash, but instead sell an OTM put to acquire it if it ever drops, is it such a bad thing if the stock dropped and you're assigned? Certainly no worse than had you went out and purchased the stock earlier. So it's not a problem then. I think people only get wiped out if they utilize a large portion of their NAV for this strategy to milk high returns. If you do put selling passively as a way to build positions in line with your bullish investment thesis it's fine. People who do the latter don't over lever and over expose their account as it may even be a cash secured position. The former, who sells puts as a direct form of income, do over leverage and the margin of error is small.
that supertrader kept selling more puts AND bringing the strikes closer since the shrinking IV meant less and less premiums. Any option selling strategy works out most of the time until it does not and since the win % is pretty high, traders get greedy and size up so when they get pinched , it is often at the point of their biggest size. A good trader will approach such system with discipline and appropriate use of margin.
Why is it the norm? Some might want to trade indexes. Some might want to trade single stocks. I don't think there is a right way to do it. Index traders are exposed to macro risks. Single stocks have event + macro risk. Just different stuff you'd have to concern yourself with. But if given the choice I'd agree with you that indexes are better. There is less event risk. It's 'tamer' for the most parts and 'more manageable'. But now it becomes a more macro trade. Also, individual stocks might have higher beta than the index, which if you're a all-in put seller, this might be attractive to them versus the relatively tamer index. So I can see why people sell options in single stocks also. The OP also said he sells options in leveraged ETFs. These ETFs are often leveraged versions of an underlying index or commodity of some form. So he is basically already trading indexes probably.